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MAY 1949

THE

BUSINESS
REVIEW
FEDERAL




RESERVE

BANK

OF

PHILADELPHIA

CONSTRUCTION AND MORTGAGE
FINANCE: A NEW PICTURE

[vttw-

Construction is still at very high levels,
yet the tempo of the building boom
obviously has slowed. Thus far,
greater outlays for public works
have offset a decline in private building.
Mortgage lending remains active,
but the pace is slackening.
The housing “shortage,” still real to some,
is of a different nature than formerly.
Prices on most types of real estate
are lower in response to weakened demand,
and less is heard about the “shortage”
of mortgage funds.
The main key to the construction, mortgage,
and real estate outlook, appears to be
the trend of construction costs.

THE MONTH'S STATISTICS
Pay rolls of Pennsylvania factory workers
dipped below year-ago levels
for the first time since July 1946.
Trode is holding up fairly well.
Bank lending to business continues down,
and Government bond prices are rising.

THE BUSINESS REVIEW

CONSTRUCTION AND MORTGAGE FINANCE: A NEW PICTURE
The construction industry, a sprawling giant among
giants, is both highly praised and roundly condemned—
praised, because of its engineering excellence and its great
output records; condemned, because in some fields, par­
ticularly housing, its production methods are considered
archaic, and because its atomistic organization is consid­
ered inefficient. Widespread difference of opinion exists as
to the merits and deficiencies of the industry, but there is
universal agreement on its importance in our economy.
In early 1949 nearly 2 million workers were directly en­
gaged in construction. Probably as many more were pro­
ducing materials for it. The importance of the industry, in
fact, lies not so much in what it can do in the way of pro­
duction, though this has been the primary concern during
the last ten years, as in what its activity means for the
economy as a whole. A high level of construction activity
during the last two years has undoubtedly been a factor in
sustaining the boom. New construction was a $19 billion
contribution to gross national product last year. A sharp
drop in building now would be a serious blow to hopes of
minimizing readjustment difficulties in 1949.
On the basis of past experience there is a strong feeling
on the part of many observers, irrespective of the details
of the present situation, that a substantial downturn in
construction and real estate activity is imminent. It would
seem, however, that dependence on cyclical charts for busi­
ness forecasting—always a questionable business—is even
less justifiable at the present time.
Yet the real estate cycle is not a myth. Although not so
consistent as to allow accurate prediction, over a period
of many years the ups and downs of construction and real
estate activity have been fairly regular. The time from
peak to peak seems to average about seventeen or eighteen
years. But wars and other events have made for interrup­
tions in trend. World War II interrupted an upswing of
the cycle, and resumption of heavy building after a war of
such length could not be expected exactly to fill in the
remainder of the upward movement. Undoubtedly the
“rhythm” of the cycle—what rhythm there was—has
been upset. Signs of a downturn are present now, but the
fatalistic view that this drop must be like 1922 or some



other period should not be accepted uncritically. The con­
struction industry is intimately related to other segments
of the economy in which many changes have taken place
within the last two decades. It cannot be that the so-called
real estate cycle will be unaffected by those changes.
IMPORTANCE OF MORTGAGE FINANCE
Just as construction is a vital part of our industrial sys­
tem, mortgages comprise a significant segment of the
credit structure. How important mortgages are depends on
one’s point of view. To those whose homes are mortgaged
—and mortgages constitute the largest single type of per­
sonal debt—the important thing is how much they owe and
how much they have to pay each month. The ability of
mortgage debtors to make these payments is now much
greater than before the war, as total mortgage debt is
considerably smaller in relation to personal incomes than
ten years ago. Yet the big problem of the debtor is in
the future—how to keep up payments if his income de­
clines, and whether it is worth the trouble to pay off his
debt if he can get a cheaper place to live.
Mortgages are more important to some lenders than to
others. Savings and loan associations, for example, have
79 per cent of their assets in the form of mortgages; in­
surance companies have 18 per cent; commercial banks,
on the average, have 6 per cent of their assets in mort­
gage loans, but the smaller country banks concentrate
much more heavily on this type of lending. Past experi­
ence has shown that mortgages are not only an important
source of earnings to these lending institutions, but also
an important source of risks.
From the viewpoint of the economy as a whole, mort­
gages, like other types of credit, have helped to produce
our high standard of living. Buying a home requires sav­
ing whether or not credit is used. By means of credit,
however, a family can enj oy the use of a home while sav­
ing to pay for it. Mortgage credit thus has enabled—
indeed, in many cases has forced—individuals to save who
otherwise would have spent the funds for consumption
goods. Home ownership, moreover, is an important part

Page 47

THE BUSINESS REVIEW
of our social, economic, and political systems. But like
other types of credit, mortgage loans also have added to
the instability of business, encouraging booms and aggra­
vating slumps. Excessive lending in the past helped to in­
crease prices, stimulated over-building, and encouraged
people to incur excessive debts. In depressions, on the
other hand, borrowers had to pay off their debts out of
reduced incomes, defaults and foreclosures rose, lenders
became unwilling to lend, and building was held back.
Experience shows, therefore, that mortgage lending can be
a force for good or ill. As long as we heed these lessons
of history, mortgage lending can help us to obtain stability
at a high level of economic activity.
RECENT TRENDS IN CONSTRUCTION
AND REAL ESTATE
The fall of 1948 witnessed a change in the real estate
market and in construction generally. This was apparent
from the behavior of several indicators—volume of con­
struction, costs, and selling prices. The dollar volume of
all construction put in place hit a peak in August 1948.
The decline since that time has been partly seasonal, but
it is clear that the drop was greater than that of the previ­
ous year. Nevertheless building is still at a high level. As
the table shows, although April activity was below a year
ago, total construction in the first four months of this
year was greater than in the same period of 1948. Pre­
liminary reports for May are favorable, but several other
indicators now point in a downward direction.
First, privately financed construction in 1949, about
three-quarters of the total, is slightly below last year s
level. A sharp increase in publicly financed construction
has made up the difference. If the largest segment of the
industry continues down, it is unlikely that increased pubEXPENDITURES FOR NEW CONSTRUCTION
PUT IN PLACE
Expenditures (in millions of dollars)

Type of construction

1949

1948

April* April

Per cent
Fir at 4
montl is of— change
first 4
1949* 1948 months
+ 4.1

Total, new construction........................

