I went to one of the new home builders in Palm Beach county two years ago and they offered a three-bedroom house for around $150K. Now the price for the same house is $280K. What's going on here?

You see this kind of pricing change in many areas of the country. For all of 2004, says the National Association of Realtors , the median existing-home price nationwide was $188,900 in December, up 8.1 percent from December 2003 when the median price was $174,800.

So why are prices soaring in most communities? Why are prices up generally? And can this continue?

There's always a fuzzy moment in the marketplace when real estate values reach a level unseen in past years and inevitably you hear, "that's it -- prices just cannot go any higher."

And yet they do in most places.

Part of the reason we see rising home values is that we measure costs in terms of cash. But a dollar today does not buy what a dollar bought 10 years ago or when Lyndon Johnson was in office, so some price "increase" is simply a by-product of inflation.

Here's an example: The Smiths bought a home for $45,000 in 1965. Merely on the basis of inflation what would it cost today? The answer, says the Bureau of Labor Statistics' inflation calculator , is $269,857.

In effect, home prices can continue to "rise" as long as inflation reduces dollar values. It's not necessarily that real estate is becoming more valuable, just that each unit of currency is buying less.

What's interesting, of course, are the homes bought for $45,000 many decades ago that are now worth far more than $270,000. If the house is now selling for $600,000, the Smiths have extra spending power worth $330,000 above inflation and that's real wealth. It's also the situation seen by many long-term homeowners in certain metro areas.

So part of the mystery of rising prices has been solved. Inflation over time simply means more dollars with less spending power are needed to buy homes, candy bars and everything else. Of course, one hopes that as prices go up incomes also rise, thus making "higher" prices tolerable.

But there are other factors causing home price increases. The big ones that stand out include:

• Mortgage Rates -- Low rates make homes more affordable and increase the pool of potential buyers, increase the competition for homes and drive up prices. Current mortgage rates are astonishingly low in the context of the past 40 years -- thus pushing up home prices.

• Population -- We are a growing country. In 1965 we had 193,460,000 people, today we have 295,398,514. That's an extra 100 million people who need to be housed, and most of them want to live in major metro areas -- thus pushing up home prices.

• New Construction -- If new home building does not keep pace with demand, then the number of available units relative to population will decline -- thus raising housing prices. In practice, construction deficits are common in many areas because of concerns with traffic, the environment, the cost of local services and other reasons.

  But another pricing factor with new homes is this: We're not building the same houses we produced 40 years ago. Today's homes tend to have more square footage than older ones, and the additional size adds to construction costs -- thus pushing up home prices.

• Jobs -- It takes cash and credit to buy real estate, so a growing job base is crucial. More jobs mean more people can compete to buy -- thus pushing up home prices.

• Social Preferences -- We assume that the usual "rule" is one household per house. But what if social patterns change and we see more multi-generational housing or more cases of big homes being sub-divided to house two or more families or households?

So will home prices always rise? Everywhere?

No. Home prices in some areas of the country have actually declined. In November, for example, NAR reported that quarterly price drops were seen in 11 metro areas.

Rising interest rates, local job declines, population exits, housing preferences and expanded home construction individually and when combined can all contribute to reduced rates of price appreciation if not actual price declines in some situations.

So this is one case where it makes sense to follow the herd -- growing populations have to live and work somewhere, a "somewhere" that with low mortgage rates, traditional housing patterns and limited construction is likely to see soaring home values in coming years.

For more articles by Peter G. Miller, please press here .