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R e s e a rc h D®jpaurta®mft km Fffsuaciss® September 21, 1973 H@HHOT5}go IHbw Fsuf Dtewim? Practically every economist will tell you that the phenomenal housing boom of the 1971-73 period has come to an end, and that a substan tial downturn can be expected over the next several quarters as a result of tightening financial and cost con straints. Few will yet agree, how ever, as to how steep the projected downturn is likely to be. The National Association of Home builders expects a “very drastic" decline in private housing starts, to a 1.5-million annual rate by the opening quarter of 1974—down about 37 percent from the high plateau of about 2.4 million units reached in late 1972 and early 1973. That forecast may be overly pessi mistic, however, because it seems to suggest either that basic demand is much weaker than most ob servers believe, or that Federal housing agencies will provide com paratively less support to the market than they did during the 1969-70 slump. Given a more conservative reading of these factors, we could envision a decline to about a 1.7-million annual rate, with the trough being reached around mid-1974 rather than earlier. In value terms, the decline likely would be much less, in view of a continued (but hope fully decelerating) rise in construc tion costs and a steady increase in outlays for alterations and non housekeeping construction (motels and hotels). For 1974 as a whole, total residential spending could fall about 8 percent below the peak of $58.7 billion expected this year, yet remain close to the previous peak recorded last year. Slower demand The continued high level of house hold formations—a consequence of the baby boom of the post-World War II period— should support a relatively high rate of homebuilding for most of this decade. Nonethe less, the recent record level of homebuilding, taking into account the large number of units presently under construction, has probably outpaced the basic level of demand for the time being. Thus, an adjust ment is considered likely, com pletely apart from the current tight ening of the mortgage market. At the present time, over 1.7 million units are under construction— about 17 percent more than a year ago. About three out of five of these units consist of multiples— the segment of the market most susceptible to imbalances, because of the long lead times involved in the planning and construction pro cess. The high level of units under construction in part reflects a lag of completions relative to starts, as a consequence of materials shortages and various construction delays. This lag has helped limit upward pressure on vacancy rates up to now, but as more and more of (continued on page 2) R e s e o ir d h i B e p & r t a im f t 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. these units come to completion, vacancy rates could rise swiftly, and thereby induce contractors to slash building activity. Slower sales The pace of home sales meanwhile has slowed appreciably, and as a result, the inventory of unsold single-family homes (completed and uncompleted) has jumped 25 per cent over the past year to 440,000 units. This higher inventory repre sents an eight months' supply of housing at current sales rates. Since a slowdown in both sales and home starts preceded the sharp run-up in mortgage rates which occurred after midyear, the inventory bulge must instead reflect some decrease in basic demand as well as growing buyer resistance to rapidly rising home prices. The upsurge in home costs has shown distressingly few signs of easing in recent quarters. During the April-June period, new home prices averaged 22 percent above the year-ago level, reflecting con tinued increases in construction wage rates, generally rising mate rials prices and soaring land costs. Labor and materials costs could moderate during the current down turn, as has already happened in the case of lumber, but the land boom might well continue una bated for some time to come. Poor man's housing With large numbers of potential buyers being priced out of the single-family housing market, an increasingly large share of the market will probably be supplied by a product which doesn't even show up in the housing statistics— mobile homes. (Dollar spending for mobile homes is classified, along with au tos, in the consumer durable-goods category.) Mobiles sold at a 650,000unit annual rate during the first half of 1973, some 14 percent above 1972's pace, and sales could rise to the 700,000 level in 1974 as more and more buyers switch to this cheaper-priced housing. Already, mobiles account for almost 90 per cent of all single-family units (homes plus mobiles) selling for $20,000 and less. Another factor affecting the lowpriced end of the market is the projected decline in Federal subsi dies. In the first half of this year, 72,000 units of subsidized housing were started— 32 percent less than in the comparable period of a year ago. In 1974, subsidized starts are http:#fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis likely to fall very sharply, unless the Administration lifts its moratorium on new commitments or actively implements its still-undisclosed new program to assist low-income housing. Mortgage tightness The general expectation of a sub stantial decline in home construc tion is of course closely tied to the expectation of continued tightness in the mortgage market. In recent months, the market has experi enced a substantial rise in mortgage borrowing costs, reflecting the overall rise in market interest rates and the sharp slowdown in savings inflows into depository institutions. Savings-and-loan associations expe rienced a $15-billion inflow during the first seven months of 1973, as against a $20-billion inflow in the comparable period of 1972. level of housing activity.) To what extent will Federal agency intervention in the market cushion the housing decline? Agency sup port should be very large— perhaps every bit as important as it was in the 1969-70 downturn. In that earlier period, agency intervention in the form of secondary-market mortgage purchases and Home Loan Bank advances to the S&L's financed roughly 40 percent of net residential lending. With support of this type, net lending by the S&L's actually increased in both 1969 and 1970. Another key question concerns the extent to which inflationary expec tations have induced a higher rate of construction and sales than would otherwise be supported by basic demand. If this has in fact been the case— if recent levels of homebuilding and homebuying After holding fairly steady at about have indeed borrowed substantially 7% percent in 1972 and early this from the future— then the expected year, the average yield on conven housing recovery in the second half tional new-home mortgages of 1974 could be weaker (and later) reached 8 V2percent in August and 9 than the underlying trend would percent early in September. Not appear to suggest. surprisingly, in this situation, housing starts in the June-July pe riod were roughly 15 percent below the rate prevailing six months ear lier, at an annual rate, and were Verle Johnston expected to continue falling. (Over the longer run, interest rates do not tell the whole story; the level of rates has risen substantially over the past decade, but so too has the i s uoiSuiqseyw • m?1D • u oSaJO • epeA9N • °MePI hbm ph • B!UJOl!!BD • euozuy • B>jSBjy BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in m illions) Selected Assets and Liabilities Large Commercial Banks Loans adjusted and investments * Loans adjusted— total* Securities Loans Com m ercial and industrial Real estate Consum er instalment U .S. Treasury securities O ther securities Deposits (less cash items)— total* Demand deposits adjusted U .S. Governm ent deposits Tim e deposits— total* Savings O ther 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 ( - ) Am ount O utstanding 9 / 5 / 73 Change from 8 / 29 / 73 + + 226 64 — 165 — 33 + 85 + 24 + 150 + 12 + 622 + 299 — 137 + 79 — 33 + 44 80 — 103 74,635 57,651 1,122 20,217 17,236 8,607 5,193 11,791 72,731 21,443 245 49,609 17,426 23,377 5,911 12,235 Change from year ago Dollar Percent + + — + + + — + + + — + — + + + 9,225 9,365 1,456 3,517 3,049 1,341 807 667 9,183 1,114 205 8,242 804 7,169 839 6,627 + + 14.10 19.39 56.48 21.06 21.49 18.46 13.45 6.00 14.45 5.48 45.56 19.92 4.41 44.23 16.54 118.17 — + + + — + + + — + — + + + W eekended 9 /5 /7 3 W eekended 8/29/73 27 225 - 198 56 295 -2 3 8 + 110 61 49 -5 3 4 -5 2 7 - 332 + + 124 - 257 27 Com parable year-ago period in c lu d e s items not shown separately. Inform ation on this and other publications can be obtained by callin g or w riting the Digitized for FR ^ g ^ g jn istra tiv e Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702, http://fraser.stlouMedtagifcisco, C alifo rn ia 94120. Phone (415) 397-1137. Federal Reserve Bank of St. Louis
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