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Hominng Feair§ According to most of the forecasts made last fall, housing starts in 1974 were expected to reach about 1.7 million units— roughly 15 percent below the 1973 figure and 25 per cent below the 1972 peak. Most scenarios envisioned a trough in the first half of the year, followed by a second-half pickup in response to an improved flow of savings into mortgage-lending institutions. Along with autos, housing was ex pected to contribute substantially to a general business recovery as the year progressed. But today, even this relatively modest forecast seems less certain than before. Money again appears to be flowing out of, rather than into, the mortgage institutions, because of the attractiveness to savers of the high rates now avail able on money-market instruments. This development could cause problems to the housing industry several quarters from now, given the usual lag between flows of funds at thrift institutions and new con struction activity. Prospective homebuyers thus may face a renewed shortage of mort gage funds, at the same time that they are forced to contend with the soaring cost of new housing. (Mortgage borrowing costs, which had dipped to 8 percent or so earlier in the year, topped 9 percent in late April and approached the highs reached in last summer's upsurge.) Supporting the market, however, is a fairly strong level of basic demand, Digitized for FR A SER as well as a buy-now pay-later attitude generated by present in flationary expectations. Early hopes First-quarter statistics seemed to bear out the earlier forecast. Hous ing starts were on target (or better) at about a 1.6-million unit annual rate, thanks mostly to February's high level of activity, which re flected a combination of unusually mild construction weather and inadequate seasonal adjustment factors. Meanwhile, residential spending in the GNP accounts fell off by about 8 percent from the preceding quarter. Hopes for an upturn later in 1974 were buoyed by an improved flow of savings funds into mortgage lending institutions during the early months of the year, which would normally be translated into a rise in housing starts during the summer and fall. Thrift institutions and large commercial banks pulled in some $14 billion in consumer savings during the January-March period— substantially more than in the pre ceding quarter. The renewed flow of savings contributed to some reduction in mortgage borrowing costs and a modest gain in home sales and permit activity, while the amount of work in the construction pipeline remained relatively high. Present fears But then the sharp turnaround in financial markets darkened the hopes for an early housing recovery. (continued on page 2) R esearch D e p a irta e iM 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. The upsurge in interest rates trig gered renewed outflows of funds from depository institutions in April, as many savers placed their funds in higher-yielding instruments such as Treasury bills. To help stem the out flow, the thrifts raised their offering rates to savers, in many cases re turning to the 7Y2 per cent ceiling rate on longer-term certificates. But even this rate was considerably below the 83A -percent interest coupon which the Treasury offered in early May on $3.7 billion of new notes. The outlook for further disinter mediation will depend in part on the spending and saving habits of the American consumer. The saving rate dropped from 7.3 percent to 6.5 percent of disposable income between fourth-quarter 1973 and first-quarter 1974, as consumers ad justed their budgets to cope with the sharply rising prices of neces sities (food and fuel) and sharplyrising social-security tax deductions. Perhaps more significantly, the sav ing rate early this year was close to the relatively low level maintained throughout most of heavy-spending 1972-73, but far below the level reached during the sluggish, heavy saving period of 1970-71. It's anybody's guess how spending and saving decisions will be influ enced by rising prices, rising debt burdens, and lowered real incomes. But even if consumers should turn cautious and raise their level of saving, they may still tend in this Digitized for FR A SER inflationary atmosphere to channel their funds into high-yielding mar ket instruments (such as Treasury bills) rather than into relatively lowyielding deposit instruments at thrift institutions— which is just what recent statistics indicate. Such a decision, if adhered to throughout the year, would sharply reduce the availability of new mortgage money. Rising costs The impact of inflation can also be seen in housing costs. The median price of new single-family housing reached $34,500 during the first quarter— some 14 percent above the year-ago level— in response to rising costs of land, labor and materials. Lumber prices have moved