The Percentage of People Who Can Afford a Median Priced Home...

One common term/statistic many articles on the real estate market tend to throw around is this: "In insert location, only insert number percent of the population can afford a median priced home." In this recent article, San Diego not included in "treacherous housing markets" list, we find the quote: "The percentage of San Diego's residents able to afford a median-priced home dropped to 9 percent in May." What does this number tell us?

The median price is the price at which half of the homes cost less and half of the homes cost more. But what does this "median price" reflect? The median price of all homes in a particular market (i.e., San Diego), or the median price of homes that have been sold in a particular market? And what does "afford" mean? I assume that it takes the average person and reasons that they can afford a house payment of a 30-year fixed mortgage that is, say, no more than 33% of their monthly gross. Of course there are many "non-standard" mortgages, from interest-only choices to option ARMs.

Assume for a minute, though, that "affordability" is defined as what a given family really can buy, even given some of these whacky mortage vehicles, and that the "median price" is the median price of homes sold. Then it follows that the top 9% of San Diego's wealthy are involved in at least the majority of real estate transactions. Since the wealthy are typically financially wiser than the non-wealthy and would shudder at buying at the top of any market, I imagine this isn't the case, which means my assumptions on "affordability" and/or "median price" are incorrect.

What I fathom is that "affordability" is defined against a 30-year fixed mortgage benchmark and some predetermined percentage of the average person's monthly gross income. So, while only 9% of San Diegans may be able to afford a home here, people are simply buying what they cannot afford, stretching themselves too thin in order to "get into the market." Anyone who has been around the block more than once knows that virtually anytime you choose short-term gain with long-term pain over short-term pain with long-term gain you're going to end up losing. What's going to happen when those variable mortgage rates start rising? Or when you lose your job or have a financial emergency and cannot make those mortgage payments you're already stretching to make? And what if this happens after the bubble has burst, and your home is worth significantly less than what it was when you bought it?