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BDARD OF GDVERNDRS
DF THE

•""•

FEDERAL RESERVE SYSTEM

Correspondence
Xo
From

hairman Ecclos
gainsay V»:ood

21.
Subject: inflationary aspects of
residential b^ilclin^ and mortgage lending

In accordance with your request, transmitted through
Mr. Thomas, I have prepared the attached memorandum and tables on
inflationary aspects of residential building and mortgage lending.
I hope to have some additional material on Monday,
1 am also attaching a copy of a statement sent to
Dr. Jack Levin for the use of Senator Flanders' Subcommittee on
Cost Factors and Cost Reduction in Housing.

Attachments




INFLATIONARY ASPECTS OF RESIDENTIAL BUILDING
AND MORTGAGE LENDING

Summary
The current housing shortage can be alleviated only in
part by production of housing. The demand for housing at current
prices is so far in excess of the supply of houses available
plus what can be built quickly, that, if corrective measures are
not taken, inflationary pressures will persist in this part of
the economy until prices have been pushed up to the point at which
few families can afford to buy.
The volume of residential building is already in excess
of capacity at atable costs, and costs have risen. The recent
stabilizing of costs is attributable in large part to a better
flow of materials during the summer, and a consequent improvement
in efficiency on the job. Shortages are again appearing, however,
and prices of materials and wage rates have continued to advance.
The demand for housing is being supported by the large
volume of readily available credit. Over half of the mortgage
credit being extended is sponsored in some fashion by the Federal
Government, and an additional portion is amenable to some Federal
control. It seems desirable that steps be taken to curtail as much
as possible the availability of credit, especially that underwritten
by the Federal Government.
The volume of building
Residential building has increased markedly in the past
two years, as Tables 1 and 1-A show. The predominant feeling, both
in Federal housing agencies and in trade circles, is that the
housing shortage will be cured only by continuing, or increasing,
the current rate of building, and that any attempt to restrict
mortgage credit will reduce building, make the housing shortage worse,
and add to inflationary pressures.
Actually, it would probably be better to reduce somewhat
the current rate of residential building, if, at the same time,
measures were adopted to reduce the demand for housing in the market.
7 r are now probably building beyond our capacity. The argument that
.e
we are building fewer houses in 19^7 than in 19^5 overlooks the fact
that the rise in the early 1920*3 was more gradual than in the last
three years, and that, in the earlier period, the whole economy had
time to adjust to the higher level of building. It also overlooks
the fact that many of the worst houses built in the 1920fs were




built in 1925 and 1926, and the fact that the 1925 rate was not
sustained.
Evidence that we are trying to build too much is to be
found in the fact that, as Table 1-A shows, the number of unfinished
houses has been increasing almost without interruption. The widespread complaints of shortages of nails, cast iron pipe, sheet
steel, mill-work, and similar items, and the "grey market" for
nails, steel, and lumber (some of which are mentioned in the attached
Notes on Building Materials Supplies) are further evidence that
supplying industries cannot, at present, support the current level
of building* The auality of building is also declining, and the
Veterans Administration has had to institute an inspection procedure for new houses built Ydth guaranteed or insured loans*
Mortgage lending

o

Probably the largest single factor responsible for the
present inflationary boom, aside from the inadequacy of the housing
supply, is the availability of easy credit, A great many families
are encouraged to believe that they can improve their housing
conditions because they can borrow on easy terms, and while the
number of potential buyers remains large, builders have little incentive to hold their costs dovjn. The volume of mortgage lending has
been increasing, and the great bulk of this lending is on old houses*
Lending sponsored by the Federal Government has been increasing, both in amount, and in proportion to the total, as
Table 2 shows. There is some duplication in the table, since the
loans of insured savings and loan associations include loans
insured by the Federal Housing Administration and insured or
guaranteed by the Veterans Administration. It is not clear, however,
that, if MIA and VA guarantees were not available the total of loans
made by insured associations would have been substantially less.
A general reduction of the availability of mortgage credit
would reduce the demand for housing — both old and new — and, if
it were not too severe, would hold demand to a level which would
permit the largest volume of building consistent v,Tith reasonable
stability of costs and prices. If credit is not curtailed, there is
a serious danger that housing will be "priBd out of the market."
It seems wiser to curtail building slightly in the next few months,
if necessary, and make possible more stable building for a longer
period, than to encourage a higher level of building at increasing
costs, which will result in a cessation of building before the housing
supply has been increased appreciably.




c
Table 1.
Non-farm Dwelling Units Started
in the United States
(Thousands)

Year
1922
1923
1922+
1925
1926
1927

c




Total

716
871

1930
1933
1936
1939

330

1941
1942
19^4
191*5

715

19^6
19V7

776

e/ Estimated.

