Giving Up a Dream and Spending It

The US savings rate has dropped to 3.9% compared to an average of 8.9%. There’s been a gradual decline in the US savings rate since the 1970s, when savings peaked at 14.3%. Yes, prices are higher (as they were in the 70’s), but consumers are currently spending at a rate that exceeds inflation. They’re absorbing higher prices and spending beyond that. There’s also the opportunity cost of not earning interest on spent dollars – today tack on 5% in lost risk-free interest.

2020 savings were an outlier because of stimulus and the lack of options to spend. Global travel shut down, so there was no place to spend the extra money until the world reopened.

What isn’t as easy to measure is the back-end costs of overspending. The number of years of delayed retirement, the amount of government assistance needed in retirement, the amount of unfunded retirement years. How many of today’s YOLO spenders will have to move into their children’s homes in the future? How many will have to find creative financial solutions because they ran out of money?

I’ve heard plenty of responses ranging from “I’ll just go back to work” or “I’ll move to a cheaper state or country” or “I’ll just win the lottery” or “I’ll just live off my social security”.

Running out of money during retirement creates many problems and the number of solutions will dwindle as we age. The ability to work depends on your physical and mental capabilities, two things that degrade as we age. Living off social security alone will barely keep retirees above the poverty line.

House Savings Shifting to Splurging

Nearly every generation has been told to save while young so they can afford to buy a house – ideally with at least 20% down. Today younger generations are facing higher prices and higher rates. Normally, we’d expect high rates to bring home prices down, but the lack of supply has kept prices in the stratosphere. This imbalance is prompting potential home buyers to spend their savings on other things.

Americans spent nearly 6% more in August compared to last year, even after accounting for inflation. Some are arguing that lack of home affordability is causing people to spend their savings because they can’t afford the home anyway. Instead of investing those savings and waiting for a better home buying environment, they’re splurging on services and experiences.

That’s a problem because Americans typically rely on their homes as a savings vehicle. Without one, the savings from the average American is substandard. We think Americans are over reliant on the value of their homes, but at least they are still saving. In other savings like a 401k, only 60% contribute to their retirement plan with contributions at an average of 7.4%.

Gen Z (ages 18-25) and Millennials (ages 25-41) are more likely to splurge regardless of income level. This is in line with housing affordability. Rather than continuing to save, it looks like the younger generations are using any predisposed savings (and debt) to fund a YOLO lifestyle.

Based on the data, the next question to ask is whether younger generations are spending more because housing is unaffordable, or are they inadequately able to save because they splurge so much?

With data going back to 1982, the US Census Bureau kept home ownership rates by age group. According to the chart, the ownership rate for those 35 or younger is about 39%, which is near their historical average of 40%.

No age group is far better or worse. The lack of housing supply is hurting everyone, not just first-time home buyers. Going back to the housing bubble, the under 35 group experienced the biggest jump in home ownership. Loose credit standards were more important to home buying than available supply. There are more homes now than in 2002 because we haven’t stopped building. Younger people can’t buy homes because they’re likely not able to get approved for loans. It’s most likely because the high mortgage rates and high prices are pushing monthly mortgage payments beyond reach for many buyers.

The larger trend of dwindling savings rates might be more of a factor here. People tend to assume what’s happening now will always be the case going forward. High interest rates likely won’t persist in a recession. Home prices could possibly cool in a recession too. Patience and letting your money work for you could be the best action to take in this environment.

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