Amy Breen, when everyone seems to be doing something (e.g. buying increasingly expensive houses), it's definitely a good idea to question whether it's the right move, and then proceed thoughtfully.
My short answer is that I'd encourage your friends not to buy a house unless they meet at least 2 of the following factors: 1) they're fully prepared to live in it for at least 10 years, no matter what; 2) it would cashflow as a rental and they're mentally prepared to be landlords if they needed to; 3) they can afford to put at least 20% down, and are okay with losing that money, if the local market turned south and they had to sell.
Longer answer / my story: I bought a condo in 2005 in one of the top 3 fastest appreciating markets in the country, at a time that real estate was exploding across the whole country, and a lot of very intelligent people in my area were saying things like, "If you don't buy now, you could be priced out of this market forever."
Only a few months later I moved out of state when a much better job opportunity arose, unexpectedly. At that point, on paper, the condo had already appreciated about 20% in only a few months, so we decided to hold it a bit longer and rent it to a former co-worker.
After just a few more months, with RE still booming nationally and feeling rich on paper, personally, due to the condo's appreciation, I signed a contract to have a SFH built, new construction. I pulled together 10% down mostly from 0% credit card checks with preferable terms, which they were giving away like candy on Halloween back then, but my actual intention was to sell the condo well before the new house was finished and ready for closing. Things in the condo's market had been selling so fast just 6 months before (same stories as today: multiple offers within 24 hours of being on MLS), so this felt like a very safe bet.
Somewhere around Jan 2006, with the former co-worker turned deadbeat tenant having stopped paying rent months before, I listed the condo for sale in line with the asking prices of directly comparable units in the same complex, about 40% above what we paid for it...and nothing happened. No offers, no showings, nothing. We waited a month or so and then started dropping the asking price...along with everyone else selling identical units in the complex, and comparable properties in the entire state of FL.
Six months later, we managed to close in the same week on the sale of our FL condo at a price about 6% above what we paid for it (so we broke even after realtor commission, not factoring in holding costs), and on the purchase of our newly built house. My intended down payment money from the condo, which only ever existed on paper, had completely evaporated. Rates for all credit scenarios had gone up significantly, relative to where they had been when I signed the purchase contract for construction months before; plus, with my now lower down payment (and credit card balance from having "temporarily" borrowed the down payment), I no longer qualified for the best rates available.
Instead of what was originally projected to be a $2,000 monthly mortgage payment, I ended up with a $3,000 per month payment from the builder's "preferred lender" who I'd agreed to work with exclusively in exchange for builder's upgrades. If I had anyone knowledgeable advising me, they would have certainly told me to at least shop around for lenders regardless of the supposed exclusivity agreement I had with the builder, and most likely would have told me not to move forward with the purchase at all, just forfeit the down payment and hope the builder didn't sue me to enforce the contract (which they had the right to do). But instead I closed on the purchase, and then immediately started looking for refinance options.
I was able to get the mortgage payments down to $2,400 on a refi in late 2006, and within a year after that the value of that house, along with most of the real estate in the country, dropped significantly, to the point that I owed more than it was worth. I still own the house today and rent it out with positive cashflow. It didn't appreciate back to my purchase cost until about 2 years ago -- roughly 13 years after I purchase it.
Rarely anymore, but out of curiosity I occasionally check the value of the FL condo from time to to time. During the trough of the Great Recession and foreclosure tsunami, identical units were listed at 10% of the price I bought mine for -- a 90% loss of value. Today, they've recovered back to the price that I sold my unit for in 2006, but haven't re-appreciated above that, yet, so there could very well be some owners who purchased in late 2005 / early 2006 who are underwater to this day, relative to their purchase price.