We just bought a house on the Peninsula after being on the sidelines for the past 5 years, so we went through many of the same discussion points as you bring up.
First, I think the NYT's rent vs. buy calculator is a great place to start. When we ran our numbers, the break-even point was around 10 years. If you are planning on staying 20+ years, then I think it really comes down in favor of buying. Then question then is when exactly?
I don't think I can time the housing market at all. When we first started looking, my husband thought things were too expensive. You can look up for yourself what Peninsula housing prices have done over the past 5 years. We both make healthy professional salaries and I calculated that despite our wage increases, the housing price increases outpaced us, pricing us out of several cities we were interested in. For us, we decided to buy primarily on personal factors such as finding an area we liked, getting comfortable with a purchase price, and figuring out things like work and school for our kid when she does get old enough. Around these forums they always advise people against trying to time the stock market. Personally I apply the same logic to the housing market; I just am not smart enough to know.
Where do you work? If you work, as many people do, on the Peninsula side of the bay, there is nothing you could do to convince me to spend $1.2M on a house in Fremont. If you work in the East Bay then that is another story. For reference, we got lucky and bought a small house on the Peninsula for a shade over $1M. My husband tried to convince me to consider houses on the other side of the bridge, but I see the backup on 101 every day with the line of cars trying to go east over the bridge, and there was no way I was going to put myself in that position.