893
937
849
810

93
319
515
i+97

169
225
860 e/

Table 1-A
Permanent i^ew Ijonfarm Family Dwelling Units
(In thousands)

Period

Started

Completed

Under construction
(end of period)

Monthly

19U6

c

January
February
March
April
May
June
July
August
September
October
November
December

1947
January
February
March
April
Llay
June
July
August
September
October ^J

38

16

42

17
19
21

160
185
228
274

25
31

316

62

67
67

6U

63
65

37
43
50

3^9
375 .
397

56

48

61

405
407
394

39

63

370

40
44

63
60

347
331
332

58
58

58
69

58

73
77

63

354
368

66

382

30

60
60

341

86
92

70

398

77

92

82

413
423

Note:—Data from Department 0/ Labor. Only nevf permanent family
dwelling units built in nonfarm areas are represented, including units financed with public funds and with private
funds, and units built by conventional methods and with
varying amounts of prefabrication. Single person accommodations, conversions, trailers, and all temporary structures
are excluded.
2/

Preliminary




o
Table 2
New Mortgage Loans Made Under Federal Sponsorship
l-to-4 Family Houses
(Amounts in millions of dollars)

Loans made iinder Federal sponsorship

All loans
made

1939
!>!;-1945

2,873
3,310
4,701
9,1+53

1947 e /

11,000

Total

Percent of
a l l loans
made

1,250

1,773
2,023
5,523
7,054

kk
ki
k3
53

6h

Associations
Ins. "by Fed.
Savings and
Loan Ins.
Corporation

Federal
Hous ing
Adm.

581
883
i,li49
2,799
2,922

669
890
474
422
830

Ins. by

Ins • or
guaranteed
Y e t . Adja.

100

2,302
7

7QP

e/ Estimated by Federal Reserve
Note;—Loans made by associations insured by the Federal Savings and Loan Insurance
Corporation include some loans insured ^ the Federal Housing Adminis"tuition and insured or guaranteed by the Veterans Administration, In 1947
such loans may have amounted to about one billion dollars. If such
duplication could be elimixiated, the proportion of all loans made under
Federal sponsorship, might be about 50 per cent in 1946 and 55 Ver cent

in 191-7.




,r*
Adviser
g
LegisXatii* .i»ANrsiL«» Service
of Congress

tear

N

*e ar<* e&eXosiag eartain sftteriaXs* in duplie&te,
which we hape wi'il be of 9
u«« to you msd Mr* Sondersctti In your
work for So»et«r Flonders Suboasialttee o» Cost factors »nd Cost
ifoduetloa in
Tiw aetorials enclosod &r« copies oft
1# A tologram sent to ths b»m& of th© Eesosroh
^ t a t e&oh F*dorml Kosenro Bsnk«
* the r#|*ort fr^a ©&eh Sank whieh w&» obXe to
supply the ixiforsmtioB rsquostedi*
A goiMwr»X s^itoaeat on *Sfcs Housing Cost
" whieh bft* H i t prop«roi!l &t tlM Board
-e-vernors«
£0* 6 in the series of fostv&r
eoaonde Studies, pubiiehsci lay th* Board of
ebout i year mgo# 1t» f i r s t srtleXo a
e«<is imd th« llousiiig ^srket9* iaay be
Isterest to you*
If you flan t o pubXish «^y of tho ia«it©ri*la suppXiod
ti» Federal iieserfo B«nks# IKO should appreciate i t if the Banks
vere ^i'vem as opportunity t o make revisions for publieatioc,
to $mk$ svre th^t so eomfidenoes are violated*




