The issue is, in these areas, there isn't much choice. Here in DC, couples max out their mortgage because prices in any area with a good school district and less than an hour commute are exorbitant. And we're not talking luxury houses here. A 1,200 square foot 3BR in Bethesda that was last renovated in the 1950s will run you $600k.

In the DC area this results in a weird trend. There are almost no 3 bedrooms in Georgetown below a million. That'll buy you about 1,200 square feet. $2 million will buy you an actual urban mansion with triple the square footage and wood paneled walls. The price is entirely driven by what ~$300k HHI couples can "afford" maxing out their mortgage eligibility. Once you get above that, demand drops precipitously.

Sounds like the 'south bay' in los angeles. $3k/month buys you a crappy 1950s tract house. $4k/month gets you a nearly twice as big house.

They could rent and probably squirrel enough away in a few years to retire or buy in cash the houses in foreclosure after the crash :)

Rents are very high too, and at that income range you're leaving a ton of money on the table by not taking advantage of the mortgage interest deduction.

I looked at a house in SF that was listed for $2M (probably go for $2.2M). At 20% down, that's $500K upfront, then ~$9,000 per month all in for mortgage and property taxes.

If you assume you shouldn't spend more than 1/3 of your gross income on a house, that would mean the homeowners should be making $325K/year (and already have $500K saved they can plow into a house).

Wow.

Not so hard if you assume it's their second house, and they bought the previous one a few years back. Once you're on the housing ladder, you're protected to some extent from the increase in the price of the house you want to buy, by the increase in the price of the one you already have.

Exactly: we bought in San Jose in Sept 2011 and have seen our townhouse's value increase by approx 60% since then (which seems ridiculous to me). We really lucked out on our timing.

The seller who had originally owned our home sold for a ~20% loss over their purchase price (purchased in 2007).

This was my experience, the small house my wife and I bought originally, then after a few years we were vested in our options and had some equity in our house, the combination let up step up to a larger house with essentially the same payment (rates had come down, our down payment was bigger).

I don't disagree. If you've been owning in SF for the last 20 years, you're good. But how many people in SF arrived in the last 5-10 years?