DARIEN, CONN. -- When Corby O'Connor moved to this high-priced New York suburb 18 months ago, she left a "really incredible" house for a much smaller one with tiny closets, a narrow kitchenette and a leaking roof.

The price of her new home was $275,000, more than twice what she and her husband had paid for their four-bedroom colonial in Rochester, N.Y., before he was hired by an executive-recruiting firm in Manhattan.

"We're tripping over each other," O'Connor said as she fended off demands from sons Tim, 4, and Brian, 2. "To live here, you have to live in cramped quarters and all your money goes into real estate.

"We have no cash. We don't go on vacation. We don't go out very often. Every single day, we're in the red."

Not all employes who move or are transferred to this sprawling metropolitan area are in that kind of bind.

But nearly everyone, whether from Cheyenne or Chicago, goes through what one local broker calls "sticker shock."

Some rent boxy three-bedroom apartments in Manhattan for $4,000 a month. Others buy $300,000 homes in remote sections of New Jersey or Long Island, leaving them with gut-wrenching commutes into the city.

And many come here to Fairfield County, Connecticut's magnet for corporate headquarters, where a steady migration of executives has pushed the average home price in upscale neighborhoods past $500,000.

Beyond individual horror stories, this spectactular inflation in real estate, with home prices jumping 20 to 30 percent a year in some suburbs, has profound implications for New York City's economy. Major corporations from Mobil Oil to J.C. Penney have moved out of New York in recent years, many citing soaring housing costs that make it increasingly difficult to find and keep a skilled work force.

Another telltale sign is that a growing number of employes across the country have been turning down jobs in New York. Homequity Inc., the nation's largest corporate relocation firm, said that 4 of 10 employes at its client firms are rejecting such transfers, primarily because of housing costs.

"The word has spread," said Joel Nezvesky of Homequity. "People say they're spending $400 a month on housing, and we tell them to add a zero to that."

A survey by Coldwell Banker, a national realty firm, says the average home price in Greenwich, Conn. is $520,000; in Stamford, Conn., $325,000; in New Jersey's Bergen County, $320,000, and in northern Long Island and Westchester County, $300,000. Even in such outlying suburbs as Morris County, N.J., average prices have risen to $235,000.

By comparison, the survey pegs the average home price in Washington, D.C., at $148,600.

To be sure, most large companies that move their employes here give them financial help, including mortgage-differential payments, closing costs, real estate agent fees and a guarantee to purchase their old home at fair market value.

Jack Jones, a spokesman for Xerox Corp. in Stamford, said his company offers transferees several such incentives, including as much as a 16 percent boost in salary. "The average family probably needs a four-bedroom, and the average four-bedroom home up here is going to cost $500,000," he said.

But many believe that such corporate subsidies are fueling the inflationary fires.

"It's a crazy, irrational market that's overheated because the investment bankers have a lot of money to spend," said Cary Tolley, a tax lawyer who recently moved from Richmond, Va., to Darien.

Darien, just north of Stamford, is the kind of town where public schools are surrounded by vast, well-tended lawns, and the backyards grow spacious on the winding roads near the local country club.

Corby and Brian O'Connor, despite spending $275,000, have what is considered a "starter" home. It is a stone's throw from the New Haven Line, where he catches the 6:23 train to Manhattan each morning.

Corby O'Connor, 32, recalled the frenzy of house hunting here in late 1985. "As we were speaking to agents, prices were going up $10,000 every two to three weeks," she said. "There was absolutely no negotiating. There were three or four couples behind us who would've paid the asking price."

Tolley, who bought his Richmond home for less than $150,000 in 1983, was looking in a different price range. He has just spent more than $500,000 for a four-bedroom colonial in Darien that his wife, Eve, says "was grossly decorated and hadn't been painted in years."

The 1957 house, while it sits on a three-acre lot, is smaller than Tolley's Richmond home, needs substantial work and is not air-conditioned. But Tolley said he likes the town's good schools, open spaces and 53-minute train ride to Manhattan.