r» %J*©k L*?i&




- 2 •

If we 0&n b« of further a«»i«t»noe to ^©u la your

pl«*ee - o not hesitate to call on us*

o f He«0ftiME»h ftttc S t a t i s t ! © *

Lisoission of tfot hi&h cost of housing has run predoainantly in tersaa of high costs of construction* This
esag*h*sis h&* eb-eeured sow* of btm probie&iss involved in re«Ute~
lag the ocwt of housing t o t)ie point &t which All families e&ri
be decently housed* rreooeupetion with east of new houses hat
led to aegloet of tli® 009% of aequirin-: old houses aaad of the
oost« of operation of both* Eafh&sit on ooat of
struotiom h - atuftlly «o*nt that the in^ortftfsoo of dosMuad
&«
dotorainint-- coat* has boon Bdnimiiod# I t h«« &lso usually
that costs h»TO bee& ciacua««c in tenas if costs incurred by
'buildors in construction r&ther theja in torsss of costs incurred
fey houso*io-lsi®rs la purchasing proportiea # including lma& aa
& bouses.
s
The
Costs of prot^ctioia, b^' ^bie»selv@8# m«v»r sot
pris#s hi|-h osough to oorer eostai CMS b obtained,
©
supers lanst bo williag and abl« to pay the prices* 9m the other
higher than the <g®fts of procuctiori, pm»mr® is put on costs to
rise* unless output e«n «3cp&nd smoothly s^d rapidly to useet the
in«r©«Mi#d doimud* Analysis of tbe eost of houslni; oust deal i&th
both tlai domansl and the supply sides of the pieture*
higjh iflflPtXa of houai&g #o«ts &ri0# in large
part oat if the postiwur inflationary sitaatioa in the econooiy
geiksrally., sad tte© unsatisfactory' bsuskif, eos»ditieri« of e s r l i e r
l*ears« the • r«atly liiereMed persottal iseaside nad holdi^ip of
liquid assets generated by wartime end postwar economic aetivity
have emabled people to bid tor better housing than they were
aoffu«tomed to previously* the also and quality of the stock of
housing brought over from the past* however» vere not Much as to
permit people to improve their housing rapidly Mi additions to
the stoofc have been small, partly beosiase of rs&teri&l and other
shortages Mi partly beceuse additions to the housinf supply* even
ua»i#r the wast favorable eircumstsu c«*# are always scall in any
short period* the r e s u l t has been that prices of houses, both
old and r*«wt have risen to exeeptionally hirh levels* Increases
in eost of n«tsgrials# labor, end eoniraetors* M VM have
T t M
r#fl«©te4 ift considerable part this feasie stwugth in the market
for houses*




- a•
VlMiromt eonsuiaptioxt of isott eeasuner g©$d» comes out
of current production, housing services represent almost entirely
the wse or existing stocks. Consequently* th$ cost to th«
consumer of new haufes is set sadnly by wh«t consumers are
vii.ling to
or old house** When prices of old houses r i s e ,
price* of s # ha»*«« also r i s e , and w*th ther, the profits of
aw
builder** When builders* profit* ris« f tb©r© ia wore incentive
to increase Jwilrtinff, operation* And, bscaas© th$ supply of labor,
s*«t*riitl«, tnd Itmd esamot \m »xptn4«4 «®©otfely «nd rapidly, th«
©f the«« ffcetora are bid up* Ir? other word»» co«t« riae#
r%*m Is c<j«t*, la t&rn, provide* «. ro»«cm for *ell«»r« of
both old a»4 new hou««* to test tho market at higher lerelt*
i |»«riod auoh sm the pre*ent# in which th»r« le
fall ifeaployne&t, & d in Khteh inflationary pre»nuree
n
are wl^epre*d # eoae of the Increase In residential ^ilein.-eo«te ommm £r*m taotor* oth^r than tho increased devitnd for
houainr* i-eaas^ for other t^pes of structures eospetes directly
for buildinr labor ftrn^ naterlalSt ft^d to sevrn extent, fttr land*
leaands for other kinds of goods and eervioes ftlso compete, either
directly or Iridir«»©tiy» furniture protection r«<|uires carpenters,
lumber, a d Balls* iaato®obile« are ® d » of sbeet sfeeel sn<i east
&
a«
Iron which are also needed for ^Jtterinr ana radiators t the
transportation *t agrictiltural pr-odu«ts require* freight
which are also tieeded for the laovesumt of ltisber and
Beoause not mil of these demand* can be ®>c at onoe with the
*f
resources available, the prices of the resources r i s e , and the
r**mzr&sm are meed in providing tho*© *t»od« auc tenrioe* for which
eonsmaers will pay *no*t«
' posts
price |«dd fior a bouso is muy one of
t^s eoatiauixi^ housi
I of a hamt owner* Interest
^har^es, imr'
.n, PSfSdr, m&iiitena«««, raplaceataat, I
heating eosta aare, in varying degrees, independent of the original
capital cost*
eduction of thew recurring eosts is worthy of
tharough stua^'» for if they 04*14 b« reduoed substantially, M
ia^ortent «i»use af I N instability of hosw twwirship would be
removed*
r^sitcr ytt^ai;tioa to tfcMe costs would also disclose
points s i whieh further reduotioxi © original oast leads to
f
tf oporatio.
iassrtisation of the »ortgas«# wkiek i« usually
aa | » i l i | i is a otrrent outlay, and whet^r i t i s , in faot,
depends in larre a^asure on the s t a t e of the joarket when the owner
s#lls his hsuse't
^aortisatios pajrment* should not b# ooonted in
their entirety «s offsets to current
i
t




