I also live in the Bay Area; and most average families that I have spoken with directly about their living situation ARE STRETCHED. Where they are working off ARMs and have very little or negative savings on a month to month basis. They are able to get by on negative savings by selling some of their stock options or borrow money from their parents. Worse case when one father spoke of selling some of his 401K to make the payment (are others doing this I wonder???). Most have some stock options, just enough to cover payments and at least one vacation trip a year – however they must sell stock to make it as their savings are close to nil.

Exceptions to the average family would be multi-millionaire families that made enough on stock options to purchase the house outright – this is true in many cases in the Bay Area. The other exception I have seen in my area is long-term residents that were born/raised here – they have either a low cost entry point but have to make the decision to either pass it off to one of their kids or cash out as the numbers look too good.

For myself I sold my last house in Palo Alto (good school district) and one of the only suburbs that is holding up well – at some point, average families will have to make a decision how much ‘stress’ they can take on in a popular area where others(non-average) may buy without any hesitation. You can almost call Palo Alto a Flipper’s target market for now.

I believe the popular areas will become stagnant with continuing interest rate increases(my opinion) and recession pressures that will effect dual-income families / corporate employment. Much of the tech entry-level development has already moved to India and China; there’s more to come.

As for the less popular areas, outside of Palo Alto – there is an growing inventory of houses for-sale on a monthly basis. There are deals being made now, sorry to those that are in a bind as I have been there before!

The high-end($2M+) is unfavorable for those families that couldn’t really afford it in the first place but was betting on a nice pick-up from what they oringinally paid for post 2000. (i.e. the bigger the house, the bigger the net payout in dollar terms) I’ve heard of two exceptions where the family bought at the 9/11 dip and flipped later (Atherton, Los Altos Hills). However a majority are wealthy enough to not care.

Since 2005 – when I sold, I have remained firm on my belief that 2008 could be the year of reckoning. I could be wrong or early on this, but for me much timing depends on how the FED plays out with interest rates.

I was too early on the tech/Nasdaq bubble; sold-off in 1998.
I waited too long for Gold to pick-up(over 10years); but it has finally paid off.
I was early on Currencies (pre-Euro, Canadian, New Zealand and Australia); very nice now.

What next? Anything you can benefit from with higher interest rates.
I’ve been going against the grain on this one since I sold my last house; and people are shocked in disbelief. Well it’s possible Bernake could drop rates, but in the medium/long-term, it has to eventually trend upward.