(MONEY Magazine) – They are not sure who came up with the idea first, but at some point one of them said the unthinkable, said it right out loud. This was a couple of years ago, if Mike McIntyre remembers correctly, and at first the talk of leaving was just some idle chat between him and his wife Sharon. After a while, though, the McIntyres began asking themselves whether some other town might be better for their kids--might be free of the burdens and expenses of this one. By last summer, they were looking at schools around Maine and checking into employment possibilities for Mike, an electrician. By winter, the prospect of moving had turned decisively from "what if?" to "when do we go?"

Now it's come to this: the last few months in their cedar-shingled home on a windswept knoll a few miles south of Nantucket town. At 8:30 a.m. on a gray March morning, Sharon and Mike are seated at their kitchen table, a bowl of oranges within easy reach, running through the reasons that they're packing up for Cape Elizabeth, Maine in mid-summer. "It's a nice life here, we know everybody," says Sharon as she cradles a mug of tea. That's right, says Mike, nodding his head. "We still love this place."

So why go? To bring their kids closer to the culture of Boston and Portland, for one thing, and to escape the island's hefty surcharges on travel, gas and groceries. But what the McIntyres would really like is to live in a place where the future looks as good as the past. When they met here one summer 20 years ago, the two couldn't have foreseen how money would blindside this 50-square-mile Massachusetts island and leave its locals wondering what hit them. "You look at the teachers and the doctors and all the people you would like to have commit to the community, to be a real part, and they're not able to," says Sharon. "There's just no future here for the average person." It is not difficult to see what she means. The school system that serves this island of 9,500 people is now short 25 teachers; the hospital suffers a chronic shortage of nurses. Every morning, hundreds of workmen and carpenters fly in on the turboprops from Cape Cod, only to fly back at dinnertime. None can afford to stay; and, since their transportation costs are passed along to the homeowners and home buyers they work for, none of them need to.

In many respects, this all comes down to real estate. Drive past a weathered gray shack here, and you're looking at an investment of at least $500,000. Walk past a contractor framing a beach house in the March drizzle, and you're looking at someone charging upwards of $500 a day. Look around at scrub brush and stunted pines rooted down in sandy soil, and you're looking at land that has risen higher and more steadily in value than any stock index anywhere over the past decade. Such wealth has blessed middle-class families like the McIntyres--the "year-rounders"--with plenty of work and a dizzying rate of appreciation on the houses they bought 10 or 20 years ago. At the same time, it has priced out friends and children and made it difficult for any but the most affluent vacationers to buy or rent. Like the residents of so many places around America--Silicon Valley, for instance, or Seattle or Manhattan--the middle class on Nantucket now wonder if the town in which they live can remain their home.

Or as year-rounder and affordable housing advocate Christine Silverstein puts it, "What happens in a community where there's a middle class, and then, as if a dam broke, this river of wealth comes rushing through? When all the water recedes, is there a middle class left?"

THE FREEWHEELING MARKET

For the time being, Sharon and Mike McIntyre have found a way to straddle the line: They've decided to rent out their Nantucket house for one year at $2,000 a month in case they change their minds about living in Maine. But when they do decide to sell--the modest three-bedroom home they built in 1993 is likely worth between $650,000 and $750,000--they'll follow a beaten path. There are two kinds of Nantucket exiles: those who leave because they can't find a way to buy or rent and those who cash in on the extraordinary value of their ordinary houses. As the McIntyres know, there's a hitch to cashing in: Once you go, a door clicks shut behind you. "We've seen families leave who want to get back in and can't," says Mike. "We just want to make sure that we're not one of those too."

In a sense, what he's saying defies the widespread feeling that a recession is rumbling east across the continent like a big low-pressure system and that it's only a matter of time before bad weather arrives. But Mike believes the price of homes here will stay high--or continue going up.

Real estate experts talk about certain home markets as having "inertia," or of being "sticky." These descriptions speak to the question of how long values in places like Nantucket can remain high in the face of an economic downturn. "On a small scale, [the island] reflects what's happened to all these boom cities," explains Karl Case, an economist with the real estate consulting firm Case Shiller Weiss. "It's like what happened in Boston or New York or San Francisco, all of which have an affordability problem for those who make reasonable wages." Though the Bay Area market has been softening, says Case, housing around hot East Coast cities remains expensive, due to sparse inventory, rock-bottom interest rates and--at least for the moment--low unemployment. In Nantucket, several additional factors add a powerful, tightening torque. Thanks in part to its geography, a thriving second-home market and an annual cap on construction permits, demand outstrips supply to such a degree that there seems little likelihood of an imminent dropoff. Those locals without hope of getting in now, in other words, may not have much hope of getting in later.

