The Easiest Partial Solution to the Housing Crisis

HUD's Underwriting Guidelines Push Over 13% out of the Housing Market

The American housing crisis is often described as a problem of supply, zoning, or interest rates. Those factors matter, but they obscure a quieter and more immediate bottleneck: millions of Americans who could afford a home are barred from buying one because mortgage underwriting practices and rules routinely refuse to easily and clearly treat their income as real. The result is an artificially shrunken pool of qualified buyers, a distorted housing market, and a construction industry that no longer builds for ordinary Americans.

Roughly 7–16 percent of the U.S. workforce earns its primary income as 1099 “independent contractors,” and another large share supplements W-2 wages with non-traditional work. In practice, however, most lenders will only fully credit W-2 income when determining mortgage eligibility. Even when federal rules technically allow 1099 income to be counted, conservative underwriting practices and lender discretion often exclude it. A worker earning $150,000 a year, if most of that income is non-W-2, may qualify for a mortgage as if they earn a third of that amount. This is not a marginal problem, it is a structural exclusion affecting tens of millions of people.

The fix is not complicated. Mortgage underwriting standards must be reformed to consistently recognize stable, long-term non-W-2 income as legitimate income for home loan qualification. Doing so would immediately expand the pool of qualified buyers, particularly first-time buyers and younger households who increasingly work in flexible, project-based, or gig-economy roles. Yes, this would bring additional buyers into the market and likely cause a short-term increase in prices. But that increase would also send a clear signal to homebuilders that demand exists for affordable, entry-level housing rather than only high-end, fully finished homes aimed at a narrow professional class.

For more than a decade, housing policy has quietly favored the most traditional employment arrangements while penalizing the economic reality of modern work. The result is a bifurcated market of owners and permanent renters, not because people are irresponsible or unwilling to work, but because the rules were written for a workforce that no longer exists. Until underwriting practices catch up to how Americans actually earn a living, no serious discussion of housing affordability can claim to address the root of the problem.

On the surface, when there are high prices bringing in a batch of more customers will not result in lower prices.

So on the face of this advice, it would seem counter-intuitive.

Home construction is not following normal patterns, however, and there are some unique historical reasons for this.

The fraud of the 2000 dot-com bubble was ‘managed’ in its disastrous economic effects by transferring that bubble’s burst into real estate. On the premise of ‘expanding homeownership’ the nation’s big banks pushed mortgages as a way to create a wealth class. What they were really doing is hiding the fallout from dot-com nonsense by moving that money around. From 2000-2008, this bubble grew and burst due to light lending standards and banks that created complex financial instruments in order to gamble with mortgage-backed-securities. After that bubble burst, the correction took a decade to sort out and ruined several American states.

The aftermath saw two important results, both of which negatively affected the average American:

• Federal lending standards were tightened to make it harder to qualify for a mortgage

• Inflation was managed by bringing in mass immigration to depress Americans’ wages

Immigration enforcement could be done, should be done, was promised to be done, but it would cause a serious of predictable policy consequences, not the least of which is higher inflation. That higher inflation in the short-term would be offset by reduced medium-term expenses on social benefits such as healthcare, education, housing, and the like. The desire for more immigration by our elites, in addition to serving their ideological agenda, also serves their financial interest by depressing and suppressing wage growth.

A small increase in the number of immigrants in an area can greatly affect housing prices, since immigrants typically seek out the cheapest options and then monopolize those locations.

An influx of a few hundred or few thousand people can dramatically change the rental landscape in any size city. Immigrants in 2023 were causing New York City to cease having any hotel openings and were taking up every available housing spot, to the point where the then-NYC Mayor Eric Adams (b. 1960) said that NYC was “full” and that immigrants should go elsewhere. Adams warned that the immigration crisis was going to “destroy New York City.”

Adams even tried relocating immigrants to the suburbs because the city could not handle and process those that were arriving.

Instead of any, even minor, economic reforms that might benefit actual Americans, major Wall Street profits were protected, no one was even censured for repeat monetary disasters, and things just kept humming along.

The responsibility for those reforms fell upon the absolute wrong man. Instead of a visionary or a reformer, we got stuck with American traitor George Walker Bush (b. 1946) who decided, instead, to become a shitty artist in addition to being a shitty President and a shitty person.

You can always tell a fake artist who has other people paint for them: they have clean floors, clean shirts, and clean hands and their ‘studio’ is filled with finished works and never a partial-one in sight.

