http://finance.yahoo.com/blogs/the-exchange/why-m-draining-savings-stimulate-economy-132919961.html
Why I'm Draining My Savings to Stimulate the Economy
For several years, the economy limped along because of me. I scrimped on everything, did it myself if I could do it myself, and hoarded money out of fear that the recent recession had another dip or two left in it.
Things are different now. I've turned my savings into spending, rung up thousands of dollars' worth of purchases on my credit cards and in the process paid a lot more in taxes. And I'll probably keep spending like this until I nearly run out of money.
In other words, I've bought a house.
Since the recession materialized in 2008, policymakers in Washington have been urging Americans to buy homes, because no single purchase does more to generate economic activity. The housing market and everything associated with it accounts for around one-sixth of the entire economy, which is why a housing bust can drag the whole nation into a recession (basically what happened starting in 2007) while a housing boom can make nearly everyone better off, including people who don't even own homes.
That's why the Federal Reserve has pushed interest rates to historic lows, which makes buying and owning a home more affordable. For buyers like me, the final piece fell into place when home values finally bottomed out last year, after falling between 20% and 40% from the mid-2000s peaks, depending on where you live.
I finally took the bait and bought a home in the suburbs outside New York City a few weeks ago. Now, money I had been saving for years is circulating throughout the economy, helping make companies more profitable and keep workers employed. It's the "paradox of thrift" in reverse: Liquidating my savings may make me more vulnerable to a financial shock, but it's good for the overall economy. That's how America operates. We don't save very much, but that's perverse good news because our whole economy depends on people spending almost everything they earn.
A lot of Americans are beginning to spend money on homes the same way I am. Existing home sales are up sharply from the 2010 low point and are closing in on normal levels, which were about 5.5 million sales per year before they spiked above 7 million during the housing bubble, in 2005. New-home sales are still depressed, but they've ticked up as well. A pickup in housing activity and home values helps explain why the stock market keeps hitting record highs and consumers are gaining confidence, even as government spending cuts hold back the economy. Here are four specific ways I'm providing stimulus:
Buying lots of stuff. I've spent nearly $2,000 at Home Depot (HD) during the last few weeks. I've bought a new dishwasher, an air conditioner, lighting, lawn equipment and more fasteners, light bulbs and packing tape than I can keep track of. Before I bought a house, I might have spent $50 a month on that kind of stuff. No wonder Home Depot's stock is up 30% so far this year.
Supporting local businesses. Before I even moved into my new home, I paid a specialty firm $1,800 to remove some asbestos pipe insulation in the basement and a cleaning service $300 to thoroughly scrub the place down. I've also paid my contractor John Augustyn more than $2,000 so far to install recessed lighting and help with a variety of other jobs. There are other projects I'd like to do if I can afford them, so the money will probably keep flowing into the economy, rather than into my bank account.
Fattening up the banks. As anybody who has ever taken out a mortgage knows, the whole process feels like a huge vacuum latches on to your bank account and starts sucking. I paid Wells Fargo (WFC) an origination fee of $650, plus I'll be paying interest that's about 4 percentage points higher than what Wells pays the depositors whose money makes lending possible. That's a healthy spread that has helped Wells, the nation's largest mortgage lender, turn in strong profits during the last several months.
I also paid around $4,000 in miscellaneous "title charges," which is a frustrating part of buying a home. These services are largely performed by people you never see, largely for the purpose of making sure the paperwork is all in order. Sure, this can prevent costly legal problems down the road, but still, it feels like unseen bureaucrats are simply tacking on charges you have no choice but to pay, like sneaky senators who attach pet projects to must-pass Congressional bills. But title companies are a valid part of the economy, too.
Funding government. The most distressing part of buying a house is the tax bill. I paid nearly $7,000 in mortgage taxes for the privilege of buying a house, and the seller paid nearly $10,000 more in city and state transfer taxes. What's worse is that many people don't anticipate such large sums when they prepare to buy a home, because they forget the government has a big paw in the middle of the transaction.
States and cities need the money. They can't borrow the way Washington can, and many municipalities have been forced to lay off teachers, cops and firefighters on account of lost tax revenue. Still, I can't help feeling I could stimulate the economy a lot better by doing something else with that money.
All told, I could easily end up spending $30,000 this year that would have stayed in the bank if I hadn't bought a home. (That's in addition to the down payment on the house itself.) In a good year, about 7 million Americans buy a new or existing home, while in a bad year it's more like 4 million. If every new home owner spent more or less what I'm spending, that's nearly $100 billion in additional economic activity that occurs in a healthy housing market. And it happens automatically, without votes in Congress, changes in Fed policy or any policy decisions whatsoever.
No wonder the Fed would rather have me stimulate the economy than do so itself.
Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
