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The Mysteries of the Housing Wealth Effect
The saving rate has risen, surprise, surprise, surprise. The housing wealth effect is one of the most well-known phenomena in economics. The basic point is that people will spend more as a result of their housing wealth. Estimates of the size of the effect vary, but most are in the range of 5-7 percent, meaning that people will spend 5-7 cents each year out of every dollar of housing wealth..
Because of this wealth effect, it is not surprising that the saving rate has now risen from below zero to above 6.0 percent. (The actual increase is even greater due to some measurement issues resulting from the statistical discrepancy in the National Income and Products Accounts.) The loss of more than $6 trillion in housing wealth implies a cutback in annual consumption on the order of $300 billion to $420 billion (3.0-4.2 percentage points of disposable income). With stock wealth also falling about $8 trillion (the stock wealth effect is estimated at 3-4 cents on the dollar), it would have been shocking if saving had not increased.
Nonetheless, the media continue to report it with surprise and suggest that a turnaround is imminent, even though housing wealth is still falling at the rate of $400 billion a month. For example, the Post attributes a statement to economist Mark Zandi about more affluent homeowners: "He says they have gotten 'their savings rate where they want it' and could resume spending soon."
Of course, if they keep their saving rate where they want it, they won't start spending, they will continue saving at the same rate. (Most likely the Post misrepresented Zandi's comment.)
--Dean Baker
COMMENTS (7)
"saving" rate, or perhaps "paying off debt" rate?
Posted by: mich | June 27, 2009 7:40 AM
People aren't buying houses like they were a year ago. That has effected the spending rate, which has gone down. So of course, the savings rate has gone up. That was entirely predictable with the popping of the housing bubble.
Posted by: Chris V | June 27, 2009 1:08 PM
Because the zero-interest-rate policy the Fed has instituted to bail out Wall Street makes it impossible for savers to derive any meaningful income from any reasonably safe investment, and the stock market will soon resume its descent, turning the baby boomers' 201(k)s into 101(k)s, the savings rate is going to end up rising to well above the 10% level that used to be normal as boomers approaching retirement realize that stocks, real estate and bond interest are nto going to support them in retirement.
The conventional investment advice so many baby boomers based their retirement planning on gave as a rule of thumb that one could plan on spending about 6% annually of one's retirement nest egg.
As that gets revised down to a more realistic level of around 3%, the savings rate is going to start setting new records.
Posted by: jm | June 27, 2009 4:04 PM
I think it's likely that the increased savings rate has less to do with putting money in the bank and more to do with paying down debt. But once the debt is paid down I don't expect that people will immediately head for the mall--not when unemployment is at 12%.
Posted by: PeonInChief | June 27, 2009 9:08 PM
Is it just a coincidence that the total of $14 trillion in lost housing/stock wealth is about equal to the $14 trillion that the Federal Reserve/TARP has injected into the banks?
Posted by: David Green | June 29, 2009 1:13 PM
Surely, media reporting on the saving rate is of a piece with the abysmal reporting on all aspects of the economy. An obvious question is whether editors, publishers, producers, etc., deliberately cast things in the most glowing light possible as part of a 'build it and they will come' psychology game. If enough people can be convinced everything is coming up roses, maybe everything will come up roses. They hope.
Posted by: Hugh Sansom | June 29, 2009 2:30 PM
i like
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