Adjustable Rate Mortgage Spending Helps Depress American Savings Rate
SACRAMENTO, CALIF — American workers had the lowest savings rate since 1933 last year. Working families had an abysmal rate of negative 1% in 2006 according to the U.S. Commerce Department.
This shocking figure follows a negative .4% in 2005. Not since the Great Depression of the 1930s have American consumers saved so little of their disposable income.
Disposable income is what is left of a person’s wages after taxes are taken out. Only four times in history have Americans had a negative savings rate: 1932, 1933, 2005, and 2006.
Savings rates were negative in the early 1930s because many Americans were forced to tap their savings to survive during the Depression. Today’s reasons for the negative savings rate have more to do with discretionary consumer spending and the need to spend more to pay a monthly mortgage bill.
“Home prices have ballooned in the past 5 years across the country, and the effects are felt most keenly in the densely populated areas on the East and West coasts,” observed Patrick McGilvray, J.D., President of http://www.TheHomeBuyingCenter.Com. “I have talked to many people in the past several years who spend over 50% of their net income to make their monthly housing payment after taxes are taken out of their paychecks. That figure is way too high in my opinion, but I understand that many people, especially first time homebuyers in California, felt that if they didn’t buy a home when they did they would not be able to afford one in the future.”
Speculators are blamed in part for the run-up in housing prices, and many amateur real estate investors who didn’t sell their homes quickly before the real estate market stalled are paying the price for their recklessness. Many of these newbie investors lied on their adjustable rate mortgage applications, and thought that they could survive negative cash flow on their properties by selling for a quick profit in a year or two. One website documents the travails of just such a rookie investor: http://flippersintrouble.blogspot.com.
Investors are not the only ones who have suffered. Homeowners who purchased homes with traditional, adjustable rate, and so-called negative amortization mortgages are spending a lot of their money to pay a mortgage that in many cases exceeds the value of their homes.