The 20% solution: personal savings rates and homeownership

The national personal savings rate is inching higher from 2022’s decade’s low, at 4.3% in June 2023.

Recently, the savings rate plummeted by necessity, as households struggled to make ends meet under pressure of the highest consumer price inflation since the 1980s. This follows two years of volatility, with savings having jumped to a record 34% of disposable personal income in April 2020, coinciding with the first round of stimulus payments, which many put directly into savings.

For perspective, savings bottomed near 2% in 2005 when consumer confidence was high on Millennium Boom fumes.

Here in California, the room for saving is even narrower due to the high cost of living, thus the savings rate is lower than the national average. During the 2010’s, while jobs recovered steadily from the 2008 recession, home prices and rents increased far faster than incomes. This disparity has chipped away at the ability to accumulate savings sufficient to cover emergencies, let alone enough for a down payment on a home.

Further, the incentive for saving remains as low as the “negative” interest rates on savings accounts, which are insufficient to cover inflation increases. In turn, the savings rate remains systemically low in California, meaning 20% down payments are increasingly rare among first-time homebuyers.

Looking ahead to 2024, residents will continue to rein in spending in anticipation of reduced income with the 2023-2024 recession. This time around, there will be no individual stimulus payments to buoy savings.

The high savings rates of 2020-2021 were fleeting, and will have no long-term bearing on the housing market. Instead, look to the jobs market for the big picture on Californians’ access to incomes and savings. Jobs finally surpassed their pre-2020 recession peak in late-2022, but the rate of growth is quickly decelerating. Considering the economic tipping point facing California in late-2023, some of these jobs are expected to disappear as we head into the 2024 recession.

Updated August 14, 2023. Original copy published November 2013.

Chart update 08/14/23

Chart update 08/14/23

Data courtesy of United States Department of Commerce: Bureau of Economic Analysis

Gray bars indicate periods of recession.

*Data averaged through August 2022

More and more, real estate demand is driven by how much money potential buyers save. Personal savings were at an all-time high in 2020. What does this mean for future home sales?

Trends in saving

The 20% down payment was once the gold standard of residential mortgages. During the fevered years of the Millennium Boom, this became a quaint novelty. Buyers (and lenders) got used to the easy days of purchasing a home with 0% down, and seller-paid or financed closing costs. This low barrier to entry was seductively convenient for Millennium Boom buyers.

Unsurprisingly, this was reflected in the personal savings rates of the period. From 1952 – 1990 personal savings as a percentage of disposable income was around 8-10%, according to the Federal Bureau of Economic Analysis (BEA). During the Millennium Boom, it dropped to nearly 0%, a 50-year low. Then, the onset of the 2008 Great Recession ushered reality back through the front door. Homeowners who felt the trauma of the housing crash began wisely stockpiling cash. The personal savings rate leaped up to 6% within a year.

The personal savings rate was at 4.3% in Q2 2023, rising slightly from decade’s low experienced in 2022. The U.S. saw a spike in savings during the several rounds of individual stimulus payments during the 2020-2021 pandemic. This follows a long and gradual trend upward from when the savings rate bottomed in 2005.

As we head into the 2023-2024 recessionary period, expect to see a greater reliance on savings emerge, with households saving when possible to make up for the economic turbulence of the ongoing recession.

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Jobs Move Real Estate

Savings to continue?

Over the last few decades, savings has followed a path conversely proportionate to consumer confidence. When consumer confidence runs high, the rate of personal savings falls as people spend more than they earn. When consumer confidence is relatively low, personal savings rises. A financial “comfort zone” is accommodated either way.

Related article:
Homebuyers feel ready and willing to buy, but not financially able

The hotly-debated definition of a qualified residential mortgage (QRM) was thought to force savings for those who seek the American Dream. However, it ended up falling short of expectations.

For a loan to be considered a QRM under the first proposed definition, the homebuyer needed to bring in a minimum 20% down payment. However, the final QRM rules had no down payment requirement, a huge miss for stabilizing the mortgage market. Thus, a return to higher savings rates will not originate in new housing regulations.

Related article:
QRM rules finalized – and little has changed

Even if the QRM had required a minimum down payment requirement, homebuyers still have many ways to get around providing significant down payments. In lieu of conventional financing, many first-time buyers opt for Federal Housing Administration (FHA)-insured financing. FHA-insured loans have more permissive underwriting standards, but require mortgage insurance premiums (MIPs). And, the minimum down payment requirement for an FHA-insured loan is only 3.5%.

Further, Fannie Mae and Freddie Mac now accept minimum down payments as low as 3%.

However, as stricter credit standards are set across the mortgage industry during our present recession, tighter access to credit is keeping many homebuyers who were qualified even a few months ago from qualifying today. These would-be homebuyers will need to return to the drawing board for the next year or two, increasing their savings and improving their credit scores before they can take on homeownership.