Negative Savings Rate For 2005

Money Down The Drain

If you came out of 2005 with more savings (or less debt) than you began with at the beginning of the year, give yourself a huge pat on the back. You were one of the few. The Commerce Department reported today that consumer rose more than double the rise in incomes which left the 2005 savings rate at the lowest level since the Great Depression: negative 0.5% This is the first time the savings rate has been in negative territory outside of the Great Depression

While there are a lot of experts putting on the spin that the reason people spent more than they had in disposable income was due to “soaring housing prices which made them feel wealthier,” I’m not buying it. I think it is an attitude change where people don’t believe that they have to save anymore. A perfect example is the huge increase in no down payment mortgages for homes.

When I was talking to some friends the other day about saving for a down payment, they looked at me like I was speaking a foreign language (and I swear I wasn’t speaking Japanese at the time). There attitude was, “why save for a down payment when there is no need to?” Their basic logic was that they can get a loan for no money down so they must be making enough money to afford it – an extremely dangerous assumption.

I’m wondering what type of spin the experts will put on if the savings rate is still in negative territory and the housing market isn’t growing as much as it has been – my prediction for 2006. For all of you taking the time to visit the personal finance site and get your finances in order, give yourself a huge pat on the back. You’re obviously in the minority at the moment…

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10 Responses to Negative Savings Rate For 2005

  1. Loi Tran says:

    I think if you can’t afford the 20% down payment on a house, you shouldn’t buy it in the first place.

  2. Caitlin says:

    A very modest home in Boston can easily run $300k+ these days so by that logic I would have to save $60k before buying a home…which would probably keep me perpetually chasing an unaffordable home (the increases in value would probably outpace my ability to save a full 20%)

    4 years ago we put 5% down on a house that needed (and I do mean *needed*) a new kitchen and financed 80% with a “construction loan” (higher rate, based on LTV of home after work is done…refi post-construction) and 15% from a HELOC (home equity line of credit…variable rate, interest-only loan) which acted like a piggy-back mortgage. We refi-d after construction to an ARM and then again a year ago to a 7/1 ARM with a lower rate, because we’re 99.9% sure we’ll sell before then.

    And now we’ve built up probably $100k in equity in the home (through improvements and home value increases) and that’s conservative (accounting for cost of selling and slow down in prices)

    so I don’t think that was a bad financial decision on our part. My point is that the 20% is a good idea for most places, but you may need to get creative to afford a home in a very expensive market…and then just don’t blow it (by pretending you have more money than you do…or whatever)

  3. Doomsday says:

    The real estate agents got the public where they want them. They have us thinking, wow we are so lucky they came out with the one year arm or the 40 year. There is even talk on the 50 yr. My point is the reason why house prices are so high is because the banks and realtors keep coming up with ways to make sure they do. If everybody held out for the tradtional 30 yr with 20% down the house prices would have no choice to fall. Not to metion the risk that banks are taking with no money down. Oh yea, can anyone say negtive savings rate. Where is all this money going to come from.

  4. samerwriter says:

    (I don’t mean to pick on you Caitlin, but your post I think should serve as an ‘extreme’ case of financing)

    There are a lot of examples of people buying more house than they can afford and doing fine. The success of an investment in hindsight has very little to do with the wisdom of making the investment in the first place.

    If you’re having to get creative (read “highly leveraged”) to buy a home, it may be an indication that the home is out of your reach. By being creative, you put yourself at a higher risk of losing your home (and your investment) if things don’t go your way.

    For example, what if interest rates had increased during the construction phase of the house? That would likely cool the housing market and could lower values. With 5% down, it’s likely that you would be faced with both negative equity and higher payments on your variable rate interest-only loan. Now you’re stuck refinancing your construction loan into a traditional mortgage, but because of the low appraisal, you’ll have to come up with cash to pay off the remainder of the construction loan. That’s how bankruptcies can happen.

    I’m glad things worked out OK, but I think it’s a rare case for an overpriced housing market to justify creative financing.

  5. Michael says:

    I like to use a figure of 10 per cent for a deposit. You also need to remember to include the closing costs when you purchase property.

  6. Scott says:

    I have to agree with Caitlin, 20% is great if you can reasonably do it, but with prices out of this world, how are you to save that amount on a normal salary? Like Caitlin, I too bought a home with a “construction loan ARM” (new kitchen and bath) and it worked out excellent for me. In the 8 years I have had this home my equity has gone from almost zero to $325,000. Of course I have been saving money as best I can the whole time (last year’s retirement savings rate for me was about 12%).

    I know I was lucky to buy at the right time, I doubt it would be possible to do that today. If I had to buy a house today I don’t know what I would do. But if you are responsible and plan on staying in one place, I would still try to buy a home.

  7. Sara says:

    The housing prices in my area have tripled in the past three years. If I started saving 5 years ago at 20% of what I expected a home to cost ($110K in 2001 and $130K in 2006). Assuming I could save this much starting out, I would have $26K saved to buy my first home. Given that the average housing price in my area is now $300K, I would only have 8.6% for the downpayment. As I waited to save more, the market would only increase. (Note: I’ve been in my house 1 year and gained over $60K in market value.)

    Caitlin’s case is not extreme. Perhaps those of you in the few unaffected areas are oblivious to the housing market, but it has changed dramatically in many places.

  8. Doomsday says:

    Stay tuned, watch what the fed is going to do to the housing mkt. The fed created the bubble by leaving the overnight rate at 1% for over a year. People thought they were getting a good deal with a low rate, but that low rate was off set by doubling house prices, and the more you borrow the more you pay for that house. People do not own houses anymore they rent them from banks.. In 1999 a house that cost 250,000 @ an 8% rate with 20% down was alot cheaper then a house in 2004, 2005 now at 525,000 with a 6 percent rate with 20% down (who puts 20% down today?), this makes the house even more expense, more interest.
    Do the math…
    The fed increased the overnight rate to 4.50% soon to be 4.75% at the end of March (a 400% increase since June 2004). The 30 yr is still very low @ 6.25. It should be alot higher. The 30yr year is still very low because it is tied into the bond mkt which smells major weakness ahead, the bond mkt is 10 times larger then the skoct mkt. This can explain the inverted yield curve we are currently facing (the last 5 times the yield curve inverted, 4 times we went into recession) not bad odds. I’m sure the house prices where they are laying off a total of 60,000 peoeple from GM and Ford will have upward preasure on houses,, of course not,, some will Foreclose. This will bring down the property value in the whole area as neighbors foreclose and banks sell the houses for half off,,. Centex is selling new houses for 150,000 off, they call it a 12 hour sale,,,hmmm starting to sound like GM employee discount. Now, how would you feel if you bought a new house last week and the guy next to you got $150,000 off next Tueday. Also Toll Brothers Bob and Bruce, sold 100,000,000 worh of housing shares 6 months ago, the housing mkt has been going down since, I will end this how I started it,,, stay tuned…..

  9. Admiral Ridiculosity says:

    In Japan before the crash a lot of folks were taking out generational mortgages with terms of 50, 75, even 100 years. Then the bottom fell out prices fell 50% and have not appreciated at all in 15 years. Then poor folk are stuck with 2-3 hours commutes underwater on mortgage making the best in condo at 50% capacity feeling the brunt of all the shared expenses. No wonder they have suicide clubs there.

    What do you think will happen when all government entities find the cash flow they anticipated disappears – there is no way they will lower taxes or reappraise downward.

  10. Admiral Ridiculosity says:

    Sell now move to Argentina.

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