Nantucketers jest that their island has become a place "where the millionaires cut the lawns of the billionaires." It's probably less a joke than a veiled truth about the real estate wealth of many year-rounders--the painters, landscapers, shopkeepers and the like who had the good fortune to buy homes or land (or both) at the right time. Flint Ranney, a realtor with Denby Real Estate in downtown Nantucket, falls into that category. In 1977, Flint moved from Los Angeles to escape what he drolly describes as a series of biblical-scale disasters--"the smog, the traffic, the energy crisis, the earthquakes, mudslides and fires." The California dream it wasn't, so he quit his stockbroker job and hauled his wife and five children to the place he'd been coming for the summer since he was a kid. "It was the best decision we ever made," Flint says, reclining in his office chair and folding his arms over his chest. He relates that he bought a house upon his arrival for $175,000 and invested about $50,000 to expand it. Recently, he says, he got an appraisal of $1.6 million.

These numbers seem to pique his curiosity: He leans forward, takes a Hewlett-Packard calculator from his desk drawer and, after punching a few keys, announces a $1.375 million appreciation on his home of 24 years. This does not appear to surprise him; indeed, among the island's many realtors, Flint is regarded as the agent who knows Nantucket's housing dynamics and appreciation rates better than anyone. "In 1993, the average house price was $344,000," he explains. "Last year, the average house was $1,281,000." Out comes the H-P calculator again. "That's 272% in seven years," he says, "or an average of 21% a year." Recently, the numbers have gotten even better--or even worse, depending on your point of view. According to Flint, the average home price as of April 2001 had risen to $1,699,000. The only listing under $400,000 was a one-bedroom, one-bath shack on a quarter acre for $375,000. No water view.

This is what drives so many year-rounders to despair. Whereas typical housing markets are characterized by upward mobility--residents can move from rental units to starter homes to larger homes during the course of a lifetime--conventional economic models have washed out with the Nantucket tide. There are no modestly priced larger homes. There are no affordable starter homes. And there are few affordable year-round rentals, since landlords--including many islanders who depend on income from guest houses on their properties--hike prices dramatically during the summer. Typically, the monthly rate becomes the weekly rate; a $1,000-a-month apartment, in other words, goes for $1,000 a week. Displaced renters sleep on friends' couches during beach season and wait for September to roll around so they can find a new place. They call it the Nantucket Shuffle.

Flint acknowledges that affordable housing is a problem and that the current rate of appreciation probably isn't healthy. He too is concerned about what this means for the future, especially since four of his children, now in their twenties and thirties, live here--in homes built on land that, to varying degrees, he helped them obtain and afford. (A son and a daughter work at his real estate agency; another son is a lawyer, and another daughter is the town administrator.) Flint remarks that "this is still as close to paradise as you can get." If there's something wrong, he's inclined to let the laws of economics--rather than various proposals for affordable housing--fix the market. As he sees it, a correction in home prices, like one that briefly swept the island in the early 1990s, could be just around the corner.

In the meantime, does he worry that the free market isn't working when teachers or policemen can't afford to live in the town they serve? "Well, the free market always works," he says after a thoughtful pause. "It's just that it doesn't always work the way you want it to."

WHAT WALTER BEINECKE SAW

You may or may not agree with Flint Ranney. But he does point to a truth about how merciless real estate markets can be in separating the winners from the losers. Precisely what the free market unleashed on this place is generally agreed upon: thousands of new homes, crowds of visitors, high wages, and ample funding for historic and natural preservation. Precisely why Nantucket has turned from a sleepy fishing town into a sanctuary of wealth and exclusivity is a little harder to pin down.

