The Zero-Savings Problem in the US (CNN)

[charlottebandito]

The zero-savings problem

Some savings measures show households are flush, but consumers are spending every dime they make.
August 2, 2005: 4:59 PM EDT
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - The savings of U.S. consumers are:

a) at the lowest rate since the Depression.

b) at peaks not seen even during the stock market boom of the late 1990s.

c) all of the above.

If you're wondering how "all of the above" could be the correct answer -- and it is -- walk outside your front door and look around.

http://money.cnn.com/2005/08/02/news/economy/savings/index.htm



I've had some people in church call me a killjoy because I don't carry $1000s of bad debt (credit cards) and don't spend money on frivilous items.  With Oil/Energy going haywire, the increase of Interest-Only loans and the "awaited" interest hikes around the corner (Real Estate bubble), and the massive debt from the Defense department, something's up right around the corner and I don't think it's pretty.  This article compares the similarities between today's conditions and those of the Great Depression.

Interesting.

 

[wabmester]

I was hoping for some real meat in that article, but it seems like alarmist nonsense to me.    The personal savings rate is a *monthly* measure of the percentage of *disposable income* saved.    So, it happened to be zero in June 2005.   They didn't mention that the rate in Dec 2004 was 4.4%, which is the highest it has been in years (the BEA attributes that 4.4% rate in December to MSFT's one-time dividend, which goes to show how sensitive these monthly numbers are to random nonsense).

Anyway, here's the actual BEA news release:

http://www.bea.gov/bea/newsrel/pinewsrelease.htm

Did you notice that the Money article also said that the *average* household net worth is more than $400,000.   I'd love to see where they got that number.

Edit: here's an article from The Economist that takes a slightly deeper look:

http://www.economist.com/printedition/displayStory.cfm?Story_ID=3839554

Although, I was disapointed that the article didn't mention demographics (personal savings rate generally falls as the population ages) or the widening wealth gap (as more wealth is concentrated in fewer hands, those few rich hands significantly throw off stats like personal savings rates).

 

[maddythebeagle]

Good point. If they are looking at a specific month, that is screwy. You are right, a lot of people send in their ira contribution in dec. and that is 4k.

- funny that people at church would be suggesting it is good to be in consumer debt? Tell them that they can't serve 2 masters, but they probably wont get it…

"Strong auto sales in June played a big part in the latest read on the savings rate. The government counts the entire price of the autos purchased during the month, even though most consumers pay for vehicles over time. "

 

[Nords]

Did you notice that the Money article also said that the *average* household net worth is more than $400,000.   I'd love to see where they got that number.

Bill Gates & Warren Buffett could probably raise the AVERAGE net worth of Afghanistan's citizens to $400K...

 

[maddythebeagle]

I think that they noted a lot of that was from home equity increases the last few years and I think that is for households (not nec. individuals) so I dont think that is too far off.

 

[justin]

It's average, not median. Wealth is greatly skewed in favor of the wealthy. Average wealth figures don't mean much to us average Joe's (net worth of mostly 7 figures or less).

 

[TargaDave]

Some will make the argument that is better to be a saver amongst debtors than a saver amongst savers.

 

[Mountain_Mike]

While points in the article are likely flawed and highly debatable, the underlying issues remain. Americans--in general-- are too far into debt, and are not saving "enough."

Most of us on this board are far from typical, and thus will be protected if the real estate bubble bursts, or some other economic event happens.

 

[maddythebeagle]

Ah...But I still think most people on these boards are a little higher than average

 

[REWahoo]

Ah...But I still think most people on these boards are a little higher than average

On what?

REW

 

[LOL!]

What's the definition of "savings"?

At one time I thought that it did not include IRAs, 401(k)s and purchases of stocks and mutual funds. Savings was what you had in your savings bank. While this may no longer be true, I think that pollsters/government have a more narrow view of "savings" than they should.

 

[MasterBlaster]

Some will make the argument that is better to be a saver amongst debtors than a saver amongst savers

I would think that other than feeling smug, the real concern is that the vast number of debtors would vote in legislators, who then pass laws to make you give up your "fair share" to the debtors.

Beware of hungry people that can vote themselves some of your loot.

So based on that, I will make the argument that is better to be a saver amongst savers than a saver amongst debtors

 

[wabmester]

Americans--in general-- are too far into debt, and are not saving "enough." 

