James K Barath, CMPS - Northwest Indiana Mortgage Planner - Benchmark Mortgage

Today kicked off the 4th annual Money Smart Week^® Wisconsinand will continue until Saturday, October 17th. For those who are not familiar, Money Smart Week is a series of more than 200 free educational classes, seminars and activities designed to help consumers better manage their personal finances.

"Money is the best deodorant." - Actress Elizabeth Taylor

It's a shame that money doesn't come with an instruction manual because we all need to know how to spend it, save it and borrow it wisely. That's why the Federal Reserve Bank of Chicago has collaborated with financial institutions, not-for-profits, schools, libraries and a host of others to support financial education in Indiana.

If you or someone you love lives in Wisconsin, check out the complete calendar of events scheduled.

Are You Money Smart Wisconsin?

Today kicked off the 4th annual Money Smart Week^® Indianaand will continue until Saturday, October 17th. For those who are not familiar, Money Smart Week is a series of more than 210 free educational classes, seminars and activities designed to help consumers better manage their personal finances.

"Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like." - Actor Will Smith

It's a shame that money doesn't come with an instruction manual because we all need to know how to spend it, save it and borrow it wisely. That's why the Federal Reserve Bank of Chicago has collaborated with financial institutions, not-for-profits, schools, libraries and a host of others to support financial education in Indiana.

If you or someone you love lives in Indiana, check out the complete calendar of events scheduled.

Are You Money Smart Indiana?

Every day I hear on the media that the economy is in growth mode and on it's way to a recovery. Many analysts have commented that even without real job growth that the recovery is in full swing. Let's take a look at the facts.

According to the official press release by the Bureau of Labor Statistics on Friday, October 2nd, the US economy lost 263,000 jobs in September with an unemployment rate hitting 9.8% nationally. The press release also noted that since the recession began in December 2007, there have been nearly 7.5 million jobs lost. You read that right.

My home state of Indiana surpassed 10% unemployment rate earlier this year. My local market in Northwest Indiana has communities that have reached as high as 16.8% according to the Indiana Department of Workforce Development.

I also read in the article, It Will Be Years Before Lost Jobs Return -- and Many Never Will, published by the Wall Street Journal that our economy requires at a minimum a 100,000 new jobs a month just to keep track with population growth. What does that really mean? In order for the US economy to get back to pre-recession growth, approximately 310,000 new jobs would be needed monthly for the next 3 years.

With the national unemployment rate incrementally creeping towards the 10% threshold, the reality is starting to settle in for many parts of the country that a full economic recovery will not happen until job growth is sustainable. Without job creation there will be no money in the pockets of consumers which means they can not buy goods and services to sustain economic growth and they definitely will not be in a position to buy homes.

Who Believes There Can Be a Jobless Recovery?

Every day I hear on the media that the economy is in growth mode and on it's way to a recovery. Many analysts have commented that even without real job growth that the recovery is in full swing. Let's take a look at the facts.

According to the official press release by the Bureau of Labor Statistics on Friday, October 2nd, the US economy lost 263,000 jobs in September with an unemployment rate hitting 9.8% nationally. The press release also noted that since the recession began in December 2007, there have been nearly 7.5 million jobs lost. You read that right.

My home state of Indiana surpassed 10% unemployment rate earlier this year. My local market in Northwest Indiana has communities that have reached as high as 16.8% according to the Indiana Department of Workforce Development.

I also read in the article, It Will Be Years Before Lost Jobs Return -- and Many Never Will, published by the Wall Street Journal that our economy requires at a minimum a 100,000 new jobs a month just to keep track with population growth. What does that really mean? In order for the US economy to get back to pre-recession growth, approximately 310,000 new jobs would be needed monthly for the next 3 years.

With the national unemployment rate incrementally creeping towards the 10% threshold, the reality is starting to settle in for many parts of the country that a full economic recovery will not happen until job growth is sustainable. Without job creation there will be no money in the pockets of consumers which means they can not buy goods and services to sustain economic growth and they definitely will not be in a position to buy homes.

Who Believes There Can Be a Jobless Recovery?

Recently, I was sucked into a conversation around the water cooler about home affordability and the impact on the real estate market. The primary topic of the conversation was that home ownership was more affordable than in years past and that first time home buyers would flood back to the market.

When I asked how does one calculate home affordability, no one really had an answer. One individual did mention that they heard something on the news about the National Association of Realtors (NAR) realeasing a Housing Affordability Index.

I wanted to get the facts behind the published report; therefore, I visited the resource section of Realtor.org and browsed the reports. NAR definitely has a tremendous amount of data to analyze through its members and is highly motivated to keep their organization relevant.

At first glance, the numbers were impressive. The Housing Affordability Index reached an all time-high in January 2009 with a reading of 172.6. When we talk about all time-high, this means since the inception of the index in 1971. For comparison, the index was 107.6 at the peak of home values in 2006.

Could this be true? How could home ownership be more affordable now in the worse recession since the Great Depression than any other time in the history of the index? How could it be more affordable considering all the additional costs as a result of credit risk-based pricing coupled with higher agency delivery fees due to declining markets?

Lets evaluate the methodology of the index for existing single-family homes:

1. Score of 100: median income is sufficient to qualify for mortgage on median-priced home.
2. Score > 100: median income is more than enough to qualify for mortgage on median-priced home.
3. January's Value 172.6 means that the median income family has 172.6% of the income necessary required to qualify for the median-priced home.
4. Mortgage qualifications assume 20% down & 25% housing payment (principle & interest) to total debt ratio.

Now it made sense. One thing that everyone can agree on is the fact that home values have fallen off a cliff in the past 18-36 months. In matter of fact, home values have fallen faster than income levels. As of the most recent Housing Affordability Index, the median-priced home in January was $164,200 compared to $221,900 at the peak of home values in 2006.

The other issue that I have with the methodology is the big assumption that housing affordability is based on families that have a 20% down payment...essentially, straight conventional loans only. The last time I checked, FHA insured loans (3.5% minimum down payment) had the highest percentage of year-over-year growth in loan applications due to the stricter guidelines being mandated by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency.

Don't get me wrong folks. I am not a pessimist. I want to be bullish on the housing market.

By the way, I truly believe that home ownership is more affordable than I have ever seen in my lifetime; nonetheless, I still question the merits of NAR's index.

How legitimate is the NAR Housing Affordability Index? Does anyone care?