The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
August 10, 1973 Qomg Tfer«glhi the Against a backdrop of rising mort gage rates, most observers were ready to conclude this summer that a decline in the nation's protracted housing boom was imminent, if not already underway. To be sure, the volume of housing completions was still rising at mid-year, as the number of units under construction reached 1.73 million— 21 percent above a year ago. On the other hand, housing starts fell 8 percent below last winter's near-record level during the spring quarter, while permit activity dropped to its lowest level of the past two years. At the same time, the pace of home sales slackened, with the result that the inventory of unsold single-family units reached 435,000 at mid-year— 30 percent above the year-ago figure and equal to a 7% months' supply at current sales rates. The decline in both sales and housing starts thus preceded this summer's run-up in mortgage rates. When rates began to climb, how ever, they climbed sharply. The av erage rate on a conventional, newhome loan rose only 18 basis points between June 1972 and June 1973, but by late July lending rates were as much as 91 basis points higher, reaching 8.50 percent and more in some sections of the country. This increase stemmed in part from the midyear rise in ceiling rates on bank and thrift-institution deposits, which was initiated to forestall a major disintermediation triggered by the continued rise in rates on competing market instruments. Ceiling rates on passbook savings 1 were lifted to 5 percent for banks and to 5.25 percent for savings-andloan associations; even at that, how ever, investors by late July could obtain 8.32 percent on 3- month Treasury bills, a major competing instrument. Consequently, on fin ancial grounds alone, many mort gage lenders and homebuilders be lieve that a sharp decline in both home sales and homebuilding can be expected by year-end, as funds that would normally be allocated to mortgages flow out of the thrift institutions despite higher rates on savings and mortgage loans. Unrelenting rise An even larger cloud than rising financing costs has cast an increas ingly large shadow over the housing industry— namely, the unrelenting rise in the costs of both home construction and ownership. In deed, it is possible that a potentially large segment of the home-buying public— the low- and moderateincome segment— may be priced out of the market. Between the spring of 1972 and the comparable period of 1973, the median sales price of a new, single family home rose by 20 percent, from $26,800 to $32,400. While part of the increase in costs represents a continuing trend towards more amenities (such as air conditioning and installed appliances) the av erage size of a new home appar ently has increased only slightly over the period, so that most of the rise in home prices represents a proportional increase in cost per square foot. In terms of the value of (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. all new single-family units, about 70 percent of the over-the-year dollar rise in construction spending repre sents a rise in price rather than in "real" product. The price upsurge, although re cently accelerating, has continued for the better part of a decade. Median new-home prices jumped 80 percent between 1963 and 1973, with only a partial offset in the form of increased floorspace and more amenities. The rise in prices has outpaced the gain in median family income over the period, especially in the last several years. Over 60 percent of all new homes marketed in 1963 sold for less than $20,000, but the proportion dropped to 19 percent in 1972 and to only 13 percent so far in 1973. This develop ment, of course, largely explains the increasing popularity of mobile homes. Whereas in 1963 mobiles accounted for 21 percent of all home sales, the proportion has since increased to 45 percent, in cluding 88 percent of all units priced under $20,000. Heavy demand pressures have played a major role in the upward tilt of home prices. Domographics explain a large part of this phenom enon; in 1972 there were 2.3 million marriages, white in 1960 oniy 1.5 million couples took the plunge. These household formations have then been translated into high levels of effective demand by a rising tide of incomes. But in addi tion, a major long-run stimulus has been the government subsidization of home-ownership costs, through such means as income-tax deduc tions for mortgage interest pay ments and property taxes. Labor, land, lumber The pastyear's increase in home prices reflects the combined influ ence of rising costs of labor, mate rials and land. Hourly wage rates (including fringe benefits) in the building trades rose by about 7 percent over the past year, while materials rose by about 10 percent. Lumber, which by itself accounts for about one-third of construction costs, rose by 35 percent between mid-'72 and the May peak. Land prices in particular have soared. According to a National Association of Homebuilders