The Housing Crisis and Our National Attitudes Towards Saving

The Great Depression deeply affected the attitudes of the generation that came of age in the 1920s and 1930s. For example, it made the country thriftier and more Democratic. It took two full generations for other social changes to turn us into a society that was more Republican and saved much less -- shifts led, as before, by those who came of age in the bleak times of the 1970s. Our current economic upheavals are the most serious since the 1930s, so it’s appropriate to consider how they may affect American attitudes going forward. And the early surveys suggest that those who came of age during this crisis -- the Millennials born from 1982 to 2000 -- and now America’s largest generation by sheer numbers — already embody distinctive attitudes.

One way to glimpse how these tough times may affect our national psychology is to understand the forces that make times so tough. We’ll start today with an aspect close to people’s sense of themselves: their homes, or more generally, housing. We’ve all now lived through an historic housing bubble which, to begin, was very different socially from most bubbles in history: Unlike tulips, the South Seas, the 1920s stock market or other famous bubbles, this one was not primarily the business of speculators and affluent people. Nearly 70 percent of Americans own their houses, including most middle-class people as well as a broad swath of moderate and even low-income families. So, this bubble’s impact is being felt very broadly. That should be no surprise, since we give home purchases super-sized tax breaks and regulatory subsidies.

The irony is that while we go out of our way to encourage Americans to put their savings in this basket, in the form of home equity, we also encourage them to keep those savings small. First, we provide a large mortgage deduction which encourages people to buy houses -- and to buy way above what they could afford, but for that deduction. That’s one reason why housing prices generally trend upwards. But the way we provide the deduction actually cuts against saving much, since the deduction isn’t for what we “save” by owning our houses -- there’s no tax break for the downpayment, for example. Instead, it effectively encourages people to save relatively little, since they get to deduct only the interest on the mortgage loan, which represents what they don’t own or “save.”  The natural result is that most people borrow 90 or 95 percent of the value of their house --  just as Bear Stearns and Lehman Brothers did. We also encourage people to keep their “savings” in housing small, by providing tax breaks for them to pull out the equity in their houses in the form of tax-preferred refinancing and home equity loans.

The result is that large numbers of people end up saving relatively little by owning their houses -- and that’s especially the case when a housing bubble creates an illusion of significant savings. Federal Reserve data show that people’s home equity, or what they “save” through their homeownership, as a share of the value of their homes, has been generally falling for 60 years — which happens to be the time period since we enacted the major tax preferences for housing. Moreover, since 1985, that share has fallen from nearly 70 percent to 43 percent. Strikingly, this share remained stable during most of the bubble -- because as housing prices rose, people withdrew more and more of what they had “saved” as equity. And in the two years since the bubble first burst, home-equity savings has fallen by about one-third, from 60 percent to 43 percent.

Today, an estimated 12 million people are under water with their mortgages. Since they owe more than their houses are worth, the bursting bubble wiped out their life savings. Moreover, the data which show that people’s home equity is still equal to 43 percent of the value of their homes combines two very different groups of people: Nearly half of homeowners own their houses free and clear (mainly older people), while the other half has modest or little equity.
All of this could really change American attitudes toward saving. For one thing, the generation that came of age as these developments unfolded, along with everyone who staked their economic futures on ever-rising housing values, are much less likely to see housing as a safe way to save. That attitude correction in itself could provide a long-term drag on rising housing prices. There also are millions of people who counted on bubble-prices to fund their retirements. That’s been especially true of later Baby Boomers and early Baby Busters, the parents and older siblings of those coming of age in this period. A rude attitude adjustment is also coming for those who haven’t bothered to save much because they’ve counted on inheriting the elevated value of their parents’ houses.

The bottom line is that Americans once more may find themselves more inclined to save --  because now they have to -- and less inclined to use housing values to do it. Since stocks don’t seem much more attractive, that could mean more saving in the safest assets, which are Treasury bonds. And that would be just what an Administration and government determined to act big, bold and expensively, will need to carry out those plans.


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