A stack of moving boxes packed with religious books is tucked into the corner of Yossi and Racheli Zehnwirth's apartment salon.

Three years ago, the couple arrived as newlyweds in this devoutly religious settlement – the second largest in the West Bank – with the hopes of buying their own home, a goal beyond reach 15 minutes away in Jerusalem.

Now, with two young boys, the family is moving to a rental half the size of their current apartment because they can't keep up with property values buoyed by high birthrates among ultra-Orthodox Jews and the demand from newcomers escaping overcrowded cities.

"Here we ride in bullet-proof buses for the price," says Mr. Zehnwirth. "Now we don't even have the [low] price any more."

As the Obama administration pushes for a total West Bank settlement freeze and Israel insists on allowing continued expansion inside existing settlements, Beitar and a second ultra-religious city, Modiin Illit, illustrate the roots of the dispute over Israeli development on land claimed by the Palestinians for a future state.

Planned by the Israeli government as a housing solution for religious sects with high birthrates and a preference for living in cloistered neighborhoods, building in the two settlements took off after the Oslo peace process began in 1993. Runaway growth has made the two cities account for one-fourth of the 300,000 Israelis spread over more than 100 settlements in the West Bank, not including Israeli neighborhoods of East Jerusalem.

But because these settlements are located relatively close to Israel proper, an agreement on a border modification and land swap is a realistic option for resolving the dispute here. Even though they have moved into the vortex of a decades-old geopolitical dispute, the residents of these communities are not nationalists like those at the forefront Jewish settler movement who seek territorial expansion.

"We didn't come here for politics or to fight. We want to live in the land of Israel, but it doesn't matter where – east or west," says Beitar Illit Mayor Meir Rubenstein. "To our great misfortune, the government put us here and now we're stuck with Obama."

Israel continues settlement expansion

The dispute over settlements has opened up the most public dispute between Israel and the US in about two decades. On Monday, Israel announced it had approved 50 new housing units in a settlement north of Jerusalem to accommodate settlers being moved from an outpost without government approval. In a policy speech earlier this month, Prime Minister Benjamin Netanyahu said that although Israel won't build new settlements, it will permit construction to allow existing communities to expand normally.

Last week, the G-8 and the Quartet of Peace process sponsors joined the call for a complete settlement freeze.

With rapid population growth, high demand for housing

Beitar Illit is about a 20-minute drive southwest of Jerusalem. The settlement looks out onto hilltops dotted by red-roofed houses that are part of the "Etzion bloc," a group of suburban settlements which left-wing Israeli governments have sought to annex in a land swap with Palestinians in previous negotiations.

The annual population growth in Beitar is nearly twice the overall rate of about 5 percent for the West Bank settlements. Mr. Rubenstein complained that Beitar Illit is planned to include 10,000 housing units, but there are permits for only 7,000 – the remainder are on hold until further notice.

Despite complaints among residents of Beitar Illit and other areas that the government isn't giving enough building permits, data published in March by the Israeli Central Bureau of Statistics on housing starts in the West Bank showed a 42 percent increase in 2008 compared with 2007.

Peace groups complain that the population in the settlements increased about 50 percent in the last decade. Regarding the dilemma faced by the ultra-religious settlements, peace groups say that the government should encourage them to live inside Israel proper.

"Israel is constructing in a way that they limit the ability of Palestinians to use their own land," says Dror Etkes, a settlement expert at the human rights watchdog Yesh Din. "I grew up in Jerusalem and I cannot afford to live there even if I wanted. Who in the country has a guarantee they'll be able to live five minutes from their home? Only the settlers are asking for this."

Religious groups take refuge from modernity in settlements

Because strictly religious Jewish groups seek to block out trappings of modernity, they prefer to live in closed communities where advertising is tailored to their sensibilities and cable or satellite TV infrastructure is banned. Combined with the fact that Beitar Illit and Modiin Illit have the highest reproductive rate in the country of about eight children per woman, that has created surging demand for residential units.

Despite the slump in real estate prices around the world, values in Beitar Illit are climbing. Fraida Sterka, a local broker, said that prices have gone up 5 percent in the last two months.

"People want to live in a place that's very observant without any outside influences," says Ms. Sterka. "There's an entire community that wants to live here. There is a shortage of several thousand housing units a year."

To make do, owners are outfitting basements as apartments and closing in balconies for extra room. Because of a lack of commercial real estate in Beitar, shops have opened up in apartment buildings.

And so, in a couple of days, the Zehnwirths will move into a converted basement with one tiny window that opens into an air shaft and a second that looks out to a stairway landing.

"It's like living in a bomb shelter," says Mr. Zehnwirth. "The government promised us apartments here. They said, come and it will free up. Meanwhile, its only gotten worse."