Housing boom crushes some

Christmas is a time when we think about spending on gifts for others. Thoughts of savings are hard to come by in this season of buying, wrapping and paying.

The height of the Christmas shopping season, then, would seem to be a particularly bad time to bring up the issue of how little we Americans save. But savings, and their absence, are certainly part of the way we live our lives in the U.S. economy. The economic pressures on savings are one reason why some extra Christmas spirit this year would be welcome at our food banks.

Nothing in economics is ever simple, it seems, and the definition of savings is no exception. To economists, savings means “what is not consumed.” But this simple definition is like an income statement without a balance sheet. We get income, we spend money on stuff, and what’s left is our savings. And, by this kind of definition, next year we do the same thing, just as if last year never existed.

Of course, in the real world we consider our savings to be our accumulated assets, not just what is left over from our paycheck after the bills have been paid. Still, the economists’ simple definition does allow us to use the national income accounts to calculate a “savings rate,” which reflects just how much of our incomes we spend each year. Most recently, what it reflects is “all of it.”

Over the past 20 years, through administrations and Congresses of both parties, we have seen the overall savings rate for Americans decline from nearly 12 percent to what it is today – zero.

The effect of the zero savings rate has been cushioned for many U.S. households somewhat by the gains from stocks in their retirement accounts and, especially, by the rising market value of their houses. Over the past two decades the positive effect of rising real estate prices has more than offset the decline in savings. The rising value of their homes, in fact, has allowed many households, through the magic of home equity loans, to spend more than their incomes could sustain.

Excessive consumer spending has certainly cushioned the economic effects of our recessions and, more recently, of the Sept. 11, 2001, attacks. But there have been some consequences that we are just beginning to understand.

One effect has been to create a kind of economic seniority system, dividing the country into the “housed and the house-nots” in terms of home ownership. The benefits of capital gains from rising prices only go to those who own their homes. The combination of very low interest rates, relatively high employment (even during our recessions), and general prosperity over the past 20 years has pushed homeownership to all-time highs. That is certainly a good thing, but the rapid rise in home prices has made it more and more difficult to find an affordable route to homeownership. In many cases, young workers jump into unaffordable homes – sacrificing expenditures on other items such as clothing, automobiles, furniture, and even health care – to avoid being left behind as a “house-not.”

But if people want to sacrifice these things for homeownership, at least it is their decision. Unfortunately, rapidly rising housing prices naturally cause rental housing costs to rise, too, with the result that many workers end up making similar sacrifices – giving up consumption goods and services in exchange for housing – except the decision isn’t voluntary and there is no potential for any home equity gains.

The underlying math is simple but unyielding. For a large number of Americans, paychecks have not risen as fast as the cost of housing. House payments or rent simply take a bigger and bigger bite each month. And when other costs – fuel, health care, taxes – also are accelerating, households can find themselves unable to afford basic necessities, even though they are gainfully employed.

That is why the lines at our food banks look different these days. Not too long ago, most of the people served by food banks were unemployable for one reason or another. Now, many of them are not only employable but also have regular jobs. The real estate boom has, in effect, just beaten them to the grocery checkout line.

Economists do not yet have a clue as to what, if anything, can be done to change this situation, even though there are good reasons to be concerned about it. In the meantime, it wouldn’t hurt us to realize that the housing boom that feeds homeowners’ nest eggs comes with a price that the “house-nots” get to pay. Volunteering or donating to a food bank would be a good way to use some Christmas spirit to balance the books, at least a little.