So there hasn’t been any real serious push for any reforms in this space for quite a while. The best we can hope for is that Sen. Elizabeth Ann Herring Warren (b. 1949) (D-MA) will penalize some banksters who will then use the regulatory fee as a moat to ensure there is zero competition. The left’s approach to regulation: fleece the productive so that they become indentured donors to their power-aggrandizement mafia, doesn’t result in better outcomes for consumers either.

After 2008, the supposed ‘collapse of the credit markets’ was met with bailouts for the banksters, and higher regulatory burdens for the consumer, reducing the pool of buyers.

With reduced pools of buyers, home construction shifted where new construction became more boutique. Instead of an unfinished home that was affordable, home builders were building finished homes perfect for upper class white collar professionals to get their starter home.

Instead of serving the entire American public, they were serving a small rich sliver of the market and hoping that, eventually, these homes ‘trickled down’ to others.

This is not a so-called ‘market failure.’ It is a rational response to a policy-induced buyer bottleneck.

Here’s how it works:

1. There are fewer qualified buyers

2. Builders chase higher margins per unit

3. Entry-level affordable homes disappear

4. Rentals become permanent housing

Those who can’t afford a home are pushed into apartments, condos, trailers, and the like. There are ‘owners’ and there are the rest of us.

The obscenity of all of this of course is that regulations were loosened to facilitate large funds buying up huge chunks of residential real estate as a way to drive up prices. The big firms aren’t required to properly disclose ownership interests, since they change so often. They were accommodated in this way because it was a benefit to the housing market.

But now that first-time homebuyers need reform, no one is even bothering to propose realistic solutions that work with the very real market as it is today.

Big firms get deregulation. Individual homebuyers get stuck with the system unapologetically.

All buyers are equal, it’s just that some are hedge funds and they are more equal than retail buyers.

The current system does not reduce risk, it reallocates ownership.

The artificially shrunken retail homebuyer pool suppresses competition. Institutional buyers use cash or alternative financing, so they aren’t affected by these rules. Regulatory friction then disproportionately and almost exclusively harms individual buyers, not funds and the homebuying corporations.

7-16% of the U.S. workforce is being paid right now as 1099 ‘independent contractors.’ This is their sole source of income.

The left hates this arrangement and would prefer, instead, if people were either paid as a W-2 employee, or that they not be employed at all. The Biden administration proposed several 1099-related rules that would have effectively outlawed or regulated-out-of-existence most ‘gig’ type work.

A project, a set of skills, no office to report to, no set hours, Liam: you’re a contractor.

1099’s are meant for project-based, irregular, work. It’s the arrangement most people have when they have a particular set of skills, and they are needed to do a specific, discrete task.

Common jobs that are paid this way include:

• Real estate

• Construction

• Professional services

• Freelance writers, photographers, and graphic designers.

• IT, marketing, and business consultants.

• Gig workers like rideshare or delivery drivers.

• Lawyers, accountants, and other specialized professionals.

Many people are W-2 employees, while also being 1099 employees at their secondary jobs.

Roughly 36% of U.S. adults engage in ‘supplemental’ work, aka a ‘side hustle’ and, from that, represents a population of 40 million people.

So herein lies the rub: when one is trying to qualify for a home loan, a mortgage, banks will only easily consider one’s W-2 income as income for purposes of the loan.

Getting a lender and loan officer to property ‘count’ and categorize 1099 income as stable and reliable is a Herculean task. Many lenders will simply refuse to do it. The easy money is to only count W2 income for this purpose. Even though the rules permit counting 1099 income, the practical difficulty in standardizing the amounts, and the higher risk of a loan default because of a miscalculation, makes nervous lenders too anxious to make the loan using 1099 income as the justification.

Especially for first-time homebuyers, this is a major hurdle to overcome.

The exclusion of 1099 income is not mandated by federal law. It is driven by ‘lender overlays’ which are self-imposed by lenders in order to reduce audit risk, buyback exposure, and underwriting variance. These overlays are invisible to borrowers and largely immune from public debate.

If you are making $50,000 from a W-2 job, and $100,000 from a 1099 job, the bank will only consider the $50,000 as income for purposes of making a loan.

Thus a household earning $150,000 annually may in practice be underwritten as if it earns $55,000. That difference alone can eliminate $300,000–$400,000 in purchasing power at current rates.