"By New York standards, that's pretty reasonable," Tolley, 38, said. "To work hard and spend four hours a day on the train, I don't know how people keep their marriages together."

But many try. The number of people commuting to Manhattan by train from Princeton, N.J., has jumped by almost 50 percent in the last three years. New Jersey real estate broker Peggy Frattaroli says some home buyers are moving as far as Bucks County, Pa., nearly a two-hour commute from the city.

Such distortions in the housing market are "the same thing that happened in California 10 years ago," said George Sternlieb, an urban affairs expert at Rutgers University in New Jersey.

While home buyers are struggling, Sternlieb said, this "enormous inflation of capital wealth" provides a huge windfall for those looking to sell. One of his Rutgers colleagues "started with a $40,000 tract house, traded up four times and now owns a $350,000 house," he said.

Roger Sonstroem, a forest-products executive, was transferred to Connecticut from Tacoma, Wash., in 1985. He was appalled at having to spend $200,000 for a house and having to begin his commute at 6 a.m.

Now, however, Sonstroem is asking $400,000 for his Trumbull, Conn., home, even though he says it is "nothing special." If it does not sell, his company will buy it at close to that price. His latest assignment is Bangor, Maine, where he has bought a top-of-the line home for $175,000.

Those who cannot resist the glittering Manhattan market are faced with a new level of surreality, one where such luxuries as closets and sunlight cost extra.

Manhattan Living magazine lists some recent condominium and co-op offerings: Studios on East 82nd Street from $170,000; one-bedrooms on Park Avenue from $440,000; two-bedrooms on East 79th Street from $580,000, and three-bedrooms on East End Avenue from $750,000 to $1.1 million (maintenance charges on these units begin at $1,524 a month).

Those looking to rent in Manhattan are told that the market is oversaturated now because of a glut of new high-rise buildings, many with rooftop health clubs and other amenities aimed at young professionals. But prices still begin at $2,000 a month for two-bedroom units, and "real" three-bedrooms -- not the two bedrooms plus dining alcove that many try to pass off as a family-sized apartment -- are harder to find than a rush-hour taxi.

"Demand in Manhattan is almost unlimited," said Nancy Packes, head of the Feathered Nest rental agency. "It's not like Denver . . . . People living in contiguous areas would move closer in if they could."

Paul Power, 26, a business graduate in Chicago just hired by the Morgan Stanley investment firm, said his apartment search was "frustrating and exasperating." He and his new wife wanted to live in a building with a doorman on the Upper West Side, but settled for a one-bedroom on West 55th Street, on the edge of the midtown commercial district.

Power likes the convenient location, but added, "If you had told me two years ago I'd be paying $1,500 a month for a one-bedroom apartment, I'd have said you were crazy."

While young newlyweds are able to make sacrifices, it is harder for older breadwinners. Robert Bradshaw, an executive at Grumman Corp., said that a number of engineers have turned down jobs at the company's Long Island plant "because they couldn't find a house they could afford."

Nancy Scull, a Darien broker, also recalled cases in which out-of-towners "come and look at houses, and the next thing you know they're not coming."

According to Homequity, the cost of living in the New York region is 20 percent more than San Francisco, 35 percent more than Washington, 38 percent more than Chicago, 40 percent more than St. Louis and nearly 50 percent more than Houston. Most of the difference is attributed to housing costs.

Such numbers have forced local governments to change their ways. Long Island's Nassau County recently dropped a requirement that its employes live in the county because so many were priced out of the market, forced to live in illegal basement apartments or use phony addresses while commuting from Brooklyn and Queens.

Bell Laboratories, a major employer in northern New Jersey, pays employes an average salary of $45,000, Sternlieb said. "In most places in the U.S.A., that will buy a very nice house," he said. "In the New York-New Jersey area, it will only support a marginal house."