1,368

1,378

5,033

4,833

Private construction...............................
Residential building (nonfarm).........
Nonresidential building (nonfarm)..
Industrial...............................................
Commercial..................... ....;..............
Other nonresidential building.........
Farm construction................................
Public utilities........................................
Public construction.................................

987
440
252
89
76
87
30
265
381

1,099
550
263
116
87
60
37
249
279

3,772
1,665
1,070
399
315
356
70
967
1,261

3.949 - 4.5
1.950 -14.6
1,062 + -8
491 -18.7
339 - 7.1
232 +53.4
88 -20.5
849 +13.9
884 +42.6

' rrBuuuuoiy.
. _
Source: Bureau of Labor Statistics, U. S. Department of Commerce




lie outlays would continue fully to compensate. Second,
the value of building contract awards during the first
four months of 1949, as reported by the F. W. Dodge
Corporation, was somewhat below the 1948 level, and
the seasonally adjusted index of the three-month moving
average in March was 175 (1923-1925 = 100) compared
with 181 last year. This series began to lag behind yearago levels in October 1948. Third, the Labor Department
estimate of the value of building for which permits had
been issued early in 1949 was 6 per cent below 1948.
While it is not possible to estimate the time lag involved
among these series, the issuance of building permits would
precede most contract awards; and awards, in turn, pre­
cede the actual construction. These figures, therefore, give
some idea of what is to come.
In general, Third District trends parallel those of the
nation, though the decline in building permits is larger
and varies considerably from city to city. Allentown,
Lancaster, and Scranton show increases for the first quar­
ter. Most others show decided declines. Seventeen district
cities combined experienced a first-quarter drop of 37 per
cent in building permits compared with last year.
Residential building has borne the brunt of the decline
in private construction activity. The year 1948, with over
931,000 new dwelling units started, was only a fraction of
a per cent under the record of 1925, yet a slow-down
seems to have begun before the year was over. New starts
declined steadily after the seasonal peak of over 100,000
in May and, beginning in September, dropped below the
previous year’s level. The value of residential construc­
tion put in place also began to decline after August A
seasonal upturn in home building which has taken place
in 1949 is not as strong as that of last year; 12 per cent
fewer homes were begun in the first quarter. Authoriza­
tions for multi-family rental buildings seem to have de­
clined more sharply than those for one-family homes—
this, despite the fact that multi-family dwellings built since
the war have been a much smaller proportion of all home
building than during the building boom of the ’twenties.
In general, nonresidential building and other types of
engineering construction bettered their 1948 records in
the first quarter of this year. The biggest percentage gains
came in publicly financed construction, which increased
in total over 40 per cent. Highways, schools, hospitals,
and churches, as well as warehouses and office buildings,
showed important gains. Contract awards and building
authorizations for these categories indicate continued high
activity for the immediate future.

L,

THE BUSINESS REVIEW
Costs are Down. Construction costs for the past year,
well over double their 1939 average, are definitely on the
way down. In the first quarter of 1949 they were higher
than in the corresponding period a year earlier, but there
was little doubt as to the direction of the trend. In this
case the fall of 1948 can be fairly definitely established as
the turning point. The Department of Commerce com­
posite construction cost index reached a peak in Septem­
ber, and by February had come down 2 per cent. Other
specific-purpose cost indexes show the same general trend,
though some observers report that the actual cost decline
in certain types of building has been greater than the in­
dexes show—perhaps a drop of as much as 5 to 10 per
cent.
Several factors have combined to lower costs. First,
greater labor efficiency. Standard wage rates have con­
tinued to inch upward, but overtime work is less frequent,
and workers seem to turn out a better job—perhaps not as
good as before the war, but a better job than last year. The
flow of materials to the job is good; there is little time
wasted in waiting. Second, builders’ overhead cost has
been cut by the shortening of the construction period. In
the Philadelphia area, building time for a home is reported
at six to eight months in contrast to ten to twelve months
two years ago. Third, material prices are lower. By the
middle of April the level of wholesale building materials
prices had fallen over 2 per cent from the September peak.
Stocks of building materials, which had been increasing
throughout 1948, began to put pressure on manufacturers
in the first quarter of this year. Gypsum products, millwork, and even iron and steel products, among the last of
the shortage items, became readily available almost every­
where. Stocks of plumbing and heating equipment, ply­
wood and flooring were two to three times year-ago levels.
The response to this situation by materials producers has
been some curtailment of production, some lowering of
prices.
With materials prices still double the 1926 level, a de­
cline of 2 per cent does not appear large; yet the reversal
of the upward trend, however slight, is of great signifi­
cance. Builders and subcontractors need no longer include
in their bids a “margin of safety” in anticipation of in­
creased costs. They are now encouraged, in fact, to shave
bids as closely as possible. Smaller margins of profit,
therefore, are probably a fourth factor tending to reduce
construction costs.
The Real Estate Market. Few statistical measurements
of real estate prices and market conditions are available.




Reports and surveys from the field must be sifted and
pieced together. These began to indicate some softening
in narrow segments of the market toward the end of 1947.
At that time the prices of older homes in the higher-price
range began to sag. During 1948 the decline was ex­
tended to the medium-price range and, by the end of the
year, to some new homes. A new development, late in
1948, was the appearance of increasing numbers of un­
sold new homes as the result of more rapid completions
and slower sales. Reports of the size of the new home
“overhang” are contradictory and difficult to verify, but
in some areas it is large enough to have brought about
substantial reductions in prices. In this area the bulk of
the unsold homes appears to be in the middle-price range
—$10,000 to $15,000. Good low-price homes still sell
quickly—though not from the blueprints, as before.
The main brunt of consumer resistance in the middleprice range is being felt by the poorly located “operation”
house, or by the $15,000 home in an $8,500 neighbor­
hood; yet in some areas vacancies are sufficiently wide­
spread to induce builders to hold off on new building
until the market has been tested further. The opinion is
gaining that, for the time being at least, the middle-price
market is saturated.
There is no mistaking the strong demand for very lowcost housing. It is reflected in the price trend for used
homes as well as in the speed with which most new homes
in the $6,500 class are snapped up. In the Philadelphia
area and elsewhere, homes in $3,500 neighborhoods are
still moving up in price.
Although Third District farm real estate prices have
continued to rise slowly, the Department of Agriculture
reports that for the nation as a whole the first post-war
decline in farm values took place between the beginning
of November last year and the first of March. Falling
farm commodity prices have undoubtedly begun to affect
the farm real estate situation.
In still another field, industrial real estate, a recent
change is evident. A survey by the Society of Industrial
Realtors reveals a market situation which appears to be
much firmer than that prevailing in the residential field,
but which now shows definite signs of leveling off. Multi­
story industrial buildings—the older type of manufactur­
ing facilities—show a downward price trend, and although
the demand for small- and medium-sized buildings is still
strong, the larger buildings have begun to show some
weakness. Vacant industrial land—scarce in many large
cities, including Philadelphia—is reported “steady.”

