Posted on 02/01/2006 8:49:13 AM PST by Toddsterpatriot
The Wall Street Journals David Wessel wrote last week that American people, businesses and government dont save enough. Citing the Commerce Departments official U.S. personal savings rate, 0.2 percent, the Los Angeles Timess Bill Sing wrote, It doesnt help that people in the U.S. are spending like theres no tomorrow. Sings and Wessels assumptions are as bogus as the government statistic on which theyre based.
To see why, one need only understand how the government calculates personal savings. Not surprisingly, the calculation is a simplistic one that involves a subtraction of cash outlays from disposable income. David Malpass, NRO Financial writer and chief economist at Bear Stearns, recently noted that savings statistics understate actual additions to savings by excluding cash flow improvements from realized gains on equities, houses, and mortgage refinancings. Importantly, the government savings rate either cannot factor in, or would calculate negatively, how Americans purchase the instruments of the wealth that Malpass mentions.
To begin with, 401(k) accounts have become highly popular investment vehicles for Americans over the last 20 years. Since 401(k) deposits come out of pre-tax income, the significant savings built up within those accounts would not factor into government calculations of money saved over outlays.
As for home ownership, mortgage payments are not deducted from pre-tax income, and often are paid out of disposable income. While no one would deny that home ownership is a form of saving, Commerce Department math would put money used to pay down a mortgage into the same basket as money used for everyday consumption.
Even if we didnt know how savings were calculated, it would still be obvious that a savings rate of 0.2 percent is wildly inaccurate. To see why, consider a variety of statistics about wealth in the U.S.
For starters, the members of the latest Forbes 400 have a combined net worth of $1 trillion, up $45 billion in twelve months. In Merrill Lynchs 2004 World Wealth Report, the U.S. experienced the biggest jump of any country in terms of high-net-worth individuals, with the number rising 14 percent to 2.27 million. If Americans werent savers, the wealth statistics in each case would have fallen.
Someone might reply that the above statistics describe rich people, and that non-millionaires dont have the means to save like the rich do. Unfortunately, a host of other statistics would also prove an assumption like that wrong.
Indeed, the Securities Industry Association reports that individual participation in the stock market has jumped from 30.2 million in 1980 to 84.3 million in 2002. As the number of investors has grown, so too have stock market returns, with the Dow Jones Industrial average trading at roughly 14 times its low of 743 in 1982.
Home ownership? The rise in home prices is increasingly on the minds of many Americans. That this is so has a lot to do with the fact that at 69 percent, the supposedly spendthrift United States has the highest rate of home ownership in its history.
Despite all of the above evidence suggesting a strong culture of saving in the U.S., it can be expected that the Americans as bad savers canard will continue to be thrown out by the major media to explain good (consumption) and bad (trade deficits) economic news.
An optimist would say the mainstream medias obsession with saving might be a happy signal that its members intend to write more positively about private Social Security accounts, stock options, and other opportunities to save. Sadly, theyve already demonized stock options, and presumably have only just begun to start scaring readers about the perils of investing their own payroll taxes. Heres hoping readers start to notice these paradoxical stances, and tune them out altogether.
Americans hold $6.1 trillion in corporate equities and $4.1 trillion in mutual funds. Out of $51 trillion in household net worth. Doesn't sound like too much.
bump
You're presuming that it's proportional that because there are less mortgages than real estate all real estate has a positive net value.
Fact is a handful of extrmely rich folks throw that off considerably. You have stated nothing showing that the average home is mortgaged for less than it's worth, and that the average homeowner doesn't have debts which far exceed the equity in their home.
Problem is this was true even during the great stock market crash. One American had enough to bail the whole market out. It didn't stop the average American from losing their shirt or being overleveraged however.
Even if you don't believe the stats that are posted, stats have still been provided to you which support an argument.
So where are your stats that say the average homeowner is upside down on their mortgage? Pony up.
You remind me of someone I once knew on another message board. From now on, I'm going to call you fatherjohn.
I'm presuming nothing. Just stated 2 facts. Haven't seen too many facts in your posts.
You have stated nothing showing that the average home is mortgaged for less than it's worth, and that the average homeowner doesn't have debts which far exceed the equity in their home.
As opposed to you who have stated only feelings. Feel free. Go out there and find some facts. Post some links. We'll wait.
Its not that I don't beleive the stats it that I beleive 1, that the data used is inproper to draw a conclusion, and that 2, there is not even distribution with regard to equity.
Do you honestly beleive that home equity is evenly distributed across all real estate owners?
Facts which are irrelevant to you're conclusion.
For instance. Say total real estate value nation wide was 99$. And total mortgage value is 9$. And there are three real estate owners.
It can either be
Owner RE Value Mortgage
A 33 3
B 33 3
C 33 3
or it can be
A 1 3
B 1 6
C 97 0
Your data is insuffiecient to draw the conclusions you are drawing.
"Nor do I agree with the notion of folks calling that savings, or being encouraged to do so."
I guess I had no savings in my 401ks or IRAs but somehow made it into retirement without any savings. My bank account seldom had any cash in it and I often ran a credit card balance but my non-savings 401ks and IRAs somehow added up to no debts and decent income.
Do you honestly believe that equity is so heavily skewed to a small percentage of homeowners to make the overwhelming majority underwater?
Dear Arthalion,
Actually, no matter how much owes on the car, it's still an asset. It's just that one may have a greater liability - a car loan - attached to the asset.
On my company's balance sheet, the actual equipment we own goes in the assets column, regardless of the loan liabilities attached to them. Any debt goes in the liabilities column.
It's nice when the assets column is greater than the liabilities column, but that's a risk of starting and owning a business. ;-)
sitetest
You seem very bad at math 1 does not equal infinity.
