Palo Alto is usually considered the Peninsula, not South Bay. :)
Where will you and/or your friends be based out of? Meaning, where will people be commuting to most of the time? This will help our recommendations. If you want something centered around Palo Alto then I recommend Craigslist housing section (search Peninsula for Palo Alto north, and South Bay for south, though oftentimes you'll find Mountain View postings in each sub section, so be flexible). Palo Alto is a wonderful town and you'll pay a premium to be there. Things will be slightly cheaper if you go one city south (Mountain View) or one city north (Menlo Park). Redwood city (two cities north) will definitely be cheaper, but it isn't nearly as nice. For commuting purposes just keep in mind that the general rule is that the cheaper the housing is, the worse the commute will be. So living in the south bay (San Jose, for example) will provide, relatively speaking, much more affordable housing, but the commute will suck donkey balls. Living on the Peninsula somewhere and commuting south in the morning will cost more for housing but give you a much better quality of life for commute.
If you can provide more details then we can provide better advice.