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o . C c U a

ECONOMIC
REVIEW
•.

Federal Reserve Bank
of Atlanta
January/February 1979

Federal Reserve Bank of Atlanta
Federal Reserve Station
Atlanta, Georgia 30303
Address Correction Requested




The Southeast
in 1978:
Expansion for a
Fourth Year
Inflation and Home
Buying

Bulk Rate
U.S. Postage

PAID

Atlanta, Ga.
Permit 292

(

FEATURES:
The Southeast in 1 9 7 8 :
Expansion for a Fourth Y e a r . . . . 3
Good but uneven growth characterized the southeastern e c o n o m y last year. Robust consumer
demand for new homes and durable goods, stimulated by the onset of chronic inflation, provided
much of the momentum. Both households and
businesses borrowed avidly, boosting the earnings
and straining the liquidity of lending institutions.
Higher prices and expanded output of farm products brought welcome relief to the ailing agricultural sector. But the minimum wage hike put a
damper on job gains, and by year-end, most sectors
were signaling slower growth in the months ahead.

Inflation and Home Buying

Director of Research: Harry Brandt
Editing Assistance: A d o l p h a Jordan
Production a n d Graphics:
Martha S. M o s s and Eddie W . Lee, jr.

14

Long-term appreciation of house values has made
home buying a truly profitable investment and one
that is particularly attractive in periods of rapid
inflation. Rising incomes and gradual changes in
financing arrangements have kept homeownership
within the means of more households but not without greater leveraging of their financial positions.

Economic Review, Vol LXIV, N o . 1. Free subscription and add i t i o n a l copies available u p o n request t o the Research
D e p a r t m e n t , Federal Reserve Bank of Atlanta, Atlanta,
Georgia 30303. Material h e r e i n may be r e p r i n t e d o r abstracted, p r o v i d e d this Review, t h e Bank, and the author are
credited. Please p r o v i d e this Bank's Research D e p a r t m e n t
w i t h a copy of any p u b l i c a t i o n in w h i c h such material is
reprinted.

)

v

NEW PUBLICATIONS

HISTORICAL SOUTHEASTERN STATISTICS, 1978, 32 pp.
Statistical time series for tracing long-run economic changes in the
Southeast and United States, 1929-77.

MONTHLY SOUTHEASTERN ECONOMIC INDICATORS, 1978,20 pp.
Contains data on major business statistics for the Sixth Federal
Reserve District and each of the six states included in the District
for the years 1 9 6 8 - 7 7 and 1974-77, respectively.
Copies of these publications are available f r o m the Research D e p a r t m e n t , Federal Reserve Bank of
Atlanta, Atlanta, Georgia 30303. Single copy free; additional copies 75 cents each. Please include a
c o m p l e t e address w i t h ZIP C o d e to ensure delivery.

2




JANUARY/FEBRUARY

1979, E C O N O M I C

REVIEW

THE SOUTHEAST IN 1978:
EXPANSION FOR A FOURTH YEAR
This article was prepared by Charles /. Haulk based o n
material contributed by other Federal Reserve Bank of Atlanta
economists Charlie Carter, John Godfrey, Frank King, and
Gene Sullivan.

