RISMEDIA, Nov. 14 — (KRT) — America is a “spendthrift nation” where consumers save less, spend more and hope the surge in home prices will fuel their retirement, a Bay Area-based economist said.

As a result, personal savings rates continue to plunge, according to Kevin Lansing, a senior economist with the Federal Reserve Bank in San Francisco. For the past four months, the savings rate has actually been negative -- a startling trend that means people are spending more than 100% of their after-tax income.

This means that consumers continue to pile up a mountain of debt, possibly figuring that the unprecedented increase in property values will bail them out of the financial shortfall.
“It’s human nature,” Lansing said in an interview.

For individuals, this means that they may not set aside enough money for their retirement. And for the economy, a sharp cutback in spending as consumers feel less wealthy if property values decline could cause an economic slowdown or a recession, Lansing and another economist warn.

Individuals tend to save less money when they know that their assets have appreciated, especially assets based on stock holdings or real estate. Consumers apparently view the rapid increases in home values and stocks as a “substitute for the quaint practice of putting aside money each month from their paychecks,” Lansing wrote in an economic letter that was released today about the trend.

“The increase in the housing market really accelerated in the last five years,” Lansing said in the interview. “The movement into flat or negative territory for the savings rate coincided with the very rapid rise in the housing market.”

From 1995 to 2000, household stock market wealth increased 122%, but from 2000 through early 2005, it declined 39%, according to a Times analysis of the Fed Bank’s data. In contrast, household residential property wealth rose 6% from 1995 to 2000, and jumped 39% from 2000 to 2005.

“Aging workers should be building their nest eggs and paying down debt,” Lansing said in his research report. “Instead, many of today’s workers are saving almost nothing and taking on large amounts of adjustable-rate debt with payments programmed to rise with the level of interest rates. Many of today’s workers could face difficulties maintaining their desired lifestyle in retirement.”

Lansing believes this phenomenon is alive and well, for better or worse, in the Bay Area.
“The Bay Area has one of the nation’s hottest housing markets and you would expect this to be going on as well in the Bay Area, if people are seeing home price appreciation as a substitute for wage income and savings,” Lansing said.

Some consumers say it’s pretty tough to save money in the Bay Area. And that’s even with home prices rising quickly.

Melody Pelzl of Livermore said she and her husband have seen an $80,000 increase in the value of their home equity over the past six years. But with one child in college and a younger child approaching college age, it’s tough to set money aside.

“What can you do? You have to take out student loans, pull out the equity in your house,” Pelzl said.

Living expenses in the Bay Area make matters all that much worse.

“Even with increases in income and higher home values, it’s getting to the point that you can’t save or throw money into a savings account,” Pelzl said. “The cost of living, the expense of raising a family, are so high. We don’t have a nest egg that we can easily draw on.” Pelzl and her husband have money deducted from their paychecks for retirement accounts.

Noel Salvador of Dublin agrees that it’s not easy to save money, but he manages to set funds aside. Still, he says he’s well-aware it would be easy to slacken savings efforts because home prices are soaring.

“My home is the best investment I’ve ever made,” Salvador said .”All the stocks that I thought were great during the dot-com boom are down 50 to 75%. I’m just slowly starting to recover.”

In contrast, Salvador’s Dublin home has jumped in value by 71% in four years.
“There is that temptation to substitute a profit on the house for saving money,” Salvador said. “But I don’t bank on my home as savings.”

If the housing market cools, consumers may well retrench spending and change their habits.
“People will wake up and realize that the house will not pay for the kid’s college education and everything else,” said Christopher Thornberg, a UCLA Anderson Forecast economist. “People will have to meet these needs by saving money.”

That sort of shift in consumer behavior could jolt the economy, he warned.

“If the transition happens slowly, that would cause mediocre growth, but it would still be growth,” Thornberg said. “If it happens rapidly, that is the thing that could cause a recession.”

Copyright © 2005, Contra Costa Times, Walnut Creek, Calif.
Distributed by Knight Ridder/Tribune Business News.

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