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By Thomas E. Brewton
web posted April 9, 2007

A potentially dangerous definition of savings is being pushed by some economists and investment advisors.

An increase in the market value of your home is not savings in either a practical sense or from the viewpoint of the economy as a whole.  Nonetheless this idea appears repeatedly in the media.

An example from the April 16, 2007, edition of Forbes magazine is money manager Ken Fisher's "Portfolio Strategy" column:

American savers, end your guilt trip. You have been told, by economists and by official government statistics, that you are inadequate, that the U.S. savings rate is negative. Wrong! It's a myth that Americans don't save.

The official numbers have some big deficiencies. They don't count capital gains....

What's true of him is true of any American with net worth tied up in a home's value, a 401(k) or stocks. A lot of people built wealth by owning a home and watching it appreciate. In my New York Times bestseller, "The Only Three Questions That Count," just out from John Wiley & Sons, that's a form of savings. The government, though, counts only how fast you pay down your home's mortgage.

Americans are really the world's biggest and most productive savers. Collectively, we are not tapped out, we are tapped in....Good times are ahead in the stock market. So buy good stocks...

Mr. Fisher is conflating savings with investment.

Unrealized capital gains, on a home or any other asset, are not savings.  They are the product of investment. 

First comes income, then saving via consumption of less than total income, and finally investing the savings in a prudent earning asset (savings account, mutual fund, 401(K), IRA, Keogh plan, etc.). 

What too often happens in our society is the reverse of that sequence.  Individuals spend as much as or more than they earn, using credit cards and second mortgages on homes to fund the excess consumption.  Such activity is a use of funds, not a source of funds, for the economy as a whole.

Genuine savings from unspent income, when invested, are a source of funds for the economy.  One of the basic principles of economics is that investment cannot exceed true savings.  If income is not saved, it's consumed.  What's consumed cannot be invested.

The only portion of home buying that is real savings is a cash down payment out of unspent income and subsequent monthly reductions of mortgage principal.

Excessive personal consumption and business bubbles like the 1990s dot.com boom are funded by creation of fiat dollars, which means that inflation, courtesy of the Federal Reserve, is the real "funding" agent.  Home prices rise in selected markets because of an imbalance of demand and supply, but the increase in unrealized capital gain on homes nationwide is the product of inflation.

Someone calculated, if I remember it correctly, that the total increase in home equity loans is approximately equal to our cumulative trade deficit with China.  Whatever the numbers in fact are, the point is that unrealized capital gains tend to be converted, via debt, into consumption expenditures.

To make the point that increased market value of a home is not savings, let me offer my experience of the moment in my home town, Stamford, Connecticut.  Home prices in this part of Fairfield County have risen insanely, doubling or tripling in the last couple of years.

Mr. Fisher's view is that I have substantial savings because of the big jump in the market value of my home. 

He's not alone.  Stamford's city government also thinks I have increased savings that ought to be turned over to the city via higher real estate taxes. 

The city's real estate has just been reassessed.  My taxes, unless I can persuade the valuation board of appeals otherwise, are scheduled to jump 48% this year.

Now, if I had invested real cash, via foregone consumption, in an amount equal to the increase in my home's market value, I would have income from that investment to defray the tax increase.  But, unless you own a home as a rental property, it's not an income-producing investment.

Should I have to sell my home because real estate taxes outrun my retirement income, I will confront the fact that higher real estate taxes cause home prices to drop.  Those higher taxes reduce a potential buyer's disposable income and cut the amount of the mortgage loan that he can obtain.

It is obvious, in addition, that unrealized gains in market prices of homes and common stocks can be reduced drastically, or eliminated altogether, by unpredictable economic recessions.  

Today's melt-down in the sub-prime mortgage market illustrates the folly of over-stretching to borrow the maximum to buy a home, in the expectation that its market price, and your income, will continue to rise.

Bottom line:  it's a fool's paradise to order your financial affairs on the belief that unrealized capital gains are real savings, on homes or any other investments. ESR

Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets. His weblog is The View From 1776. Email comments to viewfrom1776@thomasbrewton.com.


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