1978 OVERVIEW
The 1978 southeastern e c o n o m y c o u l d
be assessed as o n e of g o o d but uneven
r o w t h . A f t e r s u f f e r i n g a p o o r January
ue to weather and the coal workers' strike,
the e c o n o m y b o u n c e d back briskly for
several m o n t h s and t h e n e n t e r e d i n t o a
p e r i o d of sluggish g r o w t h in late s u m m e r .
A l t h o u g h some strong activity reappeared
in O c t o b e r , recent evidence points t o
a c o n t i n u a t i o n of modest g r o w t h for
late 1978. The u n e m p l o y m e n t rate, w h i c h
had fallen steadily t h r o u g h 1977, seems
to have stuck at just under 7 percent
after reaching as l o w as 6 percent in
June. Retail sales, w h i c h for most of the
first half of 1978 grew at a blistering
pace, seem t o have c o o l e d off d u r i n g the
latter half of 1978, a l t h o u g h year-overyear gains of 15 to 20 percent were reported
f o r many areas in the Southeast. Inflation
c o n t i n u e d t o worsen t h r o u g h o u t 1978 and
has b e c o m e a major source of c o n c e r n .
C o n s t r u c t i o n was t h e leading g r o w t h
sector, w i t h residential contracts and
e m p l o y m e n t up substantially f r o m 1977.
M a n u f a c t u r i n g p r o d u c t i o n , especially d u r able goods, ran w e l l ahead of t h e yearearlier rate. The c o m b i n e d g r o w t h of
e m p l o y m e n t , higher wages, and longer
w o r k w e e k pushed factory payroll i n c o m e
13 percent above t h e 1977 figure. As
w i t h retail sales, p r o d u c t i o n and inc o m e g r o w t h rates w e r e very strong in the
first half and slowed to a less e b u l l i e n t
pace in the second half.
FEDERAL RESERVE B A N K O F A T L A N T A




Farmers. U n l i k e t h e 1977 e x p e r i e n c e
w h e n farm cash receipts w e r e f a l l i n g
t h r o u g h m u c h of t h e year, f a r m receipts
w e r e up sharply in t h e first f e w m o n t h s of
1978. Farmers w e r e the beneficiaries of
rapidly rising prices t h r o u g h midyear.
Since July, District farmers nave seen prices
stabilize, but c r o p p r o d u c t i o n has been
so m u c h greater than a year ago that
receipts have c o n t i n u e d to show strong
g r o w t h and c o u l d exceed the 1977 level by
$2 b i l l i o n . W e a t h e r was c o n d u c i v e to g o o d
crops in most areas of the Southeast,
a l t h o u g h Georgia and parts of Alabama
suffered some severe d r o u g h t c o n d i t i o n s .
But, by and large, a b u n d a n t c r o p yields
w e r e r e p o r t e d t h r o u g h o u t the region.
Record harvests nationally began t o
restrain prices of grains and soybeans by
harvesttime. Cattle producers and, to a
lesser degree, h o g and p o u l t r y growers
benefitea f r o m higher prices. Citrus
p r o d u c t i o n was depressed by a severe
freeze in late 1977, but prices s t o o d at
r e c o r d levels for most of the year and
p r o d u c e r incomes w e r e unusually g o o d .
All in all, 1978 was a m u c h better year
for agriculture than was 1977.
Banks. The b a n k i n g industry was in high
gear for most of 1978. Total bank credit
in t h e Southeast was up nearly 14 percent.
Deposit g r o w t h was at a m u c h m o r e
m o d e r a t e 8-percent rate, and, as a result,
l i q u i d i t y pressures began t o d e v e l o p .
3

Consumer credit c o n t i n u e d to be a major
source of loan g r o w t h , as auto sales
posted a solid year. H o m e mortgage l e n d i n g
was very brisk in response t o t n e surge in
d e m a n d for h o m e o w n e r s h i p . Interest
rates rose rapidly but business b o r r o w i n g
grew w i t h little letup. A l t h o u g h d e m a n d
deposits grew at a 10-percent rate, t i m e
deposits and particularly passbook savings
dia not advance as they nad for the
previous three years.
Savings and loan associations experienced
d e t e r i o r a t i n g savings inflows t h r o u g h
May, b u t w i t h the i n t r o d u c t i o n of t h e
m o n e y market certificates of deposit, savings inflows i m p r o v e d markedly in June
and r e m a i n e d strong for several months.
Employment. Employment growth, which
had surged d u r i n g f o u r t h - q u a r t e r 1977,
c o n t i n u e d to move ahead strongly
in first-quarter 1978. Since late spring,
e m p l o y m e n t g r o w t h has been sluggish, if
not flat. Labor f o r c e g r o w t h in 1978
trailed t h e 30,000 n e w entrants per m o n t h
pace of 1977. Even t h o u g h t h e numbers
u n e m p l o y e d increased, t h e u n e m p l o y ment rate held fairly steady at u n d e r
7 percent for most of the year because of
the labor f o r c e g r o w t h that d i d occur.
Overall, e m p l o y m e n t was up 3 percent
f r o m the previous year.
Florida led t h e region in j o b g r o w t h ,
b o t h in actual n u m b e r s ana in percentage terms. In every state, c o n s t r u c t i o n
was the leading sector for e m p l o y m e n t
g r o w t h . Job g r o w t h was also strong
in wholesale and retail trade, finance,
insurance and real estate, services, and
durable goods manufacturing. Weak growth
o c c u r r e d in t r a n s p o r t a t i o n , g o v e r n m e n t ,
and n o n d u r a b l e m a n u f a c t u r i n g . Textile
e m p l o y m e n t was actually d o w n f r o m
1977 levels.
Other. The tourist industry e n j o y e d o n e
of the best years in history, if not t h e
best. Florida and N e w Orleans w e r e i n u n dated w i t h visitors. Hotel occupancy
tax collections w e r e u p 22 percent in New
Orleans. Nashville hotels had g o o d
occupancy rates, but visitors to O p r y l a n d
w e r e b e l o w anticipated numbers. Interest
in t h e Mississippi Gulf Coast as a resort
area c o n t i n u e d to increase d u r i n g 1978.
Reports f r o m most of t h e major g r o w t h
c e n t e r s — M i a m i , N e w Orleans, Nashville,
Atlanta, B i r m i n g h a m , and Jacksonville,
4




