The savings rate in the US is abysmally low; in fact it is negative for the nation as a whole. In 2005, the savings rate was (negative) 0.5%. Americans spent $ 41.6 billion more than they earned. According to economists, this is an unsustainable paradigm and once the economy starts to slow down or goes into recession, bad debts will start to pile up and an economic implosion may occur.
Economists have identified cashing out of home equity as one of the key reason for the low savings rate. In the past few years, rising realty prices and low interest rates have encouraged homeowners to borrow against their homes and utilize the money for consumer spending. However, low interest rates leading to availability of easy money has led to rising realty prices. The recent reversal in the interest rate trend can lead to dip in property prices and panic selling of realty, setting in motion a vicious cycle that may initiate the accumulation of bad debts.
Median home prices in the US rose 24% between 2001 and 2004 with the rate being over 11% in 2004. It has been estimated that consumers pulled out nearly $ 243 billion in home equity in 2005.