THE BUSINESS REVIEW
Still a Shortage? Do these changes in construction
activity, costs, and market conditions mean that the short­
age of housing and commercial space is over? Those who
say yes point to declining home prices, luxury-apartment
rent troubles, increasing office and commercial vacancies.
More than a few observers feel that a supply-demand
balance is imminent, if not here. Those who insist that
demand is unsatisfied, particularly for housing, point to
rising rents and overcrowding as evidence. They concede
that the hundreds of thousands of dwelling units built and
renovated since the war have helped; but they point out,
too, as does the Philadelphia Housing Authority, that new
building has been too high priced. The typical rent of
apartments put under permit during the second half of
1947 in the city of Philadelphia was close to $100 a month.
Not many families can afford such rentals. The shortage
persists.
There are elements of truth in both views. However,
the antagonists in the argument frequently fail to see the
other side because they are thinking in different terms. It
may well be that the demand for homes at existing prices
has been satisfied. In this sense the “shortage” is dis­
appearing. But it is undoubtedly true, that in terms of a
minimum standard, the need for housing has not been met.
In this sense the “shortage” is very much with us. It is
often forgotten, too, that the real estate and construction
markets are highly segmented. Each segment is intimately
related to the others, but at any given time conditions
within each one may vary from the average. This is a
stumbling block to a clear-cut decision on the state of the
market. Concentration on low-cost housing alone, for in­
stance, may give rise to a somewhat distorted picture.
And strict adherence to past patterns of construction may
obscure real opportunities.
RECENT TRENDS IN MORTGAGE LENDING
The volume of mortgage lending has continued at a high
level, and total mortgage indebtedness has been increas­
ing. Yet the pace of lending activity, like that of con­
struction and real estate transactions, has been slowing
down. This tendency has been particularly noticeable in
the number of mortgages made; the dollar volume of mort­
gage lending reflects price trends.
A growing proportion of mortgages made since the war
has been for new construction and reconditioning, and a
declining proportion has been for the purchase of exist­
ing homes. This trend has reflected the rapid construc­




tion of new homes, and the slackening of strong pressures
for immediate occupancy.
The tendency for commercial banks to do a larger share
of mortgage lending, a trend in evidence for a year and a
half after the war, has been reversed. Banks accounted for
27 per cent of the volume of mortgage recordings in early
1947, but are responsible for only 21 per cent now. In­
surance companies and savings banks, on the other hand,
have been making an increasing share of the loans ever
since early 1946. Large amounts of savings have come
into those institutions from the public and additional
funds have been supplied by the retirement or sale of
Government securities. Using these funds, insurance com­
panies and mutual savings banks refinanced existing mort­
gages and bought heavily on a national scale. In contrast,
some commercial banks, either because of legal restric­
tions or internal policy, were “loaned up” as early as
1947. Banks, moreover, have been more directly affected
by the restraining actions taken by the monetary author­
ities.
Contrary to the trend during most of the post-war pe­
riod, a larger proportion of mortgages being made now
are not guaranteed or insured. Mortgages guaranteed by
the Veterans Administration, which at one time consti­
tuted one-third of mortgage recordings, now comprise only
about one-tenth. The decline in VA activity has been
going on since early 1947. It was in this area that the
most urgent demands for occupancy were concentrated,
and as this condition subsided activity has declined. De­
spite the guarantee, lenders have become increasingly
cautious largely because the market for small houses is
probably the most inflated segment of the housing market.
Lenders have required increasingly strict terms on VA
loans, asking for larger down payments and shorter ma­
turities. Other explanations often given for the decline in
veterans’ activity have been the uncertainties of the sec­
ondary market and the unattractiveness of the 4 per cent
rate.
Mortgages insured by the FHA, on the other hand, have
constituted an increasing share of total mortgage record­
ings for over two years. In the early post-war period, few
FHA loans were made, principally because the legal pro­
visions resulted in less liberal appraisals. In the latter part
of 1946, however, activity started upward rapidly, ac­
counted for principally by Title VI loans, which are
granted under more liberal provisions than Title II loans.
In the spring of 1948, FHA loans became somewhat tighter
as a result of Congressional action, and for a short time

