Not to pile on too much, but the Fed has been amazingly slow to raise rates and only shows signs of doing the most timid increase. It's the cheap money that's fueling the mad rush, yes, but it's a blunt policy tool being used to help along parts of the country that are really still struggling.
Until Detroit and Stockton and Pittsburgh are doing well again, aggressive policy is going to continue to fuel massive growth in SF and the Bay Area.
Pittsburgh's actually been doing very well over the last 10 years— the recession barely happened there. And, of course, the stakes are much lower when you can buy a nice house in the city or a nice school district for $150,000.
What happens if those areas simply don't start doing well again? Large parts of America have been declining for generations (West Virginia, much of Ohio, etc)
Federal Reserve's objectives operate at federal level, and involve national unemployment level (target rate of ~5%) and inflation (target rate of ~2%) http://www.federalreserve.gov/faqs/money_12848.htm
Which is likely. Echoes of the eurozone here for sure; SF probably needs 8% interest rates but even 0% is doing very little for the Rust Belt and other perennially depressed regions. Now, the eurozone critics think the problem is lack of fiscal union, but the US suggests it goes a lot deeper than that.
In principle, couldn't the issue be too few fiscal transfers? I.e. San Francisco should be paying even more into the federal coffers, to be redistributed even more to Alabama and New Mexico?
Or, thinking about the other direction, even restricting ourselves to within California San Francisco and the Bay Area single-handedly pay for a massively disproportionate part of state government services and redistribution. Perhaps it's time to go way back to metropolitan city-states as the proper scale of government.
It doesn't make sense to separate Marin from San Francisco. And while we're at it, I'll take Sonoma and Napa. Maybe Davis too, because, you know, YOLO.
I don't think more fiscal transfers are the answer. If you took an even bigger chunk of money away from SF, you might succeed in reducing the rate at which real estate prices there are driven upward. But air-dropping that money in Akron will probably serve only to drive up real estate prices in Akron, which doesn't really solve anything (in particular, it does not increase output).
The problem here is twofold: first, not enough of the money being created is flowing into operating assets; second, the operating assets being purchased with this money aren't productive. This seems like an obvious and natural consequence of a service economy, in which the dominant inputs are labor and real estate. When you pay higher wages, that money has to go somewhere. Some of it goes toward consumption, but most is surplus and gets invested. It has the same problem it had when it was created: it can go toward real estate, operating assets, or portfolio investment. No one wants operating assets in a service economy (because they're not productive), so it ends up in real estate or portfolio investments. That drives up asset prices but does not increase output. Diverting more of this money into operating assets (things that make stuff) would increase output and alleviate the pressure on asset prices. Instead it goes into more wages (paying people more does not make them produce more) and real estate (paying more for land or office space does not make it produce more, either). One of the few bright spots was oil, but the sharp drop in prices has made investment there unattractive as well, and has reduced nominal output at the same time.
The central bankers can control the rate of asset price inflation by making money cheaper or more expensive, but they can't do anything to increase output when the money they create is used primarily to acquire nonproductive assets, or to acquire at higher prices assets that are already being fully utilized. That's why real estate is expensive and output is stagnant, and why fiscal transfers won't solve anything.
Any number of solutions suggest themselves: relaxing regulatory requirements to make manufacturing, utilities, and other non-service industries more productive; fixing China so that surplus cash in the US can be invested in operating assets there instead of domestic real estate; fixing laws that limit the supply of real estate, both to directly reduce the price and to make it less appealing as an investment; investing more tax revenue in infrastructure instead of transfer payments to individuals (where much of it ends up in ... real estate); radical alternatives like breaking up the United States into separate nation-states that are more cohesive internally. I'm sure you can think of others as well.
Until Detroit and Stockton and Pittsburgh are doing well again, aggressive policy is going to continue to fuel massive growth in SF and the Bay Area.
Tightening is not coming fast nor aggressively.