as well as smaller areas, such as
Tallahassee, Knoxville, Huntsville, and
Alexandria, Louisiana—indicate that
1978 was a virtual b o o m year despite fears
of inflation and high ana rising interest
rates. Very f e w areas seem to nave
had any serious e c o n o m i c d i f f i c u l t y .
H o w e v e r , at the close of the year, an air
of pessimism had c r e p t i n t o many of
t h e statements made by businessmen.
Continuing high inflation, along with rising
interest rates and a severely p u m m e l e d
dollar for most of t h e year, began to
raise questions a b o u t t n e true u n d e r l y i n g
strength of t h e e c o n o m y . W h i l e businessm e n f r o m most areas believed t h e
Christmas season w o u l d be g o o d if
not a r e c o r d , t h e n u m b e r of pre-Christmas
sales being used to lure buyers was
a w o r r i s o m e d e v e l o p m e n t because
of r e d u c e d p r o f i t margins and the possible
negative effect o n consumers' w i l l ingness to spend after Christmas.
INFLATION A N D THE CONSUMERS'
RESPONSE
In 1978, inflation became t h e nation's
number one economic concern. With
prices soaring and still higher prices
anticipated, " i n f l a t i o n p s y c h o l o g y "
e n c o u r a g e d consumers t o buy cars and
houses b e f o r e f u r t h e r price increases.
Inflation has affected the vast majority of
p e o p l e and t h e way they live, causing
m o r e wives t o enter t h e w o r k force,
y o u n g couples and singles to buy houses
rather than rent apartments, and older
p e o p l e to delay r e t i r e m e n t .
At t h e b e g i n n i n g of t h e year, t h e
A d m i n i s t r a t i o n forecasted a 6- t o 6V2percent inflation rate. The r e c o r d of 1978
t u r n e d o u t to be q u i t e d i f f e r e n t . T h r o u g h
N o v e m b e r , c o n s u m e r prices had been
rising at near a 9.0-percent rate, m u c h
higher than 1977's 6.5 percent and 1976's
5.8 percent. A major c o n t r i b u t o r t o
t h e price increases has been f o o d . Food
prices surged at an 11.3-percent annual
rate last year, c o m p a r e d t o 7.7 percent in 1977 and 4.0 percent in 1976.
Within the food group, the combined
category of meat, p o u l t r y , fish, and eggs
showed the most dramatic increase.
In 1978, prices of these items have g r o w n
at an 18.1-percent annual rate, m o r e than
d o u b l e the 6.8-percent increase in 1977.
J A N U A R Y / F E B R U A R Y 1979, E C O N O M I C

