AmericansÂ as a nation have no savings- the rate has been declining in recent years until last year, whenÂ it actually went negative.
The reason for this decline?Â Pundits have put forth a number of reasons, from credit card debt, and excess consumer spending, to a reliance on increasing home equity for savings.Â It is likely that all of these are contributing factors.
A Wall Street Journal article today by Jonathan Clements gives another reason- it seems that Americans are spending an inordinate amount on housing and transportation.
According to Clements, who quotes the U.S. Labor Department’s 100 Years of Consumer Spending,spending devoted to food and apparel has fallen sharply over the past century.Â Tobacco and booze are taking a smaller slice of the household pie, and entertainment and healthcare have not changed significantly from 40 to 50 years ago.
Transportation however, Clements points out, accounted for more than 19% of spending in 2002-2003. Housing takes an even bigger chunk, accounting for one third of household spending.Â The Census Bureau he states, says that in the past 25 years, second homes have increased 95% and new single family homes have increased in size 40%.
Conventional wisdom for years has been to buy the largest home possible, to maximize equity gain.Â Clements however, questions that philosophy now.
“(That it’s best to buy the largest home possible) might have been true during the recent housing boom- but it isn’t likely to be true over the long run.Â Since 1975, home-price appreciation has been modest, averaging just two percenage points a year above inflation.”
More people are discovering their “McMansions” aren’t the wonderful investment they thought they were- and sacrificing to maintain them is making less sense.
Clement’s conclusion:Â “You… have to factor in the mortgage’s cost, plus all the other expenses of homeownership, including maintenance, property taxes and insurance.Â The bottom line:Â Once you deduct those costs, you could probably amass far more wealth by purchasing a smaller home and then sinking the extra money into your 401(K) plan.”
If people take Clement’s advice to heart, a post-bubble world should show the landscape of American housing to be a very different place.