You would be amazed what they come up with these days Doug. I used to live in the Bay Area and all my middle class friends found a way to buy something. Many bought years ago so they just worked up the ladder, but many started just a few years ago. Interest rates are low and it seems brokers assume you want an interest-only loan if you are a first time buyer. How do people do it? Start at the bottom like most other people. The 700k home is a middle of the road home in many parts of the Bay Area, but you can get a condo for 300-400k. With an interest only loan and low rates you are looking at about $1500-1700/month. With the easy qualifications these days that requires an income of only say $70k, not too tough for a two-income couple in any market, especially one in a high-income area like CA.
Is it risky? Damn right it is, no equity to build means these people won't be moving up if the market doesn't move up, but its not impossible. I don't necessarily condone it, but just use the illustration to point out just how so many homeowners exist in markets with sky high prices.