REVIEW

O n the other hand, n o n f o o d c o m m o d i t y
prices rose at a 6.8-percent annual rate in
1978, w h i l e services increased 9.7 percent,
largely due to housing's d o m i n a t i o n .
After raging at 15 percent in the first
quarter and 19 percent in the second,
f o o d price inflation m o d e r a t e d in the
t h i r d quarter to a 3-percent annual rate.
D u r i n g the first half of 1978, f o o d prices
w e r e pushed up by beef shortages.
Beef p r o d u c t i o n in 1978 was d o w n f r o m
the 1977 level as the l i q u i d a t i o n phase of
the cattle cycle c o n t i n u e d t o reduce
herd sizes. Four years of heavy financial
losses to cattle producers and area
droughts c o m b i n e d to p r o d u c e massive
reductions in the cattle herd. The most
drastic herd l i q u i d a t i o n o c c u r r e d in
1977, a l t h o u g h a f u r t h e r d r o p in cattle
numbers evidently o c c u r r e d in 1978. The
result has been less p l e n t i f u l supplies
at markets. A l t h o u g h the pork industry has
had the e c o n o m i c incentive t o expand
o u t p u t , the expected expansion d i d
not occur in 1978. W h i l e total supplies
of meat w e r e smaller than anticipated,
consumer d e m a n d was g r o w i n g , pushing
prices u p sharply for all livestock products.
Food prices c o u l d flare u p again. The
o u t l o o k for 1979 is g o o d for feed grains,
but meat prices c o u l d accelerate w h e n
cattlemen begin t o w i t h h o l d animals to
r e b u i l d herds. Even if r e b u i l d i n g starts in
1979, beef p r o d u c t i o n may c o n t i n u e
to decline for several years. The USDA
forecast calls for a 1 - to 1 1 / 2 - b i l l i o n p o u n d
d r o p in beef p r o d u c t i o n in 1979. Partially offsetting this is an expected 600t o 1,100-million p o u n d increase in
the p r o d u c t i o n of p o u l t r y . The supply of
pork and poultry provides t h e key to
f o o d prices in 1979. Unless there is rapid
expansion, meat w i l l cost more.
W i t h i n the Sixth Federal Reserve
District, consumer prices are measured
b i m o n t h l y in t w o SMSAs—Atlanta and
M i a m i . Both of these cities closely
f o l l o w e d the national pattern of overall
price increases led by f o o d prices,
particularly meat. O n e difference, t h o u g h ,
was that prices of services d i d n ' t rise
as sharply in Atlanta and M i a m i as they d i d
nationally. As a result, overall consumer
prices of all items rose slightly less in
these t w o cities.
FEDERAL RESERVE B A N K O F A T L A N T A




As was t r u e in the nation, southeastern
consumers were responding to inflation
by stepping up their purchases of durable
goods, particularly automobiles. The
c o n t i n u e d strong g r o w t h of consumer debt
in 1978 is fair testimony of the decreasing
willingness of consumers t o h o l d l i q u i d
assets in a p e r i o d of rampant inflation.
H o m e buyers largely i g n o r e d increases in
interest rates a n a s e e m e d to be only
c o n c e r n e d w i t h m e e t i n g their m o n t h l y
payments, expecting that inflation w i l l
protect their investment. M o r e liberal
repayment terms for a u t o m o b i l e loans
have enabled many buyers to stay in the
market. Forty-eight m o n t h car loans
are n o w c o m m o n p l a c e . In September,
a u t o m o b i l e credit outstanding at c o m mercial banks was 26 percent ahead
of the year before. Car loans outstanding
have increased a p h e n o m e n a l 63 percent
in 24 months. Overall, instalment credit had
g r o w n 20 percent over 1977 levels.
C O N S T R U C T I O N ACTIVITY ENJOYS
STRONG G R O W T H
The pace of construction activity in the
Southeast c o n t i n u e d to b u i l d on the
g r o w t h of 1977. C o n s t r u c t i o n was the leading
g r o w t h sector, w i t h e m p l o y m e n t up
nearly 10 percent and tne value of
residential construction contracts r u n n i n g
at least 20 percent ahead of the 1977
pace. Nonresidential contracts were d o w n
f r o m the 1977 level, but 1977 was unusual
in that several m u l t i b i l l i o n dollar p o w e r
plants were a n n o u n c e d . The 1978
figures for the more typical plant and
commercial a n n o u n c e m e n t s have been
quite strong. Building permits, w h i c h
were at or near r e c o r d levels d u r i n g
early 1978, had b e g u n to taper off after the
summer months but were still at the
strong year-earlier level.
Florida e x h i b i t e d the strongest gains,
w i t h permits r u n n i n g nearly 25 percent
ahead of 1977. Permits in Alabama
and Tennessee were lagging somewhat
b e h i n d the year-ago pace. Strong rental
markets and high occupancy rates
c o n t r i b u t e d to a r e b o u n d in multifamily
starts. Substantial purchases of luxury
c o n d o m i n i u m s by South Americans
were a significant factor in the b o o m like sales of real estate in Dade and
Broward Counties in Florida.
5

