The year is 1988. A married couple and a single man are looking for houses.

In June, the couple - a University of Washington employee and his wife - purchase a freshly built, four-bedroom, two-story, 2,610-square-foot house in a tidy new subdivision in Federal Way. The price: $158,000.

Five months later, the single man - a book distributor - finds his house: a 75-year-old, poorly maintained, 1,130-square-foot rental in Seattle's Central Area. He decides to look past drug paraphernalia in the basement, weeds in nearby vacant lots and two crack houses across the street. The price: $58,500.

Jump to 1999. After living in their homes for 11 years, both buyers put their houses up for sale. With original price tags nearly $100,000 apart, they sell within $2,000 of each other, each bringing in around $230,000.

The shiny new Federal Way house appreciated just 3.67 percent annually over 11 years, while its well-worn Central Area cousin enjoyed a rousing 13.39 percent annual appreciation.

Herein lies the great untold story of the booming Puget Sound area real-estate market: the gap in value between neighborhoods that have appreciated rapidly and those that haven't and why this is happening.

While news headlines and cocktail-party chatter have tended to treat the hot market as monolithic, it is actually many little markets, each with a different tale.

For example, a Seattle Times computer analysis of single-family home-sales data from the King County Assessors Office shows the Central Area has enjoyed almost 10 percent annual appreciation in the past 15 years, and a whopping 18 percent over the past two years - making it the county's appreciation leader.

Meanwhile, Federal Way, which boasts numerous newer neighborhoods located off attractive tree-lined boulevards, rests firmly at the bottom of the appreciation sweepstakes: just 4 1/2 percent annually over the past 15 years (and a modest 6 1/2 percent over the last two).

This difference in appreciation can determine whether a homeowner has the ability to move up to a house in a more expensive neighborhood.

Unlike affordability, which mostly pivots on interest rates and household income, appreciation is influenced much more by supply and demand and represents the return on your investment.

The Central Area-Federal Way disparity is only one of the surprises in the assessor's data.

Some of Seattle's once solidly working-class neighborhoods - Ballard and Wallingford, for example - have enjoyed higher appreciation than their tonier Eastside cousins, including Issaquah and Lake Sammamish.

And South Seattle's Mount Baker neighborhood has not only continued to appreciate handsomely, but viewed on a cost-per-square-foot basis, has shot up faster over the last decade than similar neighborhoods. That means sellers there have much more move-up potential. In 1999 someone who owned a house in Mount Baker could replicate the home in expensive communities such as Kirkland and Blue Ridge that would have been beyond their reach a decade earlier.

This is not to say Mount Baker prices are among the highest. Last year the median sale there was $220,000, meaning half of houses sold for more, half for less.

The really high price-tag homes - and lots of them - are in newer communities in little known Eastside locales such as Union Hill and Novelty Hill. They beat most in-city Seattle neighborhoods in sales prices, although not in appreciation.

Sitting in his Redmond office, real-estate appraiser Alan Pope recently pulled out a yellow tablet and drew an explanation of these real-estate trends.

With a sweep of his pen, Pope sketches in the county's major freeways. Then he draws circles for the major employment centers: downtown Seattle, the Eastside's technology corridor.

"Neighborhoods close-in to employment and freeway access are appreciating at a faster rate than those that are further away," he points out.

All this wouldn't mean much if not for this key fact:

The local housing market is always a reflection of the local economy, and while King County's economy is now showing signs of slowing, it's been red hot since 1995. Jobs have been added by the tens of thousands - 51,000 in 1998 alone - and wages have climbed faster than inflation. Simply put, when the sun shines on Microsoft and other major employers, house prices reflect the glow.

Economist Dick Conway, co-publisher of "The Puget Sound Economic Forecaster," notes that for the past 15 years Seattle's job and population growth both ratcheted up at a faster pace than the United States overall.

"Because Seattle remained a major job center, it became increasingly desirable for many people - not all - to live in Seattle and be close to their jobs," he says. "So the increased demand for housing pushed its prices up, and in fact pushed them up much faster than prices in the rest of the region."

Real-estate expert Christopher Wronsky, formerly of Seattle, explains that true appreciation comes not from the houses themselves - a point proved by just one look at the photographs of the Central Area and Federal Way houses cited here - but by the scarcity of land and stepped-up demand for housing.

How intense is the pressure?

