It's quiet out on Nicholson Drive between the new Bluebonnet extension and the parish line. An uninterrupted sea of scrub grass stretches near to the horizon.

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Not for long, though.

Developer John McPherson believes Bluebonnet will transform this part of town--the last big stretch of open land in the southern part of East Baton Rouge Parish.

"This is where growth has got to happen," he says. "This area is going to explode."

McPherson made his first offer on 270 acres here last July. This spring, he and partner Greg Flores announced Lexington Estates, a 515-home development.

They are not alone.

"When you drive around, you see new stuff all over," says Ed Kramer, a developer and president of the Baton Rouge Growth Coalition.

Add to the 515 homes at Lexington Estates another 275 at Willow Grove on Perkins Road and 280 at Green Trails in Shenandoah. Tommy Spinosa's 120-acre Ford farm near Southdowns will result in some 300 houses, and Mike Wampold's 1,070 acres on Bluebonnet could yield many hundreds more.

Meanwhile, University Club still has the potential for about 500 more lots. Copper Mill in Zachary is planning another 470, and other projects are selling late phases. Tract development in Ascension and Livingston parishes adds about 2,000 each year. And then there are the several hundred condos slated to come online around town.

"It makes you wonder," says Kramer. "Who's buying it?"

Is there a Baton Rouge bubble?

Many believe the dot.com bubble has been replaced by a real estate bubble. Since the late 1990s, U.S. real estate values have risen by 50% on average, even though for most of the 20th century, long-term real housing values have been flat or negative, says Yale economist Robert Shiller.

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No one sees a local bubble, though. Prices here just barely led inflation through 2003. Last year, the average sale price did jump 4% above inflation, according to MLS data, and so far 2005 has seen an even larger increase.

But even without a bubble, could the local housing market be overbuilt and primed for a downturn?

Nationally, the pace of homebuilding has been fast but increasingly erratic. New home construction and sales had record years in 2004, but this year, monthly Commerce Department numbers have swung wildly.

Here, increases have so far been sustained. If the permitting pace in metro Baton Rouge through March continues, 2005 will see a 17% jump in new starts, for a total approaching 4,800. Permits only barely cracked 4,000 here in 2004.

The problem is there's only one sure way to know a market is overbuilt--houses stop selling. And at the moment the housing market first grazes that particular iceberg, there is a already a Titanic's worth of bankers, developers, builders and real estate agents steaming toward disaster.

There is much to argue that there is no crisis here. For one thing, lots are selling. "In East Baton Rouge, everything that goes up gets absorbed," says Jeff Martin, a Regions Bank VP who heads up real estate lending.

What is underpinning this apparently healthy market? Not much, at first glance. Since 2000, metro Baton Rouge's annual population growth has slowed to 1.0% and job growth has averaged 0.5%.

But experts argue that households are the unit of demand for housing, not individuals. "Households can be increasing while population is flat," says Ivan Miestchovich, a University of New Orleans professor of finance and urban planning. That results from factors such as smaller families, college students living on their own, divorce and empty nesters.

But growth in the number of households in the Baton Rouge area is only marginally less unimpressive than growth in the overall population. The annual growth in total households from 2000 through 2003--the last year for which Census data is available--has been about 1.2%.

That translates into fewer than 2,500 new households a year, total. And not all of them will buy. More than three in 10 Baton Rougeans are renters. So what accounts for the remainder of the 4,000 or so houses per year that Baton Rouge actually builds?

In Greenspan we trust

The short answer, says LSU economist Loren Scott, is low interest rates.

But the long answer is worth examining, because new housing in the absence of population pressure has to pull from somewhere.

Some of it comes from demolishing old houses. During the 1990s, housing in the metro area was taken off the market at a rate of about 1,500 units per year, according to the Census.

But in general, new construction is not a response to housing obsolescence. It's the cause. "New houses kill off older houses more than older houses dying gives rise to new houses," notes R. Kelley Pace, director of LSU's Real Estate Research Institute.

New starts also weaken older suburban developments, some of which are beginning to stagnate or decline here. Says Kramer, "The big neighborhoods--Tara, Broadmoor, Shenandoah, Pollard Estates, Concord Estates--all these places are 30, 40 years old. And people want new houses."

Homebuilding and the rising home ownership rate have also weakened the rental sector. Wesley Moore, an appraiser with Cook, Moore & Associates, says although actual apartment vacancy remains at a healthy 5%, "we're seeing rising 'economic vacancy' in the form of giveaways and lower rents."

Even among new houses, rapid supply at the high end is beginning to soften demand, says Danny Montelaro, Baton Rouge president for Regions Bank. Many see similar trends in the big tract developments in Livingston and Ascension parishes.

A separate factor supporting new housing starts is the broad acceptance of real estate as an investment. Kramer estimates one in every five or eight buyers here is now keeping their old house as an income property.

Nationwide, real estate has outperformed stocks and bonds since 1995, according to Brookings Institution economist Anthony Downs. People are wary of stocks after the dot.com bust, and because the Fed's means of cushioning that recession was holding interest rates low, real estate has become doubly appealing.

Whatever the causes of the building boom, it has an entire industry floating upon it.

A look at the machinery

If you picture the real estate development industry as an ocean liner, it's one that must be steered looking only at its own wake, at past trends. Everyone hopes the ship will keep cruising, but all the while they're worried about the seas ahead and jockeying to stay near a lifeboat.

Real estate agents stand at the prow. "I'm cautious but not worried," says Paul Burns, president of the local Realtors. "Where we are, we can still turn the ship."

Though the market has soft spots, Burns says it also has pent-up demand, "Anything below $350,000 is in high demand," he says. "Especially if it's new."

One step back from real estate agents are builders. They operate months or years in advance of a home selling. "That makes the building cycle extremely sensitive to demand," says LSU's Pace. "Either they're working pretty hard, or they have serious problems."

Builders try to manage this instability by banking lots to pace supply. That's why Lexington Estates' developers think they can sell out the initial 134-lot filing in 10 months.

"We're predicting high demand from builders," Flores says. They buy in blocks of five or 10, even though only three or four finished homes might sell per month.

McPherson, who is also a builder, says, "Builders get the best deal on volume, so you might buy ten lots and keep some for inventory. A lot in a seasoned neighborhood in its fourth or fifth year is worth more." The risk, though, is getting stuck with inventory if the market slows.

Developers have their own supply-and-demand concerns. Like builders, their business is to create supply, so they also risk getting stuck with inventory. Unlike builders, they're typically in for a lot more money, most of it not theirs.

"If the banks are willing to supply capital, there's an endless supply of developers willing to build," says Regions' Montelaro.

Larry Denison, Baton Rouge president for BancorpSouth, adds that developers are prone to over-leveraging. "Most would exceed 85% every time if they could. They assess risk very differently from lenders."

Kramer says the risk of being over-leveraged rises with interest rates. "Developers with equity in are OK, because the asset will appreciate in the long term," he says. "But it may go down in the short term, and if you're heavily leveraged, you have to provide a return to the bank."

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That makes it tempting for developers to front-load, Kramer says. "If they can move 200 units quick and pay down the note, they'll be okay."