Why The Slump In Housing Led To A Boom In Savings

Personal savings staged a dramatic collapse in the 1980s. From 1981 to 1989, the savings rate, as a percentage of disposable personal income, fell from 8.8% to only 4.4%. Now, the latest numbers show a modest upturn in personal savings. Indeed, even though interest paid on savings has plunged, the savings rate over the past six months has averaged 5.2%, its highest level since 1986.

Does that mean Americans have suddenly rediscovered the virtues of thrift? Not necessarily. According to a recent analysis by economists Alicia H. Munnell and Leah M. Cook of the Federal Reserve Bank of Boston, much of the drop in savings in the 1980s was a response to the housing boom of the late 1960s and 1970s. As home values soared, pleased homeowners had less reason to put away money in the bank. Now, with housing prices stagnating across the country, consumers can't expect that to happen again. So unless the housing market unexpectedly recovers, the savings rate may continue its upward climb.

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