Saving American Savings

In one of my kitchen cabinets, next to the Pyrex baking glassware and a few odds and ends, theres a coffee can. Its got a hand-written label wrapped around it that reads Stacey and Mikes Nest Egg. My wife (then girlfriend) made it around ten years ago when we were living in Boston.

Ever since, when either of us comes home with loose change, we make a point of dropping it into the can. It slowly fills up, and then a few days before we go on our next vacation, I dump it out, roll the coins up, and change them for bills. Weve ended up with a take of as much as $75 not a bad chunk of change!

Of course our can isnt the only way we save. We both contribute to our 401(k) plans at work, and the lions share of our tax refunds and bonuses gets socked away or goes toward paying down tax-inefficient debt (like car loans).

As for our two beautiful little girls, one of the very first things we did after each was born was open savings accounts for them. Regular deposits … gifts from relatives … theyve all helped boost those accounts over time. We couldnt be happier.

Im not sharing all this to gloat or make myself look better. Rather, Im trying to make a simple point: Stacey and I could live a lot higher off the hog. But instead, weve made a conscious decision to actually save money. We do our best to avoid debt, and when we do borrow, we pay the money back as quickly as possible.

The problem: Were in a distinct minority. Let me tell you why …

Asset Dependence Has Turned Us
Into a Nation of Reckless Spenders

The U.S. savings rate is abysmal. At the beginning of the 1980s, Americans saved more than 10% of their disposable income. But thats all changed.

While you can argue about whether the methodology the government uses to compute the personal savings rate is 100% accurate, you cant argue about the trend: Its clearly headed down, down, down. Just look at the chart!

In fact, consumers are now officially spending MORE than they earn. How on earth can that be? Simple … people are borrowing against their homes to buy everything from vacations to boats to granite countertops.

And that gets at the heart of our national savings crisis: Weve become dependent on rising asset prices.

Think about it: During the 1990s, the Federal Reserves easy money policies helped pump up stock prices to astronomical levels. That convinced Americans they didnt need to save much of their current income.

After all, why save 10% of every paycheck and sock it away in the bank for 5% interest when you can just buy tech stocks that go up 20% or 30% a year? With those high rates of return, you dont need to save as many actual dollars to achieve your savings and retirement goals.

In their heart of hearts, people probably knew the Nasdaq couldnt just keep surging. But they didnt care. They suspended disbelief, got swept up in the mania, and saved less and less.

Then stocks crashed. That wiped out trillions in net worth and savings in just a couple of years. It could have been a turning point for our nation a chance to clean out the excesses of the 90s and reinstate the importance of good, old fashioned saving.

But the Fed chose a different path. Rather than allow a deeper recession to wipe everything clean, policymakers slashed interest rates to multi-decade lows.

In fact, the Fed drove nominal interest rates so low (1%) that, once adjusted for inflation, rates went into negative territory. Thats akin to declaring a war on savers because theyd actually be losing money by socking away cash.

End result: Consumers were encouraged to spend even more, and low rates ignited one of the biggest speculative bubbles in U.S. housing ever. Sales exploded … construction skyrocketed … and neophyte investors flooded into the residential real estate market, driving prices through the roof.

It suddenly didnt matter if your earnings were stagnant. Heck, you didnt even really need a job. Your house was going up so much in value and mortgage lenders were so willing to fork over $300,000 cash-out refinance checks that you could just live off your new-found equity. Here in South Florida, you could earn two … three … even four times your salary in home equity every year or two.

This has caused an even deeper collapse in savings. Americans, aided and abetted by a reckless Fed, defaulted to the same old line of thinking: Why save 10% of my paycheck when my house is going up 20%, 30% or more every year?

Now, Americans Might Finally
Have To Kick Their Habit

If assets could rise forever, I suppose this twisted economic reality would also continue.

However, look at whats happening in housing now:

Existing home sales slumped to a seasonally-adjusted annual rate of just 6.18 million units in September. Thats the lowest for any month since January 2004.
The median price of a single-family home dropped 2.5% year-over-year. Thats the single biggest decline since the National Association of Realtors started keeping track in 1969.
The new home market was even worse: Median prices plunged 9.7% from a year earlier. Thats the worst decline weve seen in 36 years!

I dont believe that national home prices are going to fall 80% or more like the Nasdaq Composite Index did. But what if they fall 10% … or 15% … or, gulp, 20%? Thats enough to completely erase someones equity if they used one of the 100% loan-to-value mortgages that have become so popular in recent years.

And make no mistake, prices are already falling that much in some markets. I expect that the worst properties shoddy condo conversions and wildly expensive tower condo units in the worst areas (those with the most second home/investment buying) will fall 30% or more from peak to trough.

In other words, we Americans cant keep counting on non-stop, pie-in-the-sky housing gains. Instead, Im hoping that we finally revert back to saving some darn money from our paychecks.

Im probably preaching to the choir here, but if youre living beyond your means, nows a good time to start reining in your spending. After all, the housing ATM is now out of order. And by boosting our savings collectively, itll set us all up for a better, more prosperous future.

Until next time …

Mike

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