sur vey, the average cost per acre of finished lot increased by 30 percent in the last year alone. Moreover, the price of the average lot has more than doubled in the last 10 years despite a decline in average size. (In the past three years alone, the average lot size has declined 18 percent.) Consequently, the cost of land has contributed even more than the cost of labor or materials to the 80-percent jump in home prices of the past decade. The problem of materials costs has eased recently because of the downturn in lumber prices. From their spring peak, lumber prices in some cases have declined almost back to levels of late 1971. This decline reflects not only the down turn in housing starts, but also such factors as the increased availability of timber from national forests and Japan's self-imposed reduction in log purchases. Longer-run prospects for (umber are more uncertain. Over the last decade, the total amount of avail able commercial forest has declined by several hundred million acres, but industry sources claim that timber supplies could be increased by improved forest management (including fertilization and salvage), better utilization of logging resi dues, and improved technology in wood processing (such as compu terized processing controls in saw mills). However, a number of un certainties may act as a damper on increased investments aimed at achieving increased and more effi cient production. Even now, lumber production costs may have to rise because of the heavy investment expenditures being undertaken for purposes of pollution control. Labor costs may continue to rise at the 7-percent annual pace of the past year. Admittedly, that is a much lower rate than was recorded before the advent of the Construc tion Industry Stabilization Com mittee in April 1971. On the other hand, hourly earnings of construc tion workers currently exceed the average for ail manufacturing workers by about 60 percent, de spite a poorer productivity perform ance than other industries in recent years. Part of the problem lies with restrictive labor practices, but also with building codes and protective legislation (including environmental measures) which reduce produc tivity gains by increasing 3 costs of production. Land costs may continue to be the ma'(or cost problem, however, espe cially when influenced by the ex panding network of environmental controls—such as those involving sewer moratoria, wetland restric tions, noise control, waste disposal and open-space requirements. Much of the support for environ mental constraints comes about because of the disappointed expec tations of homeowners who find that "broadening the tax base" through economic growth does not automatically bring about a low- ■ ering of property taxes. Money costs Linalfy, there remains the question of the cost and availability of mort gage funds. The fact that the me dian price of a new home has increased by 80 percent over the last decade also means that 80 per cent more funds are now necessary to finance the same number of homes, assuming that there were no change in interest rates and non price terms of lending over the decade. However, at the interest rates prevailing this spring, $184 in monthly payments (principal plus interest) would be required to carry a 25-percent-down loan on this year's $32,000 median-priced home, compared with $85 for the $18,000 median-priced home of 10 years ago. Over the entire 25 years of the loan's life, total payments on this year's home would amount to roughly $52,000, compared with the $25,000 in total payments required for the 1963-model home. Verle Johnston uojSujqseM • Me*fl • uoSaJO • epeAafsj • OLjBpj jjB M B H • B JU JO jl|B 3 • EU O ZU v • BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Loans adjusted and investments * Loans adjusted— total" Commercial and industrial Real estate Consumer instalment U .S. T reasu ry secu riti es Other securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) Weekly Averages of Daily Figures Member Bank Reserve Position Excess reserves Borrowings Net free (+)/ Net borrowed ( - ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases (+) / Net sales ( - ) Transactions: U.S. securities dealers Net loans (+) / Net borrowings ( - ) Amount Outstanding 7/25/73 73,734 56,769 20,145 16,770 8,444 5,278 11,687 71,454 21,295 828 48,170 17,877 21,326 6,299 10,601 Change from 7/18/73 + + + + + — + + — + + - + — + 117 312 121 73 23 339 144 88 344 199 299 78 429 66 304 Change from year ago Dollar Percent + + + + + — + + + + — + + + 10,186 10,351 3,407 2,876 1,314 1,024 859 8,636 1,679 178 7,048 359 5,634 951 5,136 +16.03 + 22.30 + 20.35 + 20.70 +18.43 -16.25 + 7.93 +13.75 + 8.56 -17.69 +17.14 - 1.97 + 35.90 +17.78 + 93.98 Comparable year-ago period Week ended 7/25/73 Week ended 7/18/73 23 189 -1 6 6 37 135 -1 5 4 - - 151 + 355 -1,383 - + 53 - 11 6 15 21 184 "Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Administrative Services Department. Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Phone (415) 397-1137. e>|SB|V
@FedFRASER