THE BUSINESS REVIEW
the FHA had no authority to make Title VI loans. In the
summer of 1948, however, Congress took steps to ease
mortgage credit once more, liberalizing terms for Sec­
tion 608 loans and Title II loans. Authority to guarantee
loans under Section 603, however, was not restored. Loans
insured by the FHA have continued to rise, comprising an
increasing share of total mortgage recordings.
Trends in farm mortgages have been similar in many
respects to those in urban mortgages. Although farm mort­
gage debt is still rising, the volume of new lending activity
has been declining. Commercial banks, which increased
their share of the farm mortgage business in the early
post-war years have been declining in importance for
many of the same reasons as their decline in the urban
mortgage field.
A Shortage of Mortgage Money? As in the case of
housing, the so-called “shortage” of mortgage money is
largely a problem of semantics. In the first place a scar­
city is not absolute; it must be considered in relation to
demand. And while needs for housing are practically
unlimited, demand is comprised of need plus ability to
pay. The same type of analysis applies on the supply side.
There is a plentiful supply of funds available for lending.
Some banks, it is true, have reached their legal lending
limit, but funds are still coming into savings institutions
in large volume and most institutions hold a considerable
quantity of Government securities which they can liquidate
to make loans. Effective supply, however, comprises abil­
ity to lend plus willingness to lend. The “shortage” of
mortgage funds is often the result of a comparison of
housing needs with willingness to lend. The reluctance to
lend is reflected in rationing of funds by increasingly strict
mortgage terms—higher down payments, shorter matur­
ities, higher interest rates, and more conservative ap­
praisals.
There is no question but that the “shortage” of mort­
gage funds prevented some prospective borrowers unable
to meet the terms lenders asked from acquiring a home.
But it is unlikely that it has hindered total construction
activity since the war. Inasmuch as resources were being
practically fully utilized, easier credit would have en­
couraged higher building prices instead of increasing out­
put. Indeed, from the point of view of economic stability,
credit should be difficult to obtain in periods of inflation
and easier to obtain in recession.
Recent developments have suggested that the “shortage”
of mortgage money may be diminishing. On the demand
side, needs are still great but the public is now thinking



more about price and less about need. Although their
terms have not eased, with the possible exception of some­
what lower rates, lending institutions are beginning to be
a little more anxious to get mortgages now that commer­
cial loans and other outlets for funds are shrinking.
THE OUTLOOK FOR CONSTRUCTION
Critical factors determining the volume of construction
in the immediate future are not the availability of credit
or of materials and labor, which are now adequate and
growing, but the prices at which these will be supplied
and the kind of package they will go into. Unless con­
struction costs come down further and unless building
takes the form that consumers will buy, it is possible that
for the immediate future, at least, private construction
activity will continue to slacken. At the beginning of 1949
it was expected that public works of all kinds would in­
crease sufficiently to more than make up for any drop in
private building during the year. So far, this expectation
has been fulfilled, but the possibility of a substantial de­
cline in private construction outlays now clouds the pic­
ture. The extent of such a decline depends on many factors.
For one, a lessening of sales and production in many
lines during the last six months has probably caused some
contraction of industrial and commercial construction
plans. But many plans which have been held in abeyance
would be taken off the shelf if and when construction
costs decline sufficiently. In the commercial field espe­
cially, but also in industry, keener competition may force
some modernization of plant or stores despite high cost.
Many recent air-conditioning and display-window expendi­
tures have been of this nature. A much larger volume of
construction would be undertaken, however, if the nonresidential construction dollar would take on a closer re­
semblance to its pre-war appearance. In the meantime the
expectation of lower prices may be a deterrent to imme­
diate building.
Expectation of lower prices is probably a stronger de­
terrent to the purchase of new homes than to erection of
industrial facilities. The home buyer rarely weighs the
return on his acquisition against its cost, and if he is
aware that prices are receding, he feels that he might just
as well wait for still greater reductions. This may be one
reason why home-sellers usually prefer to present a firm
price to the public even though price reductions may be
made privately. “Consumer resistance” of this type is
highly contagious.

THE BUSINESS REVIEW

CONSTRUCTION, REAL ESTATE . . .
BILLIONS

TOTAL CONSTRUCTION

* ALL OTHER ^
CONSTRUCTION

CONSTRUCTION PUT IN PLACE
is slightly higher so far this year
than last, despite a lag in residential
building.

ION RESIDENTIAL?
, BUILDING

0.5
RESIDENTIAL BUILDING

SOURCE: U.S- DEPARTMENT OF COMMERCE

INDEX

REAL ESTATE ACTIVITY in the
Philadelphia area, as reflected in title
insurance applications, remains at
the high level of the last two years.

1945 MONTHLY AVERAGE- 100

J_I—L

AMV ' 1 ' I I I 1 1 1
SOURCE: FEDERAL RESERVE BANK OF PHILADELPHIA

INDEX

CONSTRUCTION COSTS reached
a peak in the fall of 1948 and have
declined slowly but steadily.

it:'

1.. 1__L
SOURCE' U.S. DEPARTMENT OF COMMERCE

THOUSANDS
OF UNITS

HOUSING STARTS throughout the
nation are considerably fewer than
in 1948 but are making a good sea­
sonal recovery.

I I l.. I.,
1946

1947

SOURCE: U.S. BUREAU OF LABOR STATISTICS




1948

1949

THE BUSINESS REVIEW

. . . AND MORTGAGE FINANCING
(ANNUAL RATE-)

NON-FARM MORTGAGE RE­
CORDINGS are still at a high level,
but slowing down.

PER CENT

IOO

REFINANCING AND OTHER

LOANS MADE (by savings and loan
associations) are more for new con­
struction and repair, less for the
purchase of old homes.

HOME PURCHASE

CONSTRUCTION AND RECONDITIONING

PER CENT

100

OTHER
.NSURANCE COMPANIES AND MUTUAL SAVINGS BANKS

DISTRIBUTION OF MORTGAGE
RECORDINGS shows commercial
banks declining, insurance com­
panies and mutual savings banks
still increasing.

INDIVIDUALS

SAVINGS AND LOANS

BANKS AND TRUST COMPANIES

PER CENT

100

GUARANTEED LOANS are now a
smaller proportion of mortgage re­
cordings because of the decline in
G.I. mortgage activity.




