Thought on Bay area housing future
I believe you live in Bay area where it’s very different from other regions of the country. Bay area has been fortunate because of the Silicon Valley effect. It probably never had a bad few years of price drop. Every body has been lulled into thinking that the price will continue to go up forever. I don’t blame that. In fact, price has been going up for the last 10 years at average annual rate of 8.9% according to OFHE. Whereas DC area only rise at the rate of 7%. That 1.9% extra growth rate has made Bay area the most expensive region outside of Manhattan.

However, a few caution that the real income growth in Silicon valley has been lagging behind since the end of the go-go 90s. It no longer is the center of highest job creation. Most of the advantage probably has been priced in. I do believe that Bay area will continue to rise in price for the foreseeable future, but the speed of gain is going to be less than in the past. In fact, due to its high cost of entry in the bay area, it has not been a very good residential investment market for a long time. This by no means imply Bay area is not the highest return market. It is, just that it would cost an arm and leg for investors to get into the market.

My thought and caution on real estate investment
Well, it was pretty easy until 2006. Now the hard time has begun. Despite anecdotal reports of short term recovery in recent months from a few regions, I personally believe that harder time is still ahead of us, not behind us. It’s simply not realistic to expect a trend to continue for another 5 years. A slow down and 10-20% price drop is in fact good not only for the economy, but also for the investor. For an investor, the hardest is not making money flipping houses when the going is good. The hardest thing is to hold onto self-enthusiam to be able to adjust to a new environment, therefore protecting self from the potential hazards of downturn. Like Donald Trump said, “The success of real estate investment is gauged not at the good times, but at how well you handle the bad times”. There are lots of investors still trying to deny the trend change. I understand this psychology because it was hard for me too. In fact, we need to realize that price doing down is very healthy and a very good development. It would open up more opportunities for investment. If you recognize the cyclic nature of RE market, you would love this cycle change. In the end, the inflationary pressure will eventually push housing price to new highes, that’s a law of nature and won’t change. I believe the entry point of RE investment can be timed. This time is a perfect inflection point to ponder that.

Globalization is fuel to the fire of American RE market
All the stuff that can be leveraged by globalization will shrink in value due to global competition by price, labor cost, material cost. Example of these items are all commodities, cars, computers, toys, apperals and etc.

However, all the stuff that cannot be leveraged by globalization may rise in value, such as real estate, agriculture produce, and etc.

Globalization is causing new money from countries like India and China to seek properties in developed countries like USA, UK or Australia, causing further competition to existing properties. Therefore, globalization is adding fuel to the fire of real estate market. It used be that only American buying American houses. Now Chinese, Indian, Russian, Koreans all rush to buy up prime property in the US, possibly seeking a hedge against potential instability in their own economy.

At the same time, the free money is pouring into the US, facing too many easy source of money, banks have to lower mortgage interest rate. Therefore, unless the source of easy money is withdrawn, mortgage interest rate is hard to go up.
Positive on N. NJ and NYC metro over long term
The key issue with Tri-state region is the lack of buildable land. Due to the fact that this region has been developed decades ahead of other regions, you can see 50 year old or even 100 year old houses everywhere. Most of the convenient places have been developed by builders N decades ago. Population density is getting worse. Zoning approval is extremely slow and difficult. Most builders are lucky to get a lot, let alone getting it through approval process. In the end, it may take 10-15 years to get the land approved for Residential development suitable for multi-families because that’s where the profit comes in. Despite short term price adjustment, this region is poised for long-term price appreciation above national average. I would say you should expect to see no less than 7% AVERAGE annual price appreciation in the foreseeable future. Yes, if you can hold, go ahead and buy. Please note that tri-state’s issue is slower job growth, however, that may not impact price appreciation because the bottom is sealed (zoning issue). That explains why some regions with sub-par job growth or economic vitality but still entertain robust price appreciation, that’s what lies ahead for New Jersey. I don’t like that state, but if it comes to investment, I would do it there.
Too early to say we are entering Hyper inflation period
Globalization is reducing the cost of everything including corporate salaries. IBM, Cisco, HP, Google, Apple is actually no longer American dominant companies except they are only American homebased. Increase in productivity is helping to reduce cost too. I am not sure that we are entering a hyper inflationary period. Of course, I can’t rule out this possibility.
The key of appreciation is land cost (ZONING)
Other than easy money pumped in by the VCs, Bay area also suffer from one of the toughest zoning laws in the country. That explains at least 50% of why the price appreciation can be so horrendous while at the same time people’s salary don’t seem to keep pace. There is simply no extra land for new development. Yes, I believe Bay area price will go up higher. I agree with you on that. But I am not sure about the timing. I think the market may be poised for a slow churn period.

DC area is experiencing the same zoning caused land cost. A builder customarily has to wait 10 years before his application for zoning can be approved in DC region. Most close-in counties have been nearly completely built out. Big parcel development has become extremely hard for close-in counties.

Whereas some places like Atlanta, Raleigh, Dallas, Austin may not experience the same zoning triggered price increase. That explains why Dallas has about the same high tech job concentration as Northern New Jersey, but not enjoying the same kind of price appreciation as North NJ. That’s all zoning’s problem.