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JD®l[2)@IfltIT1 TIl®rruIt 1F®cd1®u@ll IB3@IffiIk (Q)fr §@ITil 1Fll@Iill July 29,1977 Housing Opti on s The housingmarketremainedquite activethis spring. Privatehousing startsfluctuated from month to month, but for the secondquarter, they averageda 1.9-million annual . rate-about 5 percent higher than in both of the two preceding quarters, and in line with the more optimistic forecastsfor 1977asa whole. In spite of all the hoopla surrounding the single-familyhousing market, the big newsmay be the surprising show of strength by the multi-family sector.Single-family startsrose25 percent betweenthe first half of 1976and the first half of 1977,but multi.,.familystartsjumped 47 percent over the sametimespan.The multi-family sectorstill hasa long wayto go to reachearlier peaks,but further strengthseems assuredfor a number of reasons, both demographicand nondemographic.The latter factors include the sharprise in price of single-familyhousing,the short supplyof multi-family units becauseof the unusuallysteep recession decline, and the growing attractivenessof concentratedurban living. High-cost housing Despitethe record paceof singlefamily housingactivity, measured by a 1.37-millionannual rate of startsin the January-Juneperiod, housingpriceshavecontinued to rise sharply.Thisspring,the median price of new single-family,housing approached$49,000,not only becauseof .thecontinued inflation of building costs,but also becauseof the consumer'sdemandfor larger and more attractivehousing.Nearly one-half of all new housestoday havecentralair-conditioning,while 58 percent haveat leastone fireplaceand 70 percent haveat least two bathrooms.Buildersfind the option-loaded house,like the option-loaded auto, more profitable than the no-frills variety. For that matter,they feel compelled to concentrateon the high-income market becauseof a shortageof good building sites,which hasbeen aggravatedin someareasby environmental and anti-growth . restrictions-for example,the 25percent reduction in SanDiego's effective land supply becauseof sewer moratoriums. The speculativeelement in California's housing boom hasdrawn headlinesbecauseof the fear it might lead to a bursting bubble. By someestimates,roughly 7 to 10 percent of that state's220,000housing permits lastyearpassedthrough speculators'hands.But the practice now seemsto be under control. Mortgage-lendinginstitutionsare charging higher rateson loansto home buyersidentified asnonoccupants,and buildersare establishing limits on salesto non- (continued on page 2) ID®]p)@1fitll'Jll U: F®cdlE;If@n §@llliF Opinions expressed in this newsletter do not necessariiv reflect the views of the management of the Federal Bank of San Francisco; of the Board of Governors of the Federal Reserve System. occupants or are holding homes off the market until they are actually completed. Whatever the factors involved, the price of new single-family housing has risen out of the reach of many potential home-buyers. Of course, many households with relatively low incomes are able to purchase such housing because they already have a home to sell at inflationboosted prices. With the median price of once-occupied housing now exceeding $40,000,sellers frequently are able to trade up using the equity in their present homes. But many others have ignored this option and have simply tried to upgrade their present dwellings. Thus, additions and alterations now represent over 20 percent of residential-construction spending -about double the 1970 proportion. Meanwhile, many potential first-home buyers, lacking any such equity cushion, have perforce turned to the rental market for shelter. Recovery in multi's In view of the high price of new single-family housing, the wonder is that apartment building is not much stronger than it actually is. New multi-unit starts reached a 458,000annual rate in the first half of this year-47 percent higher than 2 the comparable year-ago figure, yet still less than half the 1972 peak. Still, a continued strong recovery is likely because apartment vacancy rates averaged 5.1 percent early this year, the lowest level of this decade. Moreover, nearly 90 percent of new rental units are now occupied within three months of completion, compared with no better than a 65percent three-month occupancy rate during the recession period several years ago. Strength in multi-unit housing also seems likely because of recent strong increases in rents-up 5.8 percent over a year ago. Evidently, many investors believe that the present range of rents will provide an attractive rate of return on new apartment building. Ever-rising commuting costs also make in-town apartment living an increasingly attractive proposition. Recovery in the cities Housing policy meanwhile has shifted