The Nashville and Knoxville areas of
Tennessee e x p e r i e n c e d a b o o m i n g
real estate market for most of t h e year.
Jackson, Mississippi, o n t h e o t h e r hand,
e x p e r i e n c e d some r e d u c t i o n in activity
f r o m the 1977 pace. Sluggishness seemed
to develop in Jacksonville's and Huntsville's home building as the year progressed.
The Tri-Cities area of Tennessee had
housing d e m a n d g r o w in response t o t h e
inflows of p e o p l e d u e to the industrial
expansion in tnat area. The price of land
for housing d e v e l o p m e n t s rose sharply
in N e w Orleans despite rising interest rates.
The Mississippi Gulf Coast r e p o r t e d an
extremely busy year in h o m e c o n s t r u c t i o n .
Nonresidential c o n s t r u c t i o n m o v e d
ahead in 1978, partially d u e to t h e large
contract year of 1977. H o w e v e r , 1978
was a g o o d year in its o w n right, and new
plant a n n o u n c e m e n t s made in 1978
will help keep c o n s t r u c t i o n m o v i n g in
1979. Contracts for nonbuildine construction
w e r e well b e l o w the unusually strong
1977 levels, but contracts for c o m m e r c i a l
and industrial buildings w e r e substantially
ahead of 1977. This pattern was repeatea
t h r o u g h o u t the U n i t e d States and not
c o n f i n e d to t h e Southeast.
Some of the highlights of plant announcements i n c l u d e : M i l l e r Brewing C o m p a n y ,
a $247-million facility in Albany, Georgia;
Allis-Chalmers, a $150-million plant
in Palmetto, Florida; Procter & Gamble,
a $200-million p u l p o p e r a t i o n in M a c o n ,
Georgia; G. F. Business Furniture, a
$300-million plant in Gallatin, Tennessee;
a $400-million m u n i t i o n s facility at
Picayune, Mississippi; and in Louisiana,
a $150-million Georgia-Pacific project at
Plaquemine and U n i o n Carbide, a $181m i l l i o n d e v e l o p m e n t at Taft. T h r o u g h
the first three quarters of the year,
a n n o u n c e m e n t s of facilities of m o r e
than $10 m i l l i o n have been at a b o u t t h e
1977 pace.
Housing Costs. There has been a lot of
c o n c e r n recently a b o u t escalating h o m e
prices. M u c h of the c o n c e r n over housing prices has focused o n new o n e - f a m i l y
houses. The average sales price, for
example, for new o n e - f a m i l y houses in
the South increased f r o m $49,100 in September
of 1977 t o $56,400 in September of 1978,
a rise of 15 percent. O n e basic reason is the

6




COMPONENT PROPORTIONS OF THE MEDIAN
PRICE OF NEW ONE-FAMILY HOMES*
Thous. $
Financing
Overhead and Profit
Structure Costs
L a n d Acquisition a n d
Site Preparation

1969

1974

1977

' S o u r c e s : National A s s o c i a t i o n of H o m e Builders
a n d U.S. D e p a r t m e n t of C o m m e r c e .