Consider these numbers. Between 1984 and 1998, King County grew by 84,000 new households, yet added only 24,000 single-family houses. Seattle actually lost more than 2,000 single-family houses, most likely to redevelopment of the land under them, yet added 5,000 new households.

Conway thinks the city, completely built out 40 years ago, hasn't grown more because it can't come close to meeting the demand for single-family houses.

Seattle has only about 130,000 single-family houses - 5,000 more than the number of apartments and condominiums - which means increasing pressure, and appreciation, as demand for them grows.

Wronsky says the highest appreciation will be realized "in a neighborhood that can't be replicated with amenities that would be difficult to reproduce."

As Conway points out, "our homes would be a lot cheaper in Seattle if we could build more homes." Because land is unavailable that's not possible, so buyers must compete and endure the result of competition: rising prices. And thus owners enjoy equity appreciation.

"People with higher incomes can afford to live here, and people with lower incomes are being pushed out," Conway contends.

That's not the case in outlying communities, where new homes are still being built, putting supply more in line with demand.

There are two other factors that help keep the lid on housing appreciation, particularly in South King County.

First, jobs there tend to be in manufacturing and retailing, with wages that cannot support significant escalation.

Second, apartments are plentiful and less expensive than in Seattle. In Federal Way for instance, rents average $675 and there's roughly a 6 percent vacancy rate, according to Mike Scott of Dupre+Scott Apartment Advisors. This means apartment affordability and availability aren't pushing people into buying houses.

Renters in North Seattle, meanwhile, pay an average of $836 a month for rent and have to deal with a 2.5 percent vacancy rate. "High prices for apartments in Seattle would cause more people to choose to own a home, which then creates more demand for homes and pushes up prices," Scott says.

When in-city housing pressure intensifies, in-city buyers with moderate incomes become more open to shopping neighborhoods.

"It used to be 15 years ago you said you lived in Ballard and it would be a so-what kind of thing," observes real-estate counselor Anthony Gibbons. "Then there (Ballard) and around Green Lake became up-and-coming neighborhoods. That's where young urban professionals can afford to go."

Ditto Fremont, Columbia City, Beacon Hill, West Seattle - all areas with newly acquired cachet.

This gentrification can have a significant impact on prices and desirability. One woman who bought a small Central Area home a dozen years ago says people tried to dissuade her by saying "it's black, it's trashy; it's high crime."

Today, the area remains racially and ethnically diverse, now a selling point, and the stigma is almost gone, in part because gentrification has brought fresh appeal (along with a sense of dislocation for some longtime owners).

It's no longer sold as just the Central Area. Real estate agents now sell buyers on living in Madison Valley, Squire Park, Cherry Hill or Judkins Park - all neighborhoods within it.

"It's phenomenal what's going on," observes Margaret Lyles, an agent with Gerrard Beattie & Knapp Realtors. When she began selling Central Area homes two decades ago, Lyles says "houses were $39,000, and now they're over $200,000."

She sees a pattern in that price rise.

First the older, charming homes sell to investors, who spruce them up then resell to buyers who move in. "I see a lot of young people buying who have access to the money . . . doctors, people who want to live close to town."

It's this double sale, repeated many times over throughout the community, that accounts for much of the area's appreciation.

By contrast, real-estate counselor Gibbons says, "you can't get that kind of value out of a spec home in Federal Way because it doesn't have that kind of character."

The UW worker and his wife who sold their Federal Way house last year apparently retired and left the area. They could not be reached for comment.

But book distributor Sasch Stephens, who owned the Central Area house, said he saw his neighborhood get cleaned up. On his block, old housing was rehabbed, new housing was built. The crack dealers were sent packing.

"The neighborhood is a great neighborhood now in the sense that it doesn't have the stigma that it had 10 years ago," Stephens says. "It really was a bit of a disaster area, and people who were willing to take the risk at the time were able to gain from that."

Indeed, believing in the Central Area has paid off handsomely for Stephens. While living in his house, he refinanced it repeatedly, pulling out equity to buy other properties. He now owns 95 apartment units in Bellingham, plus other real estate, all courtesy of that first house.

With Seattle housing prices as sky-high as they are, could a buyer today hope to do as well?

Perhaps.

If government projections prove correct, King County will add 195,800 new households between 1992 and 2012, making well-located housing even more precious.

Elizabeth Rhodes can be reached at 206-464-2306, or by e-mail at erhodes@seattletimes.com.