toward the upgrading of the urban housing stock, and this means both more construction and more refurbishing of in-town housing-apartments and singlefamily housing alike. One new approach involves "initiating strategies to attract private capital," according to a member of the Federal Home Loan Bank Board. Congress is considering legislation that would involve risk-sharing programs, but it recognizes that private builders and financiers place their resources _ ;........... _ _ _ _ _ _ _ _ _ _ _ _ _ _ into those areas which promise the highest return, and that mortgage lenders cannot undertake extraordinary risks because of their fiduciary responsibility to their shareholders and depositors. But within those limitations, government planners hope that private industry will pinpoint areasthat will benefit from underwriting and subsidies, so that public resources can be directed toward locations where upgrading will have synergistic results. Restoration efforts have been underway in some cities for years, but the momentum now seems to be picking up. Savings-and-Ioan associations have formed companies dedicated to the rehabilitation of neighborhoods, and the National Association of Home Builders has started an educational program to publicize remodeling procedures. Also, industrial realtors have joined together in consortia in certain cities to market industrial-park properties, in an attempt to stimulate core-city businessand employment. These efforts are directed largely to the upgrading of the present housing stock, but they seem likely also to generate some demand for new construction, which for reasons of population density would be largely multi-unit construction. ,,_. _ _ _ _ .. m •.._ _ _ _ _ _ _ _ _ _ _ _ _ match the present strength in single-family housing. There is room for more single-family activity because the postwar "baby boomers" are now between 27 and 32 years of age, in the stage of the economic life-cycle when home purchase is normally considered. However, other factors would seem to favor more multi-unit construction. The average family size has continued to decline with the fall in the birth rate, while the number of "singles" has continued to increase, rising from 19 percent to 23 percent of the number of households between 1970 and 1976. Small families and single individuals nowadays can go either way in a buy-vs.-rent decision. Mortgage lenders recently have liberalized their lending terms for single persons under a clause which defines them as "nonhistorical" buyers. Indeed, based on income and credit history, they may be better credit risks than married persons because they have fewer fixed demands on their paychecks. However, as a group, they do not have the same attachment to place as married persons with children. Consequently,. they might find cliff-dwelling more appropriate to their needs, especially if the urban environment improves. Joan Walsh People and housing Yet above all, demographic factors seem to indicate a continued recovery in multi-unit housing, to 3 UOl13u!4SEM.4Eln • U013aJO• epei\aN .04EPI !!EMEH 8 E!UJOHIE:::>0 EUOZPV • E'ISEIV 'me::> 'O:lSpue.l;l ues lS..!. 'ON l1 W1 Bd OI Vd :J!)VIS0d 's'n llVW 5SV'::> lSlIl:! BANKING DATA-TWELFTH FEDERALRESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities large Commercial Banles Amount Outstanding 7/13/77 Loans (gross, adjusted) and investments* Loans (gross, adjusted)-total Security 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* States and political subdivisions Savings deposits Other time deposits:j: Large negotiable CD's 98,863 75,834 2,110 23,656 24,379 13,058 8,847 14,182 98,053 28,688 344 67,165 5,662 31,913 27,476 10,301 Weekly Averages of Daily Figures Week ended 7/13/77 Member Bank Reserve Position ExcessReserves(+)/Deficiency (-) Borrowings Net free(+)/Net borrowed (-) Federal Funds-Seven Large Banks Interbank Federal fund transactions Net purchases (+)/Net sales H Transactions with U.S. security dealers Net loans (+)/Net borrowings H + + - + + + - + + + - + + - + 23 3 20 + 897 + 345 Change from year ago Dollar Percent Change from 7/6/77 207 32 379 29 178 60 281 520 165 717 181 73 41 0 165 82 + + + + + + - + + + + + + + - Week ended 7/6/77 + + + + + + + + + 9,770 8,764 685 1,698 4,031 1,818 826 1,832 7,804 2,805 88 4,458 497 5,493 16 2,112 - + + + + + + + - 10.97 13.07 48.07 7.73 19.81 16.17 8.54 14.83 8.65 10.84 34.38 7.11 8.07 20.79 0.06 17.01 Comparable year-ago period 32 1 31 + + 46 3 43 725 + 845 19 + 679 *Includes items not shown separately. :j:lndividuals, partnerships and corporations. Editorial comments may be addressed to the editor (William Burke) or to the author •.. • Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San 94120. Phone (415) 544-2184.
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