-1 oper*tiii£: eosta, of whoa© a*£pltfctfbi an owmrr*
it usually or
usly aware, ftt the t l a e he purchases,
•jrs not art
ff
*ly, but when tfcty coma due they are *«bstactifcl* If 4m.
has eoarvitted hl»e#ll to the lisalt of
Mi
>r HM more ifcvll
I « interest* asortifai
tiest, t*a&#» ln»urtkac«# u t i l i t i e s , a* < h*at, * large job of
•
;
repair* nBd&tesMusa** or rvpl«e«atfit ©ay have- to b$ neglected,
with tWMqpMMt imf»lrffi@Bt of T»1UO or dagger to h»alth ( or, i f
i t i* un<'«rtnk«a* w»y rwejuiro r«<!ucti<MB. of #3tp«&dltttre f©r food*
clettoiag «P mtdica* *tt*ntioa« ?b* t.hro« relet«d f«ct« that
th#t« eo«t« t «.* time ^oe« «nx# art »o
for a nubatantial «.mouat of th« difficulty which
owreers eaeounter in tlma* of economic r«v«r*ftl« Tbet* oo*t*,
rather tkam tl» ortglnfel prlc© p*dd for a h©u»e# often sake a
reduction or iBturruptios of ineome a a»re lerleua aattor for
* hows 0snt«r that*, for a tetamt.

Tl» protant situation la u&ljUE* that i t #iirli«r boosm
in s«f«r&X w&j*« At tht s t a r t of th© war r®nts and pri«as *er«
r*latiT«ly low# ^c*«i Tftoaiiei#s w«r« ftA0t The f i r s t effect of
tha UMfMMi m r t i i w itteoaas w*« to f i l l th* raeaneias &nd
r&ta# r«Rts aac prices 8«te®whfet« Th* withdrs^al of 12 or 15
mill ion parsons fn»m eiYillan l i f e into t&l «*.r»s#d foro«s reduood
that BMi fay ©iTili&a hottal&g «©s«»*h«tt# although tbs
of war worksr* and famllios of j»issb«.r» of th« ara^d f$rc#8
t© ««^*«i shortages in «one armui* lh# tXum&eini of a
part i f wstr ©oats bv sale of (^otreinuBsnt s»tmrlties to
, snfl the restriction., by pri«w» «nd r&tio^iaa?j controls,
of tKs- ipsn&Uir af irtdiviiiumls, l^ft conswisors ^Ii5i a lart^
Toiuae of eladiai «» roo^s and serri©#s irfeich eoul*i b« exercised
a l t e r the war« *t tM end or the war, ds«obilisation of HH
faro«* ~b«faiif there were no Taeartoies^ fiusilles were
ar reestablished at a rapid rate, and ilc^i^ assets
artd «aay aa^t.^ge credit as well as hi?h ourrwnt intsossee wsrs*
t© ossBf**te far ths- llialteo supply «f housing t both old and
& reotilt, pri«ss t f (s|j fecmtes havs- VfMI very
rapidly te> lir$»l« »»eh hl^hmr than at the- M t f the warir and
M
on. eo«ti has been gr**t* In a4diti«& # the h3.gA levsl of
a c t i v i t y gMfftllyg tho larps Tolttme of capital foods
production, a»a t£w relatively low eapaclty of the bwilaimg industry,
have resultee in pressure on coste. liottleneeks have appeared in
one line ai*ter anothtr, In mstsrlals, transportation and labor,
H a l t i n g iioreajias In supplies and contributing to higher costs*




MI laportant reason for the continuation of this inflation i«
tho exiafcesca of the X»rg» voluss© oi% liquiu assets said readily*
giTradleible
h oeoRo^gr, which hm permitted
©
others to p«y t\m wtotrply a^mneed prie#* Cor