There are plenty of folks who've lost everything in their 401k and been left peniless.
Yes I beleive equity is EXTREMELY skewed especially across different regions. Further if that number contains corporate re and loans that would be true even more so.
I think when you adjust for credit debt, yes the majority are underwater and further they expect their 401 will bail them out. Which is might, they may end up above water. But not where they wanted to be.
A downturn in stocks or real estate would severly affect the average homeowner.
Average home equity is 57.1%. Real estate assets are $19.1 trillion. Mortgages are $8.2 trillion. I guess you can spin the real numbers in some educational way? Or you could get some facts from someone more credible than yourself? We'll wait.
Averages again.
Why don't you look into median home equity.
Feel free. If I do it you'll just end up saying that a house isn't an asset.
Bubble trouble
Real estate will make you rich, eh? If everyone thinks so, how can it be true?
September 20, 2004: 10:12 AM EDT
By Amy Feldman, with Adrienne Carter, Jonah Freedman and Sarah Max, MONEY Magazine
NEW YORK (Money Magazine) - Forget book clubs and poker nights. America's property craze has spawned a new social network: The real estate investment club.
Across the country, dentists, retirees, janitors and even teenagers gather each week in hotels, buffet halls, synagogues and the like to sniff for scuttlebutt and attend get-rich seminars with titillating titles like "Turn an Ugly House into a Pot of Gold" and "Exploding Profits Through Bankruptcies."
California now has more than 40 such clubs, Florida 50. The Georgia Real Estate Investor Association has grown so large -- its main monthly meeting can draw 1,000 -- the group recently bought a building to host an almost daily schedule of confabs.
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In Texas, Randy Steadham, a former oil services exec who is president of the Realty Investment Club of Houston (none too subtle acronym: RICH), says his membership has quadrupled since 2001, to 2,100 people.
"I for one," he drawls, "have pulled all my money out of the stock market and put it into real estate."
Hmm. Substitute the words tech stocks for real estate, margin loan for interest-only mortgage, and the housing boom takes on an ominously familiar tone.
The question isn't whether home values across the country will vaporize all at once, as the Nasdaq did. (They won't.)
It's whether too many people are acting as if nothing bad could happen.
Let's be clear: No one knows when home prices will top out in your area.
History suggests, however, that it'll happen not long after homeowners and buyers reach maximum certainty that they've discovered the fail-safe key to riches.
Considerable anecdotal evidence suggests that fateful time may be near.
Consider:
Owners have unrealistic expectations
Last year, 34 metro areas (15 of them in California) showed double-digit price spikes. Many homeowners seem to expect these kind of gains forever.
A survey of nearly 700 owners in Boston, Milwaukee, San Francisco and California's Orange County by Karl Case of Wellesley College and Robert Shiller of Yale finds that the average person in counting on double-digit growth each year for the next 10 years.
Reality check: Over the long run, housing has risen at around one percentage point a year ahead of inflation. That implies more T-bill-like returns in the future.
Housing is incredibly unaffordable
The number of people with million-dollar homes has grown so quickly the Census Bureau has had to add a new upper-end entry to keep pace. Based on a comparison of median home values (nationwide: $191,300) with median incomes, the U.S. market is more expensive than at any point since World War II.
The median home now sells for more than twice what its occupants make; in some areas the price-to-income ratio is double that or more.
In Boston, the median home sells for 3.3 times median income. In San Diego it's 5.2 times and in San Francisco 4.2 times.
If interest rates rise, as they're expected to do, housing will get less affordable still.
Signs of a slowdown are already emerging
Sales of existing homes fell 3 percent in July from June's record pace.
At the current rate of sales in Orange Country, there are now five months' worth of homes on the market, compared with just one month's worth earlier this year, said one agent.
And in Las Vegas, where prices soared 52 percent in 12 months ended June 30 (the greatest one-year jump for any metro area ever), sales have dried up faster than a desert oasis.
"Two months ago I couldn't keep a listing for a day," said Prudential Americana agent Leslie Carver. "Now no one has looked at some of these in weeks."
Housing debt is getting worse
With $6.8 trillion in mortgage debt at year-end, banks now own 45 percent of our homes, the highest level on record.
And although interest rates have begun to climb, borrowers continue to embrace adjustable-rate mortgages (ARMs), which will constitute an estimated 32 of mortgages financed this year, versus 19 percent in 2003.
In hyper spots, like California and the Northeast, people looking for the lowest monthly nut are increasingly betting on a dubious gimmick: the interest-only ARM, in which your entire monthly payment goes toward interest and zippo pares down principal.
"Your essentially your renting from your bank with an option to buy," warns Northern Trust chief economist Paul Kasriel.
If you're a homeowner who has locked in a comfortable fixed-rate mortgage, you can probably weather any downturn with little worry.
But this is no time for a big cash out refi or home equity loan. They will cut away your equity margin of safety and, if you're unlucky in a real estate crunch, leave you owing more than your home is worth.
A common sense credo for deciding how much to cash out: never take more than the IRS will let you deduct. (The most you can deduct is the interest paid on the amount you borrowed to buy or improve your home plus the interest on as much as $100,000.)
A second strategy to consider: downsizing. That's not to suggest you try to time the market by moving into a rental to wait out a storm that may never strike.
But if you're already thinking about trading in Casa Grande for cottage living, there's no point in trying to squeeze out the last iota of appreciation.
As economists like to say, if something can't go on forever, it won't.
As opposed to all the UAL employees who have those big juicy pensions?
The fact is you're looking at the wrong numbers and drawing the wrong conclusions. If I looked at averages the day after the stock market crash the averages would look ok too.
Which is exactly why one shouldn't be relyng on a company or government entity to handle their retirement they should be investing in their own investments not tied to a corporation or politician.
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