NON- GUARANTEED

FHA

SOURCE: HOME LOAN

BANK BOARD f VA

AND FHA

THE BUSINESS REVIEW
In the longer run, of course, lower costs would be favor­
able for residential construction. Of the million families
who had planned to buy new homes in 1948, half could
afford to pay over $7,500; only one-seventh could pay
over $12,500. The bulk of new housing has not been
priced to meet the bulk of the demand. The average price
tag on homes bought with VA loans last year was $8,300.
The average construction cost of a one-family dwelling,
exclusive of land, sales profit and other non-construction
expenses, is estimated by the Bureau of Labor Statistics
to have been $7,900 at the end of 1948. A substantial
reduction will be required before a large portion—per­
haps the largest portion—of the market can be reached.
The Economy House. In an effort to find a way to
offer a low-cost unit for sale, certain trade groups and
Government agencies have been encouraging the construc­
tion of a so-called “economy house,” and meetings of
builders and mortgage bankers have been held throughout
the nation to discuss an economy housing program. Econ­
omy house designs vary considerably but they all have
small size and simplicity in common. Single units are
typically one-story, cellarless construction. Labor-saving
“dry” wall board is used. The frills are cut out of the
kitchen, and the bathroom is not tile. The use of standard
plumbing equipment and “modular co-ordination”—the
use of standard-size construction units—is encouraged.
Depending on its size and location, such a home might
now be built for $4,000 to $6,500.
There is rather sharp disagreement over the merits of
the economy house as the answer to the housing problem
and the cure for sagging residential building. One argu­
ment raises the question of an obstacle which has hin­
dered prefabricated housing—consumer acceptance. Op­
ponents of “economy” doubt that the American house­
wife will be satisfied without a “dream kitchen” and tile
bath. Supporters urge that she be given a chance to
choose. Another obstacle is the question of the adequacy
of space provided—to which the answer might be that
even 600 square feet of space is better than none and that
the economy house might be kept “expansible” for later
additions.
Many observers have pointed out that while economy
homes may meet a widespread need at the present time,
they would soon be occupied only by the lowest income
groups and would increase the danger of creating new
slum areas. This is a serious problem. There is, unfor­
tunately, ample precedent for such a slum-breeding proc­
ess. It would seem, however, that good building plus



adequate community planning could avoid the evil. Build­
ers and realtors are becoming increasingly aware of the
need for undertaking preventive measures on a commu­
nity-wide basis. In any case, plans for large-scale economy
house construction are being made.
Apartment house development is severely handicapped
by high costs. Many projects have been built and others
are planned under FHA Section 608 requirements. But the
point is rapidly being reached at which it will be impossi­
ble to build and profitably operate at the rentals now
obtainable.
Construction costs were among the worst actors during
the 1946-1948 inflation. They will have to fall consider­
ably more than other prices in order to reach their pre-war
relationship to the general price level. Proper price ad­
justments, if they are made, and continued efforts on the
part of builders to find new cost-saving techniques will
minimize the danger of a significant decline in construc­
tion activity and will contribute to general business pros­
perity.

OUTLOOK FOR MORTGAGES
The demand for mortgages will depend basically on the
trend of construction. As has been pointed out, although
construction activity is picking up seasonally, expansion­
ary forces are not as strong as previously. The demand
for mortgage funds, therefore, is likely to decline grad­
ually but still remain at a relatively high level.
The housing bill now pending in Congress authorizes
local housing authorities to issue securities guaranteed, in
effect, by the Federal Government to run for 40 years.
These bonds will have practically the same investment
status as Governments and municipals, and are expected
to be an attractive investment for commercial banks and
other institutions. Nevertheless, they are likely to be more
of a supplement to than a substitute for mortgage money.
Funds will continue to be available for mortgage lend­
ing. Personal saving is likely to stay high, particularly
if the distribution of income shifts to the upper income
groups. And so long as the market for Government se­
curities is supported, any holder of Governments can ob­
tain funds readily by selling. Policies of the monetary
authorities, therefore, will be important in determining the
availability of funds. Depending on the business outlook,
action to ease or to tighten credit may be expected as
changing circumstances require. Whether lenders will be

THE BUSINESS REVIEW
willing to supply mortgage funds, however, will depend
to a considerable extent on the attractiveness of alterna­
tive outlets. The recent declines in yields of Government
securities favor mortgages, especially those with Veterans
Administration and FHA guarantees. Willingness to lend
will depend also on the relationships of earnings and risks.
It is frequently argued that a higher rate paid on guar­
anteed loans would make lenders more willing to extend
funds. Even if this is so, for a change in the rate to
stimulate construction, borrowers must be willing to bor­
row more at the higher rate. Probably the most effective
inducement to lenders would be a reduction in housing
prices to a level more nearly in line with the long-run
trend.
Implications of a Price Decline. A reduction in new
construction prices would mean a decline in the market
prices of existing real estate. If the decline went far
enough, some debtors might find that it would cost less
to buy or rent another property than to pay off the rest
of the mortgage. For this to happen on any significant
scale, however, a decline of real depression proportions
would be necessary. But in the event of a general depres­
sion, debtors would be faced by a more acute problemhow to meet fixed interest and principal payments out of
smaller incomes.
It is true, of course, that we have learned something
from unfortunate experiences in the past. The widespread
use of amortization is often cited as the biggest single
improvement in our mortgage procedure. Lower interest
rates also help to ease the burden. On the other hand, as
prices and the size of mortgages have risen it has been
necessary to lengthen the terms of mortgages in order to
keep the monthly payment within manageable proportions.
This is apt to mean that the average mortgagor will be a
long time getting a good stake in his home.




Creditors, of course, would be affected by most of the
adverse factors troubling debtors in case of a price de­
cline. In the past, mortgage difficulties have sometimes
proved disastrous to financial institutions, bringing on
heavy losses and failures. A repetition to the same extent
is not to be expected, in view of the much stronger finan­
cial position of lending institutions and the existence of
Governmental agencies set up to prevent such an event.
Another source of strength in the mortgage market is the
small number of second mortgages made today. Further­
more, since practically all loans are amortized monthly,
lenders are more able to keep aware of the status of the
loans, and borrowers find it easier to make the payments.
But while the fact that about one-fourth of all nonfarm
residential mortgages outstanding are now guaranteed by
some arm of the Federal Government is a source of com­
fort to many lending institutions, a large volume of mort­
gages is still uninsured; and though there may be protec­
tion from loss, there is no protection from adverse public
opinion.
The economy as a whole suffers when borrowers and
lenders suffer. Mortgage lending and the liquidation of
mortgage debt have been important factors in the past,
aggravating our spirals of inflation and deflation. The
various sources of strength in the mortgage picture, as
already shown, will act to minimize the deflationary effect
of a price decline. But it is impossible to determine how
reliable these factors may be, inasmuch as many were de­
veloped in a period of rising real estate prices and have
yet to be tested. The practice of amortization, for example,
will have the disadvantage of necessitating continued
heavy saving in depression as well as in boom. The surest
protection against the consequences of disorderly defla­
tion in the real estate market, is always a conservative
lending policy while the outlook is still favorable.

