Sorry, but I vehemently disagree. With my salary and credit history, I can qualify pretty easily for a $6-800k home. That all-of-a-sudden puts me in a market that I wouldn't have dreamed of being part of before the loan was offered, if, instead, I had to pay cash, or pay a substantial portion of the amount of the home in cash (50-75%, for instance).

If this was true across the board (tightened credit), homes simply would not sell at their current prices. Most people, with the expenses of day-to-day living, would have a very difficult time scrounging up $600k for the down payment of a home, if they could do it at all in their lifetime. Meanwhile the stock of unsold homes and anxious homeowners looking to move would grow. Market forces would eventually push these prices down.

This isn't even theory. This literally happened after the crash when banks stopped loaning money. People wanted to buy houses, and why not? Loan rates were insanely low. But a substantial portion of the population found it difficult to extend their credit further, or get first-time credit, and thus house prices tanked around the country.

You're right that the Bay Area is unique. We have a dangerous combination of: The aforementioned credit, many highly paid people, and people who are younger, and perhaps less intelligent with how they evaluate the value of things, using credit as a sledgehammer to get what they want. But even well-payed engineers couldn't afford the houses around here without substantial credit extension.