back toward their earlier peaks following a late-1973 decline, and the long-term trend is upward because of lagging reforestation programs and other factors. Land costs seem bound to rise because of continued population growth, while large wage increases are likely to occur in the construction industry following the termination of the controls program. (These increases would only continue an earlier uptrend; both land and labor costs have risen more than 50 percent over the past six years.) Rising home-ownership costs are also a problem; costs of taxes, insurance, utilities and other such items have risen 13 percent over the past year, or twice as fast as rental costs. Somewhat paradoxically, these fig ures could support the case for a relatively high level of housing activity this year, since the arith metic might persuade househunters to buy now rather than later. In addition, demographics provide an important underpinning for housing demand. The marriage rate has been strong recently because of the increase in the marriageable-age population, and ''single" house holds have increased because of the rising proportion of both young and older people who maintain separate households. More intervention? Nonetheless, the inflation-gener ated turnaround in the money and capital markets now threatens to upset the projected turnaround in the housing industry. In this situa tion, we may witness renewed intervention on the part of the housing agencies— although if last year is any criterion, this could have the side effect of increased pressure on securities markets. In 1973, the Federal National Mortgage Associa tion, the Federal Home Loan Banks and other agencies raised a record $12 billion in those markets to finance their secondary-market and other mortgage-support operations. The original scenario for 1974 en visioned a sharply reduced interven tion; in fact, the agencies made net repayments of about $800 million on their outstanding debt during the first quarter of this year. In addition, the Home Loan Bank Board raised S&L liquidity requirements in re sponse to improved savings inflows — but it was then forced to rescind this move in April when the thrifts began to experience outflows of funds. The same agency went to market this week to raise $2 billion with which to replenish the coffers of mortgage-lending institutions. In the same changed atmosphere, Housing Secretary Lynn raised the ceiling rate of FHA and VA loans to 81/2 percent to forestall deepening discounts, which could otherwise raise sale prices as sellers forced buyers to cover the amount of the discount. In another support move, the Government National Mortgage Association reaffirmed its intention to purchase mortgages on as many as 200,000 newly constructed homes at the below-market rate of 73A percent. Meanwhile, the housing legislation introduced into Congress last fall remains bogged down, partly due to disputes over the Administra tion's moratorium on certain subsidized housing programs. If enacted, the legislation would raise the ceiling on FHA mortgages and reduce downpayment requirements for such loans, would raise the single-loan limit for Federallychartered S&L's, and would sharply increase deposit insurance cover age. These measures would afford some relief to homebuilders and lenders, but they are purely com pensatory; they are designed to offset some of the inflation which has already taken place, but they are not directed at the fundamental problem of inflation itself. Verle Johnston Digitized for FR A SER i ----------- 3 o uoiSuiijSEM • qejn • uo8a.io • epEAa|\| • oqepi M EM B H • e jU J0 p | E 3 • E U O Z Jjy • E>|SE| v P®IHUipTB<dI©(g[ ts p flr a s a ^ fl BANKING DATA— TW ELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Loan gross adjusted and investments* Loans gross adjusted— Securities loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities 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 4/24/74 82,405 63,533 1,046 23,155 18,896 9,189 5,766 13,106 78,263 22,002 664 54,446 17,916 26,391 7,423 13,535 +8,539 + 7,588 - 958 + 3,000 + 3,015 + 959 - 612 + 1,563 + 7,382 + 1,503 - 591 + 6,493 - 176 + 6,913 - 419 + 4,889 -1 1 5 + 79 - 28 + 58 + 18 + 18 -2 0 0 + 6 -3 2 8 -8 5 3 - 18 + 836 - 38 + 689 + 149 + 636 Week ended 4/24/74 - Change from year ago Dollar Percent Change from 4/17/74 45 379 334 Week ended 4/17/74 + 70 49 21 + + + + + + + + + + + 11.56 13.56 47.80 14.88 18.98 11.65 9.60 13.54 10.41 7.33 47.09 13.54 0.97 35.49 5.34 56.55 Comparable year-ago period + 158 46 112 + 2,152 + 2,243 + 1,229 + + + 125 117 379 *Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Diaitized for FRASERlistrative Serv'ces Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, htt|:):^/fraser.stloufSTea.Oi^/ 'sco' C* li,om ia 9412°- phon' (415) 3 3 7 -U 3 7 . Federal Reserve Bank of St. Louis
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