THE BUSINESS REVIEW

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THE THIRD FEDERAL
RESERVE DISTRICT

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THE BUSINESS REVIEW

THE MONTH'S STATISTICS
Employment and pay rolls in Pennsylvania manufacturing industries declined again in March. Both average hourly earnings
and weekly earnings remained above 1948 levels, but the number of production workers employed had fallen so far that for
the first time since July 1946 total pay rolls were below those of the previous year. The statistics for April, which will appear
in the June Business Review, will show an even greater decline. This is contrary to the expected seasonal trend, though a
slight drop also occurred between March and April last year. Hardest hit are textiles, furniture and lumber products, rubber,
and the automotive and auto equipment industries.
Year-ago comparisons for March department store sales are distorted by 1949’s late Easter. Weekly figures indicate that
for the 17 weeks ended April 30, district department store sales were only about 4 per cent behind 1948. The ratio of
stocks to sales in Philadelphia stores at the end of April was lower than last year. The stores have been buying cautiously,
and inventories are generally “light.” Major household appliance sales continue in the doldrums.
By the middle of May the decline in business loans outstanding at weekly reporting banks in the United States had entered
its seventeenth consecutive week. As business lending slackened, banks bought Government securities and helped bring
about a rise in bond prices. Required reserves of member banks were reduced by about $1.2 billion by the lowering of
reserve requirements early in May. The strong market demand for Government securities resulted in substantial net sales
by the Federal Reserve System.

Third Federal
Reserve District
SUMMARY

United States

Per cent change

Per cent change

3
mos. Mar. 1949
1949
from
from
year year mo. year
ago ago ago ago

Mar. 1949
from
mo.
ago

OUTPUT
Manufacturing production.... - 2* - 7* - 5* - 2
Construction contracts.............. -19 -13 + 6 +20
Coal mining................................... -33 -48 -33 -34

Factory*

3
mos.
1949
from
year
ago

- 6

- 2
- 7
-13

- 4

- 8

Payrolls

Sales

Stocks

Per cent
change
Mar. 1949
fro m

Per cent
change
Mar. 1949
fro m

Per cent
change
Mar. 1949
fro m

Per cent
change
Mar. 1949
from

mo.
ago

mo.
ago

year
ago

mo.
ago

year
ago

mo.
ago

year
ago

— 2

— 7

— 3

+ 1

+23

-12

- 5

- 4

- 4

+15

- 3

- 3

- 5

- 3

+ 3

+29

+12

- 1

+ 9

+19

- 4
— 5

+ 8

- 4

- 1

+12

-12

+ 7

-20

+16

- 1
+ 2

- 7

-10

0

- 1

+32

-12

+ 7

- 4

+26

+ 3

+ 6

+20

+ 6

— 7

Lancaster.......................... -1

- 3
- 5

Reading............................. - 1

Investments................................... - 1
U. S. Govt. Securities.............. - 1
Other............................................. +1

+1
+ 8
- 3
- 4
+ 3

+1
+ 9
- 4
- 5
+ 2

—
+
+

2
1 + 8
2 - 6
2 - 7
2 + 1
£

+
+

o
0

— 2
+ 2

_ 2
+1

+22

+ 2

+1

PRICES
0+ + 2t + It

OTHER
Check payments........................... +24
Output of electricity................... - 2

+ 3
- 1

- 1
0

** Adjusted for seasonal variation,




CONDITIONS

Employ­
ment
Per cent
change
Mar. 1949
fro m

Philadelphia..................... - 1
- 1

* Pennsylvania

LOCAL

0
- 4
- 5

BANKING
(All member banks)

Consumers......................................

Check
Payments

- 4

- 4
- 4
-14

EMPLOYMENT AND
INCOME
Factory employment.................. - 1* - 6* - 4* - 2
Factory wage income.................. - 2* - 1* + 1*
TRADE**
Department store sales.............. - 2
Department store stocks........... + 5

Department Store

9
7
8
1

f Philadelphia

- 4

0

- 1

- 1

-14

- 3

mo.
ago

+10

year
ago

- 7

+11

year
ago

-16

+13
+17

- 7

+15

- 3

+27

-19

+ 5

-10

-11

+19

+20

+12

- 3

Wilkes-Barre.................... - 3

- 1

- 7

- 1

— 2

- 8

- 3

- 6

+18

- 2

— 2

- 6

- 6

- 1

+35

+ 7

York................................... - 3

-14

- 4

-12

+23

+ 4

+12

-16

+11

- 7

* Not restricted to corporate limits of cities but covers areas of one or more counties.

Page 57

THE BUSINESS REVIEW

MEASURES OF OUTPUT

EMPLOYMENT AND INCOME
Per cent change
Mar. 1949
from
month
ago

year
ago

3 mos.
1949
from
year
ago

MANUFACTURING (Pa.)*...................
Durable goods industries.........................
Nondurable goods industries..................

- 2
- 3
0

- 7
- 7
- 7

- 5
— 4
- 7

Foods.............................................................
Tobacco........................................................
Textiles.........................................................
Apparel.........................................................
Lumber.........................................................
Furniture and lumber products.............
Paper.............................................................
Printing and publishing...........................
Chemicals.....................................................
Petroleum and coal products.................
Rubber..........................................................
leather.........................................................
Stone, clay and glass................................
Iron and steel..............................................
Nonferrous metals.....................................
Machinery (excl. electrical)....................
Electrical machinery.................................
Transportation equipment (excl. auto).
Automobiles and equipment...................
Other manufacturing................................

+ 1
0
- 4
+ 5
+ 1
- 5
0
+ 2
- 2
- 2
+ 2
+ 1
- 3
- 3
- 4
- 3
- 4
+ 2
0
- 3

- 4
-10
-18
- 7
- 5
-21
-10
+1
+ 1
- 3
-22
- 8
- 9
- 3
-12
-10
- 9
+ 4
-33
-12

- 4
-10
-15
-10
- 5
-18
- 9
- 2
+ 2
0
-27
-13
- 5
0
-10
- 8
- 6
+ 6
-35
- 8

COAL MINING (3rd F. R. Dist.)f....
Anthracite....................................................
Bituminous............................ .....................