You could put it all on the bull market. Flint and several other realtors point out that the island gained a platinum glow in the 1980s and 1990s, when CEOs such as Jack Welch and Wayne Huizenga bought homes here and brought along friends and colleagues. Meanwhile, lawyers, entrepreneurs and mid-level executives with high-paying jobs and stock options had begun to notice that Nantucket was a private--and still unspoiled--retreat just an hour by plane from New York City. And it was as good an investment as any blue-chip stock. Not only could their homes appreciate handsomely in value; if they wanted, they could reap tens of thousands of dollars a year by renting out during the summers.

In truth, the island also owes a large debt to someone who left before the 1990s boom even started--a man named Walter Beinecke, an heir to the S&H green stamps fortune, who amassed a huge portfolio of properties in town in the 1960s. You might say that for Beinecke, Nantucket was a value investment. From the time the whaling industry died out in the 1840s, the island--once among the most affluent communities in the world--had been in the funk of depression. "When I was a kid here [in the 1940s], this was a poverty pocket," remembers Alvin "Toppy" Topham, a native who heads the Planning and Economic Development Commission and who, with his thatch of white hair, windburned face and accent full of nasal A's and dropped R's, seems every inch the Nantucketer. "The only influx of money came from rich people during July and August and a tired old fishing fleet," Toppy recalls. There were 3,300 people on the island at that point, and most year-rounders did whatever they needed to survive from season to season--fix houses, go scalloping, fish for cod, tend a vegetable garden, keep a few cows in the yard for milk. The historic downtown stayed intact and the beaches stayed pristine, thanks to a general lack of outside interest. Yet to Beinecke, one of the wealthy visitors who summered here, Nantucket was an architectural and natural marvel. Down on its luck perhaps. And worn around the edges. But a place--quite obvious to him--with tremendous potential.

He had vision. And it turned out he was a savvy developer, dedicated preservationist and unapologetic elitist. Beginning around 1964, Beinecke began snapping up commercial buildings that are now worth millions for as little as $30,000. He made it clear that he wanted to rent to shops that would lure an affluent clientele and that he'd rather bring in one visitor who would spend $100 in a high-end store than 10 visitors who would spend $10 each on knickknacks and fudge. He didn't want the island to be overrun by tourists, and he was intent on preserving the appearance of the old village and setting aside open space. (About 44% of the island is now protected from development, yet another factor that presses on land values.) He reasoned that if he did what was best for the town, he would be doing what was best for his investments. And to judge by the fact that he sold his properties for $55 million in 1987, he was right. His legacy here remains controversial (he now lives in Texas), but it's easy to see that his brilliant long-term investment also benefited the island.

Also, that he was the first to cash out.

UPSTAIRS AT THE BANK

It's worth noting that good real estate investing on Nantucket, like good real estate investing anywhere, requires getting in and out at the right time--even if that means waiting two decades like Walter Beinecke. It's also true, however, that islanders looking to finance a home think of land as a commodity that can free them from long-term uncertainty and the short-term rental shuffle. Its appeal as an investment is, at most, secondary.

Beth Ann Meehan is the senior loan officer at the Pacific National Bank, a Federal-style red-brick redoubt that stands alongside the Main Street mansions that ship captains financed with whale oil money during the last Nantucket boom--the one back in the 1820s. Five years ago, says Beth Ann, about a quarter of the bank's loans went to first-time home buyers. This year it may be zero. Traditionally, the cheapest way to finance a first home in Nantucket was to buy a piece of land and help with construction, a route Beth Ann and her husband Neil, a scalloper, followed in the mid-1990s. With parcels of land now going for a minimum of $225,000, however, this tack now seems unworkable. As a result, Beth Ann's loan appointments have begun to carry a gloom of predictability.

Here's how they go: She places a box of tissues within reach of the two armchairs facing her desk. A young couple come in; they're each working two jobs; they've saved some money; they've paid off debt. They've done all the things they were supposed to do. Their parents live here, and they want to stay here. "They come in pretty optimistic about what they can buy--they say, 'Oh, we don't want anything crazy; we looked at a house the other day that was $500,000, a good starter home,'" Beth Ann explains. "So then I begin to go through the motions. I tell them I have a program where you can do 10% down, which means stretching their savings quite a bit. Then I show them what the payments look like on a $450,000 mortgage, and they about fall over.

"That's a tough realization--they get very upset," she adds. "So then we talk about what they do qualify for." At that point, she says, they usually decide to search for a home on the Cape or somewhere else off-island, which is precisely what she expected from the start. And it's not only Beth's bank clients who arrive at this decision. "I go to a going-away party for one of my friends every few months," she says.

