The national personal savings rate rose to 8.2% of disposable personal income in February 2020. This continues a long and gradual rising trend from when savings bottomed in 2005 when consumer confidence was at all-time highs. Savings remain well below their peak seen in the 1970s, when interest rates were also at their height.

Here in California, the room for savings is even narrower, 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 becoming rare among first-time homebuyers.

Looking ahead to the remainder of 2020 and 2021, many residents will find themselves drawing on savings to survive the coming months of job loss as the damaged economy goes into free-fall. Others who remain employed during the 2020 recession will turn to saving as a way to fend off the anxiety of our present economic trifecta situation of a pandemic, recession and financial crash. Therefore, expect to see personal savings rise in the coming months even as the economy – and housing market – continue to slow.

Updated April 21, 2020. Original copy published November 2013.

Chart update 04/21/20

2019 2018 2017
Annual average personal savings rate
7.9% 7.7%
7.0%

 

 

Chart update 04/21/20

Feb 2020 Feb 2019 Feb 2018
Personal Savings Rate
8.2%
8.8% 8.0%

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

Gray bars indicate periods of recession.

More and more, real estate demand is driven by how much money potential buyers save. Personal savings is down. What does this mean for future demand?

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 is at 8.2% as of February 2020. This continues a long and gradual trend upward from when the savings rate bottomed in 2005. As we head into the next 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 2020 recession.

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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.

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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 instituted across the mortgage industry in preparation for recession 2020, 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.