higher rate of h o u s e h o l d g r o w t h w h i c h
spurs housing demand. 1
H o w e v e r , greater d e m a n d is not t h e only
t r e n d causing h o m e prices t o rise. In
the case of new homes, cost factors enter t h e
picture. A c c o r d i n g to data p r o v i d e d by t h e
National Association of H o m e Builders, land's
p o r t i o n of the total cost of a single-family
h o m e grew f r o m 21 percent in 1969 to
25 percent in 1977 (see chart above). The
increase reflects b o t h higher costs of land
acquisition and m o r e regulations g u i d i n g
land d e v e l o p m e n t projects. Financing
costs have been g r o w i n g as a percent of
t h e total h o m e price, but the cost of
the structure, i n c l u d i n g labor and material
costs as a percentage of total cost, has
declined. Higher p r o d u c t i v i t y t h r o u g h
m e c h a n i z a t i o n of b u i l d i n g t e c h n i q u e s ,
the standardization of construction t h r o u g h

' See Inflation and H o m e B u y i n g " in this issue for a l o n g - t e r m analysis of
national housing inflation.

JANUARY/FEBRUARY

1979, E C O N O M I C

REVIEW

greater use of préfabrication m e t h o d s ,
m o r e efficient b u i l d i n g tools, and general
use of industry m e t h o d s in t h e b u i l d i n g
trade can be cited as the major reasons
causing t h e decrease in t h e percentage
of structure costs. Rising interest rates,
insurance costs, closing costs, and
taxes have pushed f i n a n c i n g costs u p w a r d
at a rapid pace. In fact, since j u n e of
1977, f i n a n c i n g costs have g r o w n 15 percent, m o r e than t w i c e t h e rate of g r o w t h
f r o m January of 1976 t o June of 1977.
The degree that each cost c o m p o n e n t
c o n t r i b u t e s to the overall cost of a house
varies f r o m place t o place. For example, the
land costs in a city generally are m u c h
hieher than in rural areas, simply as a result of t h e greater c o n c e n t r a t i o n of
p o p u l a t i o n and d e m a n d . Also, wage rates
for builders have been lower in t h e South
than in t h e o t h e r regions of the c o u n t r y ;
h o w e v e r , t h e gap is closing fast. Generally,
areas that have rapid g r o w t h , z o n i n g
restrictions, and many p u b l i c services also
t e n d t o have a t r e n d of rising housing
costs.
M o s t of t h e trends c o n c e r n i n g the costs
and prices of new homes are also apparent
for existing homes, a l t h o u g h existing
homes are generally lower in price than
new homes. The cost factors that influence the price of existing homes are
basically t h e same as for new homes. For
instance, the costs of m a i n t a i n i n g an
existing h o m e i n c l u d e t h e same materials
and labor expenses that are r e q u i r e d for
a new h o m e but o n a m u c h smaller scale.
CREDIT FLOWS T O THE H O U S I N G
INDUSTRY
The g r o w t h in residential c o n s t r u c t i o n
activity, a l l u d e d t o earlier in this article,
and in single-family housing prices indicates
that credit flows for c o n s t r u c t i o n and purchase of housing held u p very well.
M o r t g a g e l e n d i n g by savings and loan
associations exceeded l e n d i n g in
the previous year in each m o n t h f r o m
January t h r o u g h July. The gap n a r r o w e d
c o n t i n u o u s l y as funds became m o r e costly
t o the associations and mortgage rates
paid by ultimate b o r r o w e r s rose by about
three quarters of a percentage p o i n t .
In August and September, net mortgage
l e n d i n g was b e l o w year-ago levels

