First, there are no more "upgrade buyers" as existing home equity is now almost non-existent--and it won't be back for a long, long time.
Second, non-conforming (i.e. non-government-sponsored) loans are almost impossible to come by and our banks here in the US are going into "Japan mode" where they quietly don't loan any money to anybody while they slowly recuperate.
Third, demographics are against you: Baby Boomers are moving from Big Houses next to work (viz. Los Altos, LAH, etc.) to small places in the middle of nowhere to retire without the kids. This bodes very badly for places like Los Altos Hills.
All this points to two things: 1) short term, expect 50% price drops from 2008 peak; 2) long term, expect that prices here will NOT keep up with inflation for a long, long time. Also, on an inflation-adjusted basis, prices will NEVER back back to peak in our lifetimes. This Bubble was funded by impossible financial structures which will be outlawed for a generation at least.
Check out: http://www.patrick.net/housing/crash.html
The analysis on there is very simple: a house's RENT is what determines it's "value" to people minus what you expect to make on appreciation. Nobody believes houses are going up in the next decade, so the rent-to-price ratio MUST therefore return to Earth. In Los Altos Hills today prices are at least DOUBLE the correct ratio and in many cased 3-4x the right ratio.
I am less optimistic for such appreciation as mention below, expecially in the next 3 years. Going back to 1998 when the average sales price was 1.48 million and the median sales price was 1.2 million, we had huge appreciation the next two years. In 2000 the average sales price rose to 3.5 million and the median sales price was 2.97 million. Since 2000, prices have softened and are now just getting back closer to the 2000 numbers. 2007 ended with the average sales price slightly above 3 million and the median sales price at just under 2.6 million. Note: that the number of sales was also down in 2007 with only 96 sales (the third lowest in the last 9 years). The numbers would indicate that (in the short term) we should continue to get slow growth/or be flat in the hills expecially in the higher end. Your price point is considered the higher end in the hills. Note: only 6 homes sold in 2007 at 5 million or above,12 sold in the 4 million range, 15 in the 3 million range, 35 in the 2 million range and the rest under 2 million.
Looking long term, we should see fair appreciation (I'm guessing an average of 4-5% per year over the next 10 years (on average), but not what you should get in another investment vehicle. I would base your purchase on lifestyle choice and be happy that the home (over time) will apreciate.
That is a Million dollar question. I am an optimist and I believe prices will increase by at least 20% by 2010. Historically, home prices in the Silicon valley have at least doubled every ten years. I believe this trend will continue.
Hope this helps!