-33
-30
-44

-48
-52
-19

-33
-37
-10

CRUDE OIL (3rd F. R. Dist.Jtt...........

- 2

-10

- 8

CONSTRUCTION — CONTRACT
AWARDS (3rd F. R. Dist.)**.............
Residential...................................................
Nonresidential............................................
Public works and utilities........................

-19
-52
- 2
+ 3

-13
-44
-15
+26

+ 6
+ 3
- 1
+16

♦ Temporary series—not comparable with former production indexes*♦ Source: F.W. Dodge Corporation. Changes computed from 3-month
moving averages, centered on 3rd month,
t U. S. Bureau of Mines, ftAmerican Petroleum Inst. Bradford field.

Pennsylvania
Manufacturing
Industrios3"
Indexes
(1939 avg. =100)

A11 manufacturing___
Durable goods
industries..................
Nondurable goods
industries..................

Employment

Average
Weekly
Earnings

Payrolls

Per cent
Per cent
Mar. change
Mar. change
from
1949
from
1949
(In­
(In­
dex) mo. year dex) mo. year
ago ago
ago ago

%
chg.
from
year
ago

Mar.
1949

Average
Hourly
Earnings

1°

Mar.
1949

chg.
from
year
ago

122

- 1

- 6

287

- 2

-1 $52.51

+ 5 $1,348

+

149

- 2
- 1

- 5

331

+1

57.92

+ 6

1.471

+ 9

- 7

234

- 3
0

- 3

45.30

+ 3

1.179

+ 7

0
0
— 4
+ 2
0

- 2
- 4
-12
- 7
- 5

240
206
191
236
204

0
+ 1
5
+ 5
1

+ 3
- 8
-15
- 6
+ 2

45.37
27.86
44.42
37.15
42.58

+ 6
4
__ 3
+ 1
+ 8

1.121
.773
1.199
.954
1.066

+
+

+8
1
+

4
0

-19
- 4

195
257

_

5
+ 1

-19
- 1

42.80
47.91

0
+ 3

1.021
1.158

+
+

+ 2
— 1

- 1
+ 3

295
267

+ 6
3

+n
+ 8

62.15
50.95

+12
+ 5

1.638
1.287

+13
+ 9

0
+ 2
+ 1

- 1
-19
- 9

314
240
187

_

1
1
+ 1

+ 8
-16
- 3

63.52
46.22
37.05

+ 9
+ 4
+ 7

1.642
1.402
1.023

+11
+ 9
+ 5

2
1
— 4
- 2

- 7
- 1
-14

281
307
283

- 2
+ 6
- 4

51.59
60.06
57.97

+ 6
+ 7
+12

1.270
1.534
1.435

+8
+11

- 6

425

3
3
- 5
- 3

- 4

54.28

+ 3

1.402

+ 7

- 3

- s

462

- 5

- 4

59.49

+ 1

1.536

+

0

+ 4

518

+ 4

+15

65.72

+11

1.633

+11

2
5

-32
-11

250
250

p

-27
- 7

58.88
43.54

+ 6
+ 5

1.486
1.154

+ 9
+ 7

99

Foods........................... 118
Tobacco......................
97
Textiles........................
77
Apparel........................
90
Lumber........................
90
Furniture and
lumber products. . .
84
Paper............................ 116
Printing and
publishing................. 134
Chemicals................... 124
Petroleum and coal
products.................... 150
Rubber........................ 129
Leather........................
86
Stone, clay and
glass............................ 125
Iron and steel............ 138
Nonferrous metals... 127
Machinery (excl.
electrical).................. 199
Electrical
machinery................ 217
Transportation
equipment
(excl. auto)............... 240
Automobiles and
equipment......... ..
117
Other manufacturing 120

_

_
—

_

—

_
—

2

8

8

3
+ 5

2
9

+10

6

* Production workers only.

TRADE
Third F. R. District
Indexes: 1935-39 Avg. =100
Adjusted for seasonal variation
SALES
Department stores....................
Women’s apparel stores...........
Furniture stores.........................
STOCKS
Department stores....................
Women’s apparel stores...........

Mar.
1949

Per cent change
3 mos.
1949
from
month
year
year
ago
ago
ago

Mar. 1949 from

252
224

- 2
+ 7
+15*

- 4
+ 5
-11*

248p
233p

+ 5
+ 1
+ 4*

- 5
- 5
-10*

- 8
- 7
- 5*

Per
cent
change
from
year
ago
+16
+20
+ 5
- 9
+ 2
+ 8


http://fraser.stlouisfed.org/
Page 58
Federal Reserve Bank of St. Louis

Third F. R. District

Stocks (end of month)

% chg. % chg. % chg.
Mar. 3 mos.
Mar.
1949
1949
1949
from
from
from
year
year
year
ago
ago
ago

Ratio t o sales
(mon th’s
bupf ly)
Ma rch
1949

1948

Total — All departments...........................................

Recent Changes in Department Store Sales
in Central Philadelphia

♦Not adjusted for seasonal variation.

Sales

Departmental Sales and Stocks of
Independent Department Stores

P—preliminary.

-12

- 9

- 4

2.7

2.5

Main store total.........................................................
Piece goodsand household textiles......................
Small wares................................................................
Women’s and misses' accessories.........................
Women’s and misses’ apparel...............................
Men’s and boys’ wear.............................................
Housefurnishings......................................................
Other main store......................................................

-12
0
- 4
-22
- 9
-21
- 5
-27

-10
0
- 3
-16
- 7
-14
-10
-20

- 4
-14
- 4
- 1
- 9
- 3
- 8
- 4

3.0
2.8
3.6
2.6
1.7
3.9
3.7
3.3

2.7
3.3
3.6
2.1
1.4
3.2
3.8
2.6

Basement store total...................................................
Small wares................................................................
Women’s and misses’ wear....................................
Men’s and boys’ wear............................................
Housefurnishings......................................................