If Americans started saving more, our economy would slow.   Consumers fuel our economy.    And it would be nice to know if there really is a savings problem, because that might mean that we currently have the pedal to the metal, and things can only slow down from here.

And it's a global issue.   Japan used to be known for their high savings rate, but their rate is now about the same as ours.   And the demographics in Japan are interesting; I believe they have the largest population percentage of old folks in the world, so it would make sense for them to be spending down their assets in aggregate.

New Zealand has had a *negative* savings rate for a while now.

If people are spending more because of real estate "wealth," we're doomed.   Real estate is currently more overvalued than any time in history.   The federal reserve says that it's 25% overvalued on average, and in places like SoCal, it is 40% overvalued.    If we simply return to mean value (and usually we regress to the mean, meaning that prices should become as undervalued as they are currently overvalued), a 25% drop in housing values will cause $4.5 TRILLION in wealth to vaporize.    That would sting.

 

[Patrick]

Real estate is currently more overvalued than any time in history.   The federal reserve says that it's 25% overvalued on average, and in places like SoCal, it is 40% overvalued.    If we simply return to mean value (and usually we regress to the mean, meaning that prices should become as undervalued as they are currently overvalued), a 25% drop in housing values will cause $4.5 TRILLION in wealth to vaporize.    That would sting.

What do you mean by "overvalued?" Compared to what?

 

[wabmester]

What do you mean by "overvalued?"  Compared to what? 

The traditional metric for housing valuation is the price/rent ratio (sort of like the stock P/E ratio). The Federal Reserve says that it is currently 25% over the historic mean.

Other metrics include the "affordability index" which looks at how many people can afford the mean housing price, which is also at a historic low in many places (and that one takes current interest rates into consideration).

 

[SteveR]

My two cents.

RE prices, like anything else, are driven by supply and demand. Inflation occurs when too few dollars chase too few goods. This causes the price to go up. As long as people are out there willing to pay the $$ for something, people will always be more than happy to sell it to them for what they think it is worth. As long as the interest rates stay on the low side due to cheap money, and the infrastructure keeps supporting higher RE prices, (banks, mortgage companies, insurance companies, appraisers, etc.) then the bubble (if there really is one) will continue to grow.

When money gets tight with higher interest rates fewer people will be doing second and third mortgages and will be less likely to be able to pay for more expensive housing. This will help to slow the increase in housing prices. I still don't see a real bubble; I see accelerated inflation in a market that still demands housing. It is going to take a pretty major event to reverse housing prices and I just don't see it on the horizon. The media has nothing better to report these days so they are all just restating what each other says and trying to make it more diasterous with each new story.

The median price of a new house is going to continue to rise; the rate of rise may change but I just don't see a significant reduction anytime soon.

 

[REWahoo]

My two cents.

RE prices, like anything else, are driven by supply and demand. Inflation occurs when too few dollars chase too few goods. This causes the price to go up. As long as people are out there willing to pay the $$ for something, people will always be more than happy to sell it to them for what they think it is worth. As long as the interest rates stay on the low side due to cheap money, and the infrastructure keeps supporting higher RE prices, (banks, mortgage companies, insurance companies, appraisers, etc.) then the bubble (if there really is one) will continue to grow.

When money gets tight with higher interest rates fewer people will be doing second and third mortgages and will be less likely to be able to pay for more expensive housing. This will help to slow the increase in housing prices. I still don't see a real bubble; I see accelerated inflation in a market that still demands housing. It is going to take a pretty major event to reverse housing prices and I just don't see it on the horizon. The media has nothing better to report these days so they are all just restating what each other says and trying to make it more diasterous with each new story.

The median price of a new house is going to continue to rise; the rate of rise may change but I just don't see a significant reduction anytime soon.

How many times did we hear during the dot.com boom, "This time it's different."

When the housing market collapsed in TX in the 80's, I was transferred by my company. A co-worker who had been transferred out of TX as I was coming in begged me to assume his home loan and just take over his payments. I could buy a similar house down the street from his for 20% less than he owed the mortgage co. He ended up mailing them his keys.

That wasn't a supply/demand bust, it was a rising interest rate squeeze combined with a declining economy. The same situation can play out again, especially in those markets where home prices have gone nuts.

