Sorry I took so long to answer this, when the market is running the opportunity cost of replying here rises.
I said:
>>>>So when someone sells their previous house they are spending the proceeds on something else and borrowing 100% to buy the next one?<<<
No, and I never made that claim. Equity appreciation is capital gains, not savings. Savings is foregone consumption.
You are confused by the money price of the house. It is the house which is the savings, the unconsumed portion of the house. Think of it as corn you grew yourself from a harvest saved in the basement if that is easier, the money price might rise or fall but the number of bushels is constant. To understand this fully you have to look at the house separate from it's money price, all savings vehicles will vary in money price and savings in money form will also vary relative to what money will buy. If we look at the RE without confusing it with the money price, we can see that the value relative to other like RE hasn't risen at all even though the sale price has. That even though money is used to facilitate the transaction from one house to the next one, the amount of RE you buy with the sale price is roughly equal in value. If they issued special RE dollars, your house wouldn't have had a capital gain at all unless you improved it or the location itself had become improved. You might fool yourself and sell your high priced house for a cheaper one, but you aren't buying one that is the "same", you are buying one of lessor value.
So when someone sells their house today 90% is capital gains, and 10% is savings (the amount of the principle of the loan paid back).
The loan is a separate transaction even though they may occur at the same time. All loan principle is paid back with savings either current or past savings. You pay it with what is left unconsumed (eaten) from what you produce. That is why I said that houses are consuming savings. That isn't completely accurate, what they do is force savings since the value of the lowered liability can frequently be drawn back out with a sale of the underlying security (the house). Problem is a house is a highly illiquid savings vehicle with very high transaction costs and ongoing maintenance costs. There are some that would argue that the interest portion of a loan is also paid out of savings, but this is only if the person receiving the incomes saves it. I like to think of the interest as "rent" on the money you use to buy the house, it is an expenditure the same way the maintence costs are an expenditure.
What you call a "capital gain" can often be the return of uncompensated labor fixing up your house. Frequently I'm sitting in someone's kitchen and they are telling me how much they "made" on their house. In my head I'm counting up the trips to Home Depot, the numerous contractors, new appliances and endless string of weekends fixing up the house and thinking that they are lucky to get away even (with the illusion that they made a decent rate for their labor).
My assertion is that most 1st time home buyers are not using savings to buy homes,
The first time buyer may not have cash savings to put into that first house but as I stated above they will put savings into it, either by consuming less of what they produce to pay principle or by putting in sweat equity. They use savings with the first monthly payment unless they have an IO loan. The thing about the low interest rates of the last few years, paydown of principle is at a much higher rate than at the higher rates prior to 2000 because of the way interest is calculated on an exponential curve. Take the difference between a 150k house fully mortgaged at 7.5% against a 350k house fully mortgaged at 6% for 30 years fixed. In the first seven years (the average homeownership in US) the higher priced house accumulates paid down equity three times as fast as the cheaper house even though the payment is only twice as much.
It is consuming people's income and ability to save, as evidenced by the net negative personal savings rate for the year 2005.
The savings rate as measured by the BEA is negative but it is far from negative when you use a real rather than monetary measure of savings as it was originally defined (production-consumption=savings). Also, look at this survey for a real idea of how individuals spend their money. This implies a far higher saving rate than the one BEA comes up with.
bls.gov
Notice the income quintiles of page 8 and look at the lowest quintile. It shows income of an average of $8,201 but their expenditures are $18,492. Either these units are not reporting all their income or they are retired spending past savings (eating the house). I doubt seriously that they are all graduate students living on student loans. Also, look at the way they break out the data to show what various groups do, the homeowners are much better savers, higher educated are also better savers, higher income earners are also better savers.
The negative savings rate that bears always point to (it makes them feel superior because they KNOW that their savings rate is far from negative) is largely a function of government over-spending and government incentives paid to individuals with low levels of productivity not to produce at all or to move their production to the underground economy. i.e. retire at 62, take SS and make a little "side" cash fixing lawn mowers or single mothers given a stipend to stay home with the kids, and those who are forbidden to work at all if they are disabled or handicaped if they want to continue receiving benefits, etc. |