Under the rules, they are permitted to also consider 1099 work, but typically the conservative loan officers will refuse to do so. They have a great deal more discretion in not adding 1099 income to the calculation. So, for example, if there is any variance in the amounts paid, or the frequency with which one is paid, or the source of the funds, they will not consider those in the loan application.

This is a term known as ‘income volatility’ where the source, amount, and date of payments, to some workers, are irregular.

Yet this is increasingly becoming the norm.

This affects, first and foremost, the size of the loan you qualify for. But it also affects the interest rates you are offered to secure that loan.

Typically, the underwriting guidelines specify that the loan rate must not exceed 28-32% of your defined ‘debt-to-income ratio’ (DTI).

Debt-to-income ratio (DTI) measures the percentage of a borrower’s gross monthly income that goes toward monthly debt obligations, including housing. Most underwriting guidelines cap housing expenses at roughly 28–32% of gross income, with total debt typically capped higher. Crucially, the income used in this calculation is often limited to W-2 wages.

So if someone has a car loan or other types of loans, those are deducted from those gross monthly wages. From that snapshot of ‘net income’ each month, then 28-32% of that number is your ‘debt-to-income ratio’ which can support a mortgage payment.

If your dream home would cost 34% of your monthly income, you will not qualify for the loan.

Banks don’t want to loan you every single dollar you have to spend. They want you to be well-within the range that is set for them.

These standards derive from what are called the “HUD underwriting guidelines.” The Department of Housing and Urban Development propagate these guidelines, which become the basis of mortgage lending because the federal government will guarantee these loans, as long as they meet the federal guidelines.

The HUD guidelines set the policy for the specific loan programs, which are, for most people, loans that come from either:

1. The Federal Housing Administration (FHA), or,

2. In rural areas the United States Department of Agriculture (USDA), or,

3. For veterans loans backed by the Veterans Administration (VA).

This enormous carrot incentivizes banks to lend at these specific terms, and to not deviate from these guidelines.

10-20% of mortgage applications are also currently being denied, which varies on the year and location. So of those who think they can get approved, 10-20% are being rejected.

An estimated 16% of homebuyers have simply given up on their search for a home in the past five years because they couldn’t find something affordable or suitable.

An estimated 75-77% of U.S. households under current rates cannot afford a median-priced home. These are people effectively shut out of home buying for financial reasons.

A significant part of that reason is the way in which mortgages are reviewed, underwritten, and ultimately approved.

The nation’s youth was pushed into ‘gig economy’ jobs in the past decade: driving for Uber, food delivery, and various short-term-job kind of work. This arrangement allowed people to work as much or as little as they want, but it is generating income from which no one is able to qualify for a home loan.

Now the 2008 crisis was blamed on the ‘expansion of credit’ to those who, perhaps, should not have qualified for a home. During that period of time there were plenty of examples of low rates incentivizing very risky and foolish behavior, predicated on the assumption that ‘real estate will only appreciate in value’ which, while still kinda true, didn’t help people meet unaffordable notes and over-leveraging collapsed many entrepreneurs who took on too much risk at the time.

The pre-2008 crash was driven by credit expansion divorced from income reality: no-doc loans, inflated appraisals, teaser rates, and leverage layered on top of borrowers who often had neither stable earnings nor meaningful equity. Recognizing documented, taxable income is not a return to that regime. It is the opposite, an insistence that lenders acknowledge income that is real, recurring, and already reported to the federal government.

Counting 1099 income does not require loosening credit standards. It requires applying them honestly. Non-W-2 earnings can be verified through multi-year tax returns, averaged to account for variance, discounted for volatility, and paired with reserve requirements that reduce default risk. None of this increases leverage beyond what existing debt-to-income rules allow. It simply corrects a distortion in which earned income is ignored because it is inconvenient to underwrite.

This is not about inflating borrowing power or reviving speculative lending. It is about recognizing how Americans actually earn a living and allowing credit decisions to reflect reality rather than an outdated employment model.

Restricting the calculation of income for home purchase qualification primarily benefits people with extremely traditional and ‘conservative’ employments:

• Large corporations

• Government employees

The rest are left to suffer. Something has to change here.

The easiest partial ‘fix’ to the nation’s home affordability crisis is to bring in the various American workers who have non-traditional employment. This would have the short-term effect of bringing in new ‘buyers’ and causing a spike in prices. But that spike would also move the home builders to find housing products that are better suited to the average American, which right now, they are not.

Until underwriting rules recognize modern work, housing affordability will remain a managed scarcity rather than a solvable problem.