Personal savings rose slightly in the second quarter (Q2) of 2013, but savings overall remain low. Savings were at an all-time low when homebuyer confidence was highest, during the Millennium Boom. They jumped during the 2008 recession and have since slowly fallen. Savings remain well below their highs seen in the 1970s.

Prospective homebuyers are saving less and less, casting doubt on their ability to muster a 20% down payment.

personal savings rate since 1952

Chart update 08/06/2013

Annual Personal Savings Rate

Personal savings rate

Chart update 08/06/2013

2nd Quarter 20131st Quarter 20132nd Quarter 2012
Personal Savings Rate

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 Recession in 2008 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.

Personal savings is at 4.5% mark, as of Q2 2013. The long, slow recovery continues to chip away at the modest savings accumulated during the last few years. Expect the up and down motion to continue as we navigate this listless jobs recovery.

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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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But future homebuyers may not have the luxury of riding the wave of consumer confidence. The hotly-debated definition of a qualified residential mortgage (QRM) may force savings for those who seek the American Dream.

For a loan to be considered a QRM under the current proposed definition, the homebuyer must bring in a minimum 20% down payment. The payoff? Lenders who originate QRMs will be able to freely sell their loans with no strings attached. In contrast, lenders must retain a stake in any loan which falls outside QRM guidelines.

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However, even if the 20% down payment requirement is built into the QRM, don’t expect it to trigger a massive increase in personal savings. 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.

More importantly for the savings rate, FHA-insured loans are not subject to the QRM requirements. And, the minimum down payment requirement for an FHA-insured loan is only 3.5%.

The FHA certainly poached some market share from conventional loans during the “credit crunch.” If the QRM is finalized with the 20% down payment built in, this greater FHA share will be cemented. Savings will rise marginally to reflect the buyers who still opt for the conventional route. But savings won’t leap up, dampened by the availability of low down payment FHA-insured loans.

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