Lets settle this once and for all..

[Daniel Bryant]

A house in (random B class neighborhood) the midwest/south costs 100k and rents for 1200.00 a month

A house in (random B class neighborhood) NYC  costs 800k and rents for 2500-4000 a month.

Why on earth would anyone wanna buy in NY???

[Chris Martin]

Originally posted by @Daniel Bryant:

A house in (random B class neighborhood) the midwest/south costs 100k and rents for 1200.00 a month

A house in (random B class neighborhood) NYC  costs 800k and rents for 2500-4000 a month.

Why on earth would anyone wanna buy in NY???

Because that $800K house (which is $1.3M in SF) will be (theoretically) worth X% more where 'X' is some appreciation value that buyers assume will occur over the next 'Y' years. 

People investing in high cost areas look at more than cash flow, just as people investing in high growth (e.g. tech) companies look for more than current earnings.