Yes. People buy those homes for neighborhood, amenities, schools, neighbors, friends, entertaining, prestige, etc. They typically have a very large down payment (or just cash) and expect to live in their home a very long time. That type of property is a destination, not necessarily an investment.
Therefore; the decision to buy in those areas is not primarily based on financial issues. I'm not saying that is not important, it's just that it tends to be secondary.
An extreme analogy would be buying a Ferrari. People that buy that type of car are not expecting a great return on their investment. On the contrary; the value drops like a rock, the insurance is expensive, registration is another huge expense, and you don't want to park it anywhere. They buy them because they expect to enjoy the car.
The good news is a house in the areas you mentioned should do a whole lot better than an exotic car. And you get to live there too.
With this in mind, a buyer in the $1.7M to $2.5M price range should be more concerned with finding the 'right house' rather than timing the market. Why buy a home that seemed like a $2M bargain based on all the numbers, that you didn't like?
You emphasize 'high price' by capitalizing it. If you are thinking about buying in those neighborhoods and look at everything as high priced then you might want to rent in those high priced neighborhoods instead. It certainly makes strict financial sense to rent instead of buy. Your commitment would be all of $6K-$8K-$10K a month. You can keep the down payment in the bank and be free to leave at the end of the lease. If Ashok is correct, then you could lose $600K or spend $240K on rent for 2 years instead.
You may be in the alternative minimum tax range. You may get little or no benefit from writing off the property taxes and the interest you pay on the mortgage(s) that lose their tax benefits over $1.1M as well. How much more is that beyond the $600K Ashok thinks you are going to lose vs. just renting?
It's interesting he has 2 thumbs up and everyone else has zero.
I disagree with Ashok. No one knows where the market will go for 'high end' homes in the West Valley/Peninsula area. Over the long term they have always done well. And if the home does really well in the next 20 years, only $500K of gain is going to be exempt for a couple, so you'll pay taxes on the rest anyway.
It's about buying the home you want or not buying the house you want; that's all.
Mark Burns, Realtor
Coldwell Banker Elite
President - PRDS, Contracts and Forms for Silicon Valley Residential Real Estate 2008, 2009
President - Silicon Valley Association of Realtors 2007
DRE #00896552 licensed since 1985