The national personal savings rate is starting to look more normal in Q4 2021, at 7.3% as of October 2021. Today’s savings rate follows two years of volatility, 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. This rate fell back slightly in 2020, then bounced back to 27% in March 2021 with the arrival of yet another round of stimulus. For perspective, savings bottomed near 2% in 2005 when consumer confidence was high.

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. Over the past decade, 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 low in California, meaning 20% down payments are increasingly rare among first-time homebuyers.

Looking ahead to 2022, many residents will continue to draw on savings to survive as they face high levels of inflation alongside joblessness. 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 recovery for a clearer picture of Californians’ access to incomes and savings. One million jobs are still missing from California’s economy as of September 2021. At the current start-and-stop pace of recovery, these jobs won’t begin a consistent recovery until around 2024-2025.

Updated December 21, 2021. Original copy published November 2013.

Chart update 12/21/21

2021 2020 2018
Annual average personal savings rate
12.9%* 16.3%
7.6%

Chart update 12/21/21

Oct 2021 Oct 2020 Oct 2019
Personal Savings Rate
7.3%
13.6% 7.2%

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

Gray bars indicate periods of recession.

*Data averaged through October 2021

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 7.3% in Q3 2021, having fallen back after a spike in savings due to the most recent round of individual stimulus payments. This follows a long and gradual trend upward from when the savings rate bottomed in 2005. As we continue through the current 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.

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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.