These guidelines are set for BROAD populations - specifically very poor and "normal" people have the same guidelines. For poor people, a high threshold is important to "get them in a house" - they might genuenly need to spend 30% of their income on rent or mortgage. For "normal" people, that same percent is "way too much money" for "way too much house".
The result is that normal people get approved for a big fat mortgage. But we don't want a big fat house, we try and buy a normal house, but we really want it so we pay "just a little more than it is actually worth" and drive the price up "just a little".
Of note, FNMA and FDMC adjust their guidelines for high COL areas and some other guidelines. And also, their guidelines have moved over time. Also, it is a generally accepted "fact" that home ownership is good, and poor people should be encouraged to buy a house.
Which has the undesirable effect that it makes it difficult for workers to move to where the good jobs are, so now you have situations where workers are stuck in place A, doing job 1 for $X even though they should probably go to place B, and do job 2 for $Y -- because to move from A to B they'd have to buy a house in place B, and sell their house in place A, which is both annoying and relatively expensive.
This varies culturally, IIRC Poland and Germany - despite being neighbours - have different cultural assumptions about whether it's "normal" to buy a home rather than renting.
Maybe a shift to more Work From Home reduces the problem by allowing workers to take more jobs in place B despite actually living in place A.
The problem here is really with the supply of homes. If there was a good supply, issues like this would never arise, or would rarely arise, because there is always a house just as good down the street that you don't have to overpay for.
Part of the problem is the supply chain but I bet alot can be done by the govt to get out of the way. Of course the other side of the coin is activists that scream both: "We need more housing" and "how dare you build more housing" in the same sentence.
Important to compare like renting a modest Apartment. If that payment that works for you is X, maybe 3X is too much house? Houses also take a lot of repair, and need things like new roofs and HVAC.
There are a few areas of the country where you basically cannot rent from a private party anymore. 90%+ are one of a handful of mega rental corps.
(to separate the house from the group, not a maintenance hedge)
I have no idea if it would have actually been possible, though. Wells aren't allowed to be too close to septic tanks and septic drain fields, and there are other spacing constraints too. From what I recall of the way the house was placed on the lot and where the septic tank and drain field were there may not have been anyplace on the lot acceptable for a new well.
Could also have assumed that a well problem would entirely fall on you (worst case) and budget accordingly.
I bought my house in early 2007 and mortgages were indeed crazy back then. My analysis said that at the mortgage rates for a 30 year fixed mortgage back then (a tad over 6%) said that my ideal home financially would be around $H or less, that I could go up to 1.25 $H without house payments being high enough to crimp my currently lifestyle, and maybe I could push it to 1.5 $H if the house and location were really great.
When I went to get a mortgage from the now infamous Countrywide Financial they looked at the same data I had and pre approved my for a loan of around 3 $H.
That was an absolutely ridiculous amount. I had the analysis to prove that, so just laughed and went back to looking at homes in the under 1.5 $H range [1].
A lot of people who didn't know how to do their own analysis thought that the mortgage companies would only approve them up to what they could reasonably afford, and so getting a pre approval for much higher made them think they could actually afford way more expensive houses than they actually could.
[1] In case anyone is curious, I found a house that was almost perfect as far as size, layout, and location for 0.9 $H and almost bought it, but then found that its water source was a well owned and shared by a group of 4 houses. I could not get satisfactory information on how maintenance and repair of the well was handled. I ended up with a place a little bigger, in a better location, but without quite as nice a layout for 1.16 $H.