The national economy may be struggling, but property values in Maryland are rising faster than they have in more than a decade - led by startlingly higher prices in Ocean City.

Annual assessment notices were mailed yesterday to 692,000 property owners statewide, and all show healthy increases from three years ago - the last time these same places were re-valued. Maryland physically inspects one-third of the state's properties each year, and phases in the change over a three year period.

Statewide, the average one-year increase is 8.8 percent, compared with a 1.9 percent average for the same areas in 1999. Ocean City led the pack with a one-year increase of 23.5 percent - nearly double the next highest figure - while economically depressed Allegany County trailed the state at 3.1 percent.

The phenomenon of sharply higher values is vitally important, officials said.

"It's been the engine that's kept this economy going," said Jan W. Hayden, president of the Greater Baltimore Board of Realtors, who said her colleagues expect a slight softening in sales in the next year.

What to expect more generally is up for debate, but Ronald W. Wineholt , director of the Maryland Department of Assessments and Taxation, said that is a question for economists.

"Our job is not to predict the future. We just appraise it [property] at a current value," he said. Residential values outstripped commercial ones, Wineholt said, by a 2-to-1 ratio. "I think commercial values are more reflective of what is currently going on in the economy."

John Hopkins, assistant director for applied economics at the Regional Economic Studies Institute at Towson University, said that while housing has been "the bright spot" in the economy, "I'm hesitant to say that Maryland has a housing bubble forming. In a state known for Smart Growth and trying to limit urban sprawl I think those trends are going to continue," even if not quite at the current pace.

Ocean City officials are celebrating their newfound popularity, and making plans to refill the town's rainy day fund, which was partly drained in recent years to keep the tax rate steady.

"The stock market is lackluster at best, and people have turned to real estate," said Ocean City Mayor James N. Mathias Jr., who said buyers were from across the mid-Atlantic region. A list of ocean properties that have each sold twice in 2002 shows huge price increases - from $169,000 in March and April to $259,000 by November in two cases.

But the higher values won't help the state dig out of a projected $1.8 billion budget shortfall because higher assessments translate into property taxes, which go almost totally to local government - not state - coffers. The notices in the mail now are the basis for local property tax bills that will be mailed in July.

Even for Baltimore City and the 23 counties, the effect on revenues will be limited by a series of tax and assessment caps enacted a decade ago after the last real estate boom - although second homes and extra acreage are exempt from those caps.

Although Queen Anne's and Anne Arundel counties are second and third in the state respectively for increased values, after Worcester County where Ocean City is located, the governments will not get the full benefit of those price increases.

Anne Arundel law limits revenue growth to no more than the rate of inflation, up to a maximum of 4.5 percent. That means only about 2 percent more money for the county treasury next year, budget officer John R. Hammond said. The county's 12.3 percent value increase is "interesting information. But from a revenue standpoint it really doesn't do anything for the county."

Commuters driving to Baltimore, Washington and Annapolis are moving to Kent Island in Queen Anne's county in droves, pushing up values an average 12.9 percent there, said assistant assessment supervisor Margaret O. Ness.

Howard County, which saw a 9.7 percent average assessment increase, is limited by an annual assessment cap of 5 percent. "We're going to have predictably stable growth in property taxes for at least the next few years. It really has had the effect of smoothing out the revenue increases," said Raymond S. Wacks, Howard's budget director.

Maryland law limits assessment increases to no more than 10 percent a year, but five counties have a stricter 5 percent cap. Baltimore City and Baltimore County are at 4 percent, Prince George's has a 1 percent cap, and Talbot County is at zero.

State assessment officials, builders, real estate agents and government officials says the increasing values are caused by two things: historically low interest rates feeding demand while housing supply is also low.

Land is so valuable that in Howard County - which has Maryland's sixth-highest average assessment increase for next year - a wooded 27-acre tract in Ellicott City zoned for two homes an acre sold in July for $2.6 million.

The trend is producing other problems, however, builders said.

"We hear all the time from people in their 40s and 50s that their kids can't afford to live in the communities where they [the parents] live," said John Kortecamp, executive director and chief executive officer of the Home Builders Association of Maryland.

"It's not just a question of taking farmland. We're not saying where development ought to go, but we're saying it's got to go somewhere," Kortecamp said.

The homebuilders want a law that would require each county to compile a list of available building sites, and another list of projections for job growth, to see if they match. Ultimately, he said, Maryland needs a law similar to one in Oregon that requires a five-year review of development inventory to ensure at least a 20-year supply of building sites.

Kortecamp praised Baltimore County's redevelopment of the former Riverdale Apartment complex in Middle River to new, detached single-family homes, but said similar projects and redevelopment in Baltimore are "just part of the equation." To house the more than 1 million new residents Maryland expects in coming years, more high-density developments such as the planned mixed use community of Maple Lawn Farms in Howard County will be needed.

Even with the demand and low interest now, higher real estate values aren't uniform throughout the state.

Baltimore County, where assessors visited eastern county properties, saw assessments rise only 3.7 percent - one of the three lowest in Maryland, despite miles of waterfront that county officials have worked hard to redevelop.

Ronald C. Tolson, state assessment supervisor for the county, said the area has less high-priced waterfront than Anne Arundel, but has many older communities where values haven't increased much.

In Baltimore, where the southern third of the city, including Federal Hill, Fells Point and Canton, was reassessed, values were up by an average 7.7 percent, compared with 2.4 percent three years ago.

"We're fortunate getting this growth," said Edward J. Gallagher, deputy director of finance and city budget director.

In Harford County, where assessors visited the developing eastern third of the county along the Interstate 95 and Bel Air corridors, commercial values outgrew residential ones - the only place in Maryland where that happened.

County administrative officer John J. O'Neill Jr., who is also budget director, says that could be attributed to "new buildings and new construction in the industrial area of the county," that Harford officials have worked to encourage. "That's starting to show fruit," O'Neill said.