-14
-35
-15
-21
+ 9

- 8
-15
- 9
-16
+ 7

- 7
+26
+ 3
-13
-16

1.8
2.2
1.3
2.4
2.6

1.7
1.1
1.1
2.2
3.4

— 3

— 3

THE BUSINESS REVIEW

CONSUMER CREDIT

BANKING
Receiv­
ables
(end of
month)

Sal ca

Sale Credit

% chg. % chg.
Mar.
3 mos.
1949
1949
1949
from
from
from
yearago yearago year ago

Third F. R. District

Department stores
Charge account.......................................................................
Instalment account................................................................

— 12
-10
-19

— 9
- 5
-14

— 4
—14
-16

+ 1
— 9
-16

- 2
+14

Furniture stores

MONEY SUPPLY AND RELATED ITEMS

Changes in—

United States (Billions $)

Mar.
30,
1949

Money supply, privately owned.................................

164.0

-2.1

- .1

Demand deposits, adjusted........................................
Time deposits.................................................................
Currency outside banks..............................................

81.0
58.0
25.0

-2.3
+ .3
- .1

- .5
+1.0
- .6

Turnover of demand deposits......................................

5
weeks

year

19.2* +3.2* + .5*

Commercial bank earning assets................................

Loans made

Loan Credit
Third F. R. District

+13

Loan
bal­
ances
outstanding
(end of
month)

% chg. % chg. % chg.
Mar. 3 mos.
Mar.
1949
1949
1949
from
from
from
yearago yearago yearago
Consumer instalment loans
Commercial banks..................................................................
Industrial banks and loan companies..............................
Small loan companies............................................................
Credit unions...........................................................................

+1
-10
- 4
+ 6

- 2
-ii
+1
+ 9

+25
+ 5

- .9

-1.2

U. S. Government securities......................................

42.3
60.9
9.2

+ .3
-1.3
+ .1

+3.4
-4.6

Member bank reserves held.........................................

Instalment account................................................................

112.4

19.0

- .4

+2.4

Required reserves (estimated)...................................
Excess reserves (estimated)........................................

18.6
.4

- .2
- .2

+2.6
- .2

Changes in reserves during five weeks ended March 30
reflected the following:
Effect on
Decline in Reserve Bank holdings of Governments..
Net payments to Treasury.............................................
Return of currency from circulation...........................
Other transactions.............................................................
Change in reserves........................................................

—
—
4*
+

.5
.1
.1
*1

— .4

+28
* Annual rate for the month and per cent changes from month and year ago
at leading cities outside N. Y. City.

PRICES

OTHER BANKING DATA
Mar.
1949
(Index)

Index: 1935-39 average “100

Per ccnt change
fr 3m
month
ago

year
ago

April
27,
1949

Changes in—
4
weeks

year

Weekly reporting banks — leading cities
United States (billions $):
Loans — .

0
+ 2
+ 1
- 1

+

170
169
197
190
145
196
153

0
0
+ 1
0
0
- 1
0

+ 2
+ 2
0
- 1
+ 7
0
+ 7

Fuel...............................................................................

Weekly Wholesale Prices—U. S.
(Index: 1935-39 average =100)

Weekended
Week ended
Week ended
Weekended

-1.0
+1.2
+ .3

+1.0
-2.5
- .7

509
33
91
3
275

Consumer prices

+
+
+
+

24.3
37.3
71.8

2
8
6
2

- .7
- .3

- 20
+ 5
- 10
+ 5

+
+
+
+
+

911
1,606
2,865

197
225
206
186

14.1
1.9
4.1
.3
3.9

- 20
+ 10
- 39

+ 54
- 42
+ 17

- .6

+2.0
+ .8
+1.2
- .3

Third Federal Reserve District (millions $):
Loans — <

.1
.4
.4
.1
.2

15
2
14
1
22

Member bank reserves and related items
United States (billions $):

All com­
modi­
ties

Farm
prod­
ucts

Foods

Other

April
April
April
April

5............................................
12............................................
19............................................
26............................................

196
196
195
194

226
225
225
223

208
208
207
206

184
184
183
182

Week ended May

1............................................

193

221

205

181

19.0
21.2
24.3
27.4
1.1
Federal Reserve Bonk of Phila. (millions $)

- .5

1,465
1,609
891
1,168
44.6%

- 40
- 5
- 35
- 58
-.4%

- 13
- 11
+ 87
+ 93
+2.4%

Source: U. S. Bureau of Labor Statistics.




Page 59

THE BUSINESS REVIEW

OPPORTUNITY DRIVE
The Spring Savings Bond Drive—the “Opportunity Drive”—began on May 16 and will continue
through June 30. The national goal is to sell $1,040,000,000 in Series E bonds. Pennsylvania’s
quota is $82,600,000 and Philadelphia’s $21,600,000.
Individuals are urged to participate in the Pay Roll Savings and Bond-A-Month plans, one of
the easiest and surest ways to “save for a rainy day.” The widest possible distribution of our na­
tional debt, moreover, gives more citizens a real dollars-and-cents stake in the country.
Although only E bond sales will count toward the goal, F and G bonds will continue on sale. The
principal characteristics of the three types of savings bonds are listed below.
Series G
Savings Bonds

Series E
Savings Bonds
Issue price............................................................................

Series F
Savings Bonds

75% of maturity value

74% of maturity value

100%

Maturity...............................................................................

10 years from date of issue

12 years from date of issue

12 years from date of issue

Rate........................................................................................

Varies; 2.90% if held to
maturity

Varies; 2.53%. if held to
maturity

Varies; 2.50%. if held to
maturity

Denominations...................................................................

$25 to $1,000 (maturity
value)

$25 to $10,000 (maturity
value)

$100 to $10,000

Redeemable for cash prior to maturity......................

At holder*8 option only,
after 60 days from issue
date at stated redemption
values

At holder’s option only,
after 6 months on one
calendar month’s notice at
stated redemption values

At holder’s option only,
after 6 months, on one
calendar month’s notice at
stated redemption values*

•ulu'JkJ

Use as collateral.. . ............................................................

No

No

No

Salable in open market.....................................................

No

No

No

Amount for which eligible investor may subscribe. .

Not more than $10,000
maturity value in each
calendar year

Not more than $100,000 issue price of Series F and G
together in any one calendar year

* Upon death of owner, redeemable at 100% after 6 months from issue date if application for redemption is made within 6 months after
decease.


Page 60



Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102