Thursday
April 24, 2014

Ready to Invest in Homes Again

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Ready to Invest in Homes Again

Spending patterns continue to be in flux.

Americans socked away $250 billion in each of the 10 years prior to 2008—before the onset of the financial crisis. The savings rate was a low 2 to 3 percent of disposable income. Starting in 2008, consumers became more careful about spending and are now saving some $600 billion a year.

The adjustments were certainly warranted. But the rise in savings has not affected all sectors of the economy equally. Spending on food, clothing, utilities, and health care has hit new highs. The growing population is fueling these areas, so where are the increased savings coming from?

Vehicle sales have fallen to about 12 million units a year over the past three years, well below the 16 million to 17 million unit sales pace typical before the slowdown. Then there are home sales. New- and existing-home sales hit 1.2 million and 7.1 million, respectively, in 2005. The comparable figures are now 300,000 and 5 million.

This process of saving more and reducing debt is known as deleveraging, and it’s not just households doing it. Businesses, banks, and state and local governments are doing it, too.

Only the federal government has been moving in the opposite direction: spending more using borrowed money. But this trend is likely to reverse soon. The debt ceiling bill enacted in early August all but ensures federal borrowing will slow because it creates a mechanism for $1.5 trillion in spending cuts if Congress fails to act on the recommendation of a new super committee of lawmakers charged with identifying cuts.

Meanwhile, we can expect deleveraging to slow among businesses and consumers. There isn’t a perfect straight-line path in economics. Deleveraging is big now, but tomorrow will be different. Despite major hurdles in the housing market, there are also signs sales and prices have reached the bottom.

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