In addition to density of jobs, temperate weather and limited land, many of the public schools are top rated and there is a concentration of great private schools too. The east bay traffic seems worse, it's hot and uncomfortable, and a little too close to some high crime districts. And many of those newer housing developments are horrible... pack 'em in, no yards, no walkable downtowns. There's really no comparison. I wish there was to ease the burden on housing prices on the peninsula. East bay and San Jose are really examples in development gone wrong.

The answer is complex, but fundamentally comes down to proximity to jobs and average local incomes. The great weather and nearby world-class city round out the reasons.

For example, there are roughly 250,000 housing units in SM County and about 400,000 jobs here. Other nearby expensive areas include Santa Clara County, which has about 600,000 housing units and 900,000 jobs there. San Francisco has 350,000 units and about 500,000 jobs. The corridor between SF and Gilroy has roughly 1.5 jobs per housing unit.

The jobs in these three counties are very high paying, with median income roughly 75% higher than the state average.

Looking at "cheap" areas of California: Sacramento County has 550,000 housing units and 450,000 jobs. Fresno has 300,000 housing units and about 240,000 jobs.

These areas have about 0.8 jobs per housing unit, close half the ratio of the SF area.

The median income is about 30% below the state average in these counties.

It wasn't always this way. In 1970, homes cost around $35,000 here. They cost around $25,000 in the Central Valley. In the Central Valley, the number of homes and the number of jobs grew at almost the same pace from 1970 to 2008.

In the San Francisco/San Mateo area, there population increased about 10% and the number of jobs increased around 50%. There has been little construction of residential units, but a lot of construction of new office campuses.

So there are a lot more high paid engineers, lawyers, MBA's, salesmen, programmers, and scientists in the area than there used to be. Notice all the highrises along highway 101, they were not there in 1990.

These high paid people work in the SF to Gilroy corridor disproportionately. They want to live near work. The highest paid people live near work (in SM County, in northern SC county, in SF),and bid against each other for the limited housing stock.

Hope this helps explain high local prices to you.

You're probably speaking in comparison to the San Jose area, and the main reason is there simply is no more room to build. Supply and demand.
If you want to buy a new home in San Jose, you simply buy a new home, or buy lot on the outskirts, and build.

To do the same thing in Burlingame, San Mateo, Palo Alto, you have to buy an old home, tear it down, and build a new one. Very costly endeavor.

That being said, whenever prices get too expensive inside San Jose, they can always build outwards. Very few places in San Mateo County are that way, most the towns are already built to capacity.

The best answer will come from looking at a satellite view of the county. There is very little developable land between the Bay and the mountains along 280. A huge impact can be attributed to Stanford Unversity in Palo Alto. Finally, San Mateo County is the only non-bridge escape from San Francisco. So those tired of SF and looking for warmth and back yards will choose south of SF as the place to go.