When will the Housing Market Recover? The Answer may lie in Mortgages

There are multiple resources that experts use to determine the health of the housing market.  They use price indexes, new home sales, existing home sales and available inventory. 

However, there is one important piece of information that is not typically evaluated but is an essential piece of the puzzle.  How much can people afford?



DTI Buyer's Poll Results

This poll shows the results from multiple loan officers across the country.  Each loan officer was asked how many of their buyers are at their buying limit.  A whopping 81% of the loan officers said that 50-100% of their buyers could not afford more.  92% of the loan officers state that at least 1/4 of all their buyers are buying at their limit or higher. 

The cost of homeownership is the lowest we’ve seen in many years.  Record low rates combined with depreciated home values have made homeownership much more affordable than in years past.  Many of my clients have told me they simply could not afford the house they’re buying if the combination of low rates and low prices didn’t exist.

My colleague Jeff Bell (Mortgage Banker, Cobalt Mortgage) was the first to bring this topic to me.  The question is simple…How many homebuyers could not afford to buy if rates and home prices were higher?

Mortgage lenders determine whether a buyer can afford to home by using a calculation called “Debt-to-Income” (Or DTI for short), which calculates the percentage of the homebuyers income vs. their debt expenses. 

Most programs have a limit of 43-45% Debt-to-Income limit.  Some homebuyers can exceed these limits by small margins if they have good compensating factors, but this limit typically represents the maximum amount the homebuyer should qualify for.

The results of this poll show that the majority of buyers today cannot afford a higher rate or home price. What does this all mean?  It means the buyers who are buying today are only capable of maintaining the housing market from dropping further, not support an increase in values.

It also means the consumers who can afford a higher priced home or interest rate is not buying at this time.  There are many consumers who represented the majority of homebuyers in the past who are not buying today.  There are three groups of homebuyers who represent a large portion of these consumers.



  • They Currently Own- They can’t sell their current house and are waiting for the market to recover before they sell and buy another home.  On an interview on Bloomberg, Spencer Rascoff (COO of Zillow.com) said that approximately one-third of all homeowners would like to sell their home if they saw the floor of their respective markets.  There’s also a group of homeowners who would like to sell but are currently underwater on their home value and cannot considering moving until they gain that equity back.


  • Foreclosure/Short sale or Bankruptcy- Many consumers who qualified for homes lost their homes in a foreclosure or short sale or filed bankruptcy.  They’re in the process of rebuilding their credit and their financial health before buying again.  FHA mortgage guidelines require 2 years of seasoning from a bankruptcy and 3 years from a foreclosure or delinquent short sale before a homebuyer can qualify for a FHA loan.  Some will need longer than that to build their credit score to a qualify.  My personal experiences with consumers who have gone through one of these events typically do not apply for a loan until many years after because they don’t believe they can buy that soon.

How does this affect you?  Like the last 2 years, if you don’t own a home, have a safe job and want to buy  home for long term ownership, this market continues to be a good market to buy.  If you’re  waiting for the market to recover before selling, you may be waiting longer than you thought.

First time buyers appear to be the safety net and hope for the housing market in the mean time.  As the young, recently graduated working adults hit the work force, let’s hope the majority of them are working in job fields of demand.