Her comments bring to mind something else worth noting about Walter Beinecke. Long before he sold his downtown properties, Beinecke had an insight about the future of the island that he would occasionally share with listeners. He'd say that he didn't think the middle class could survive.

US AND THEM

One of many theories about Nantucket is that the wealthier the island becomes, the less desirable it becomes for the wealthy. Matt Fee, a year-rounder who runs a successful bread bakery and takeout restaurant called Something Natural, believes that if the island loses any more natives or becomes more congested or more expensive, the service economy will begin to collapse. Think about it, he says. The middle class needs wealthy visitors to support the tourist economy just as much as the wealthy visitors need the middle class to run it. Like it or not, they're locked in balance.

Matt looks at the situation as an employer as well as a worried native. Like a lot of small business owners here, he has to provide housing for the college kids and foreign workers who come in summers to staff his shop--otherwise they couldn't afford to stay and he couldn't turn a profit. For now, Matt puts up his employees in a second house he owns and one that he rents. But these arrangements have become burdensome with the home-market boom.

Clad in a sweat-soaked T-shirt and flour-dusted khakis in an office above the bakery, Matt says, "Some people are saying, 'Jeez, we can't do anything; let's let the market decide and we'll all be better off.' But the market isn't going to take care of everything. The market is going to drive us off the island." Among other things, Matt wants the township to build homes for teachers and other town employees, create a permanent class of affordable housing for year-rounders and limit car traffic during the summers. If Matt's April election as one of the island's governing selectmen is any indication--he received the most votes in a five-person field--a strong bloc of constituents supports his ideas.

Matt goes back several generations here. His grandfather worked as a fisherman and ran a hardware store in the village of Siasconset; his father worked as a phone company lineman before starting a popular sandwich shop that recently celebrated its 30th anniversary. After graduating from Harvard in 1982, Matt wasn't sure what to do next. "I lived in Boston for a year or two doing temp work for a law office and an advertising agency," he says. Around that time, while at home during the summer, he heard that Something Natural was up for sale and put together financing to buy it. A few years later, when a local developer went bankrupt, Matt and his wife bought and finished a half-built house--in the same neighborhood, as it happens, that Sharon and Mike McIntyre are moving away from.

But Matt says he'll never leave. "I'm 41," he says. "I think we're here for the duration." And anyway, he wants his seven-year-old twins to be able to make a home here too, if they want, and he thinks that maybe he can make a difference for the next generation. You wonder whether this is charmingly naive, whether he's going to be drowned by an oceanic flood of wealth.

Plus there's the question of Nantucket politics. Over the past few years, heated battles over planning and development have become the norm, setting off some blistering exchanges and tense standoffs at town meetings. As Andy Lowell, a carpenter who moved his family to New Hampshire after he became despondent about the island's future, explains, "Even though this is considered a quaint, peaceful, picturesque little town, deep down inside it's just boiling over."

Matt thinks the pressure may be easing. Just recently the town approved the building of several units of teacher housing, he says, and the level of discourse between factions is better than it's been in a long while. But talking to people like Andy, Matt and Flint Ranney, you start to see just how many unresolved issues linger in the air. Can the locals keep the economy humming and likewise protect the island's environment and intimacy? Can they welcome immigrants from Jamaica and El Salvador, who increasingly live in employer-owned housing for the year and staff the supermarket checkout counters and take on lower-rung service jobs? Can they live with the zillion-dollar homes, the platoons of Land Rovers, the flotilla of yachts and still maintain a foothold? "The rich people are not going away," says Matt. "So we've got to figure out a way for us and them and our kids to live together."

We're only talking about a tiny island, of course. But we could just as well be talking about thousands of towns across the country facing challenges that don't have quick or easy answers. Asked why anyone on the outside should care if the island finally drives away people like him, Matt thinks for a moment and says, "They don't have to care about us, but it's up to us to care about ourselves. We have to care about what our community turns out to be and whether we can continue to afford to live here."

That's why when he adds, "Nantucket is kind of a microcosm of the world," you have to agree. And then you have to wonder whether people like him--and people in similar predicaments elsewhere--can sort it out or ride it out before they too have to pack their things and move along.