Sunday, October 19, 2008

why do we save so little?

U.S. saving rates have always been low and now are the lowest they have ever been. We save the smallest percentage of any country.

Q: Why do Americans save so little?

A: Because we can.

Financial innovations in the past ten years allows Americans access to something their parents never dreamed of: The Home ATM.

The ease of home equity loans have allowed Americans to dip into, and deplete, what historically has been a major source of household wealth. That is the equity in their home (i.e., the value of their houses less the amount left on their mortgages). Prior to the last ten years home equity loans were not so easy to get.

The chart below helps show this. The blue bars are the amounts of money U.S. households have taken out of their homes (a negative saving) each year since 1991. You see it rise steeply until housing prices crashed in 2007. (When housing prices crash, there is a lot less equity to borrow against.)

Source: Calculated Risk: The Adjustment Process

What I find even more interesting is the red line. This is the amount withdrawn from the Home ATM as a percentage of disposable, or after-tax, income. (The vertical scale is on the right-hand side of the chart.) As you can see, a few years ago it was as high as 9% of income. This is why during those same years overall U.S. household saving rates were zero to negative. Although some people were saving, others were dissaving. That is, spending a lot of the wealth stored in the value of their homes. (Click here for U.S. saving rate chart.)

Hmmm.... A credit crunch is here. A recession is coming. Household savings are low. People are in debt up to their ears. All these things have never happened together.

2009 should be interesting.

Be blessed.
(a.k.a. Prof. Sunshine)

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