REW

 

[Patrick]

The traditional metric for housing valuation is the price/rent ratio (sort of like the stock P/E ratio).   The Federal Reserve says that it is currently 25% over the historic mean.

So this is like a moving average? The longer the current ratio stays above the historic mean, the closer the mean will get to the current ratio?

 

[wabmester]

So this is like a moving average?  The longer the current ratio stays above the historic mean, the closer the mean will get to the current ratio?

Right. It could be that houses will stay relatively expensive long-term due to a variety of forces, including the changes in cap gains exclusion for your primary residence (started in 1998, I think) and the lower long-term cap gains rate that applies to investment property.

The same thing could be argued about stock P/E ratios. They've been above the mean for over 10 years now. Probably due in a large part to changes made in the 80's wrt IRAs and 401-Ks.

However, there is currently a lot of speculation in the housing market. I believe I read that something like 25% of mortgages are being written for 2nd homes and investment properties. Personally, I don't think it'll end well.

 

[retire@40]

What's the definition of "savings"?

At one time I thought that it did not include IRAs, 401(k)s and purchases of stocks and mutual funds.  Savings was what you had in your savings bank...

I define "savings" as growth in your net worth.  That is, your net worth that you will be using later to pay for your expenses.  This includes bank savings, retirement plan contributions, and other investments.

I don't count my home because I do not plan on using it to generate any income for me.  So if I pay an extra $100 toward my mortgage, that is a sunk cost that I do not ever plan on recuperating.  For others who plan on renting their home, or selling it, or doing a reverse mortgage, it does contribute to their net worth growth.

 

[wabmester]

I think the BEA defines savings as the amount of disposable income that you didn't spend. Since 401-K deductions are made before income is distributed, I don't think they count that towards savings.

 

[SteveR]

REWahoo,

I got smashed in the TX housing bubble bursting too. I lost all my equity and had to pay to get out of my mortagage because the house value (as determined by them) went below my mortgage due amount. That hurt for sure. Why did it happen? A lot of reasons but the facts were that no one was buying (demand) and the supply was high at the same time due to overbuilt area and speculation. In my area (Austin) there were millions of square feet of unrented office space and yet they were still building more. Cranes were everywhere and so were For Rent signs. The housing side slid down with the rest of it.

Is it always just about supply and demand? Well, I guess it is all in the way you look at it. I believe it is but the reason for the two of them vary in each boom or bust cycle.

 

[justin]

I lost all my equity and had to pay to get out of my mortagage because the house value (as determined by them) went below my mortgage due amount. That hurt for sure.

"as determined by them" - just curious, did you sell the house, and have to write a check at closing? Or did the mortgage company call you up one day and say, "your loan to value is greater than 100% based on our appraisal, so send us a check tomorrow for the difference. Or we'll take your house. Thanks, Your Mortgage Friends."?

That last scenario is hard to believe if it did happen!

 

[laurence]

Just an observation, but homes here in North San Diego county have stopped selling. In my neighborhood alone, the houses 2, 3, and 4 houses down have had a sign out front for months, and each has lowered his asking price between 20-30%. Sure, some of that was probably an overshoot of what they could get, but the feeling in this neck of the woods is the RE boom is over.

 

[SteveR]

Justin,

I had taken a promotion in my company and was moving from the area.  When I started the sale process the mortgage company sent out an appraiser and then I got the nasty news that I had to pay up the difference or lose my credit rating.  Several people in my area just walked out of their loans and left the empty house.  I could not do that so I had to write the mortgage company a check at closing to cover the difference.  I had to take out a personal loan to do so an that was a double hit to my wallet.  I had to rent a very cheap place in my new city for almost a year to make up enough to save for a minimum downpayment.

Two years later we divorced and I sold the new house.  Got out of the whole divorce with my son and no money and half of my retirement and all her credit card debt.  What a deal!  So, 15 years ago I was charging groceries to live on due to lack of funds.  I will never do that again.  My IRA will allow me to live well and still have money to pass on the my grandkids.  If I can go from zero (actually a negative networth) to a very positive one today, anyone can do it with proper motivation.  

Anyway, back to the topic....yes it sucked to have to pay the mortgage company to actually sell my house.  My company did not help at that time.  I was the poster child for company buy outs after that so others who followed in my footsteps got a nice buyout at their original purchase price and lost nothing.  Too bad I had to be the one to get the policy changed.   :