FEDERAL RESERVE B A N K O F A T L A N T A




for t h e first t i m e since early 1975. Florida
and Alabama associations a c c o u n t e d
for most of the decline in year-overyear p e r f o r m a n c e , w h i l e l e n d i n g was up
in Tennessee and Mississippi.
In light of t h e rise in interest rates
and the s o m e w h a t slower g r o w t h in t h e
e c o n o m y , this small decline in t h e
g r o w t h of mortgage l e n d i n g was an
u n e x p e c t e d l y strong p e r f o r m a n c e .
Strong d e m a n d for single-family housing,
b o t h as a c o n s u m p t i o n g o o d and an inflation hedge, accounts for some of the
strength. In t h e region as in the rest of
the n a t i o n , t h e n u m b e r of families in the
age groups that normally occupy singlefamily housing was e x p a n d i n g rapidly.
M i g r a t i o n gave an extra push t o southeastern h o m e d e m a n d .
In response t o t h e strong d e m a n d for
housing and t h e strong mortgage d e m a n d
d e r i v e d f r o m it, savings and loan associations in t h e r e g i o n actively sought
funds t o use for mortgages. They w e r e
l i m i t e d d u r i n g the early part of t h e
year by regulatory ceilings o n depositors.
C o n s e q u e n t l y , deposit inflows w e r e b e l o w
year-earlier levels in each m o n t h f r o m
January t h r o u g h May. So the associations
t u r n e a m o r e of their a t t e n t i o n t o borrowings f r o m the Federal H o m e Loan Banks,
sales of existing mortgages, and r e d u c t i o n
of l i q u i d assets for lendable funds.
Capacity t o raise f u n d s f r o m these
sources and deposit inflows d e c l i n e d as
s u m m e r a p p r o a c h e d . In response t o this,
the bank regulatory agencies and t h e
Federal H o m e Loan Bank Board a l l o w e d
t h e institutions that they regulate t o
offer b o t h eight-year certificates of
deposit w i t h attractive interest rates and
s i x - m o n t h certificates w i t h rates tied to
the s i x - m o n t h Treasury bill rate. O f the
t w o new instruments, the latter, called
money market certificates, was the m o r e
attractive t o t h e public. Their issuance
h e l p e d t h e savings and loan associations to
keep some o l d deposits and to attract
some n e w ones. T h o u g h hard n u m bers are not yet available, these m o n e y
market certificates probably already make
u p 5 percent or m o r e of savings and loan
liabilities in the region. Their effect
may be seen in the fact that, even in t h e
face of rapidly rising interest rates,

7

CONSTRUCTION CONTRACT AWARDS

C o n s t r u c t i o n contracts
g r o w strongly in 1978.

continued

to
District States
—

600

— 400

—

1977

Bank loan g r o w t h o u t s t r i p p e d deposit
g a i n s , r e s u l t i n g in s o m e l i q u i d i t y
pressure for banKs.

200

/V

SV

1978

G R O W T H IN M E M B E R BANK L O A N S
PERCENT
INCREASE

y 0
c
u
- '

us

District
States

District
States

•

—

ic

3

-

-

1977

10

5

1978

(OCT 76 - OCT. 77)

(OCT 77 - OCT

78)

G R O W T H IN M E M B E R BANK D E P O S I T S
PERCENT
INCREASE

District
States — 10

1978

1977
(OCT 76 - OCT

The issuance of m o n e y market certificates of deposit by savings and loan
associations starting in June reversed the
d o w n w a r d t r e n d of savings inflows.

77)

(OCT. 77 - OCT. 78)

SAVINGS A N D LOAN I N F L O W S

MIL. S
•800

• 400

/V
1977

8




JANUARY/FEBRUARY

1978

1979, E C O N O M I C

REVIEW

M A N U F A C T U R I N G PAYROLLS

M a n u f a c t u r i n g e m p l o y m e n t gains and
higher wage rates resulted in g o o d
g r o w t h of incomes of factory w o r k e r s .
District States
— 160

— 140

/V

Ay

1972=100

RETAIL S A L E S

—

200

District States
— 175

Retail sales, spurred by anticipatory buying, higher incomes, and heavy use of
c r e d i t , rose s u b s t a n t i a l l y o v e r 1977
levels.

— 150

A'

MIL

MIL.

NONFARM EMPLOYMENT

— 11.5

—

E m p l o y m e n t gains w e r e m o r e m o d e r a t e
in 1978.

11.0

MIL.

Labor force g r o w t h was q u i t e slow for
m u c h of 1978.

LABOR F O R C E
102 —

100

U N E M P L O Y M E N T RATE
8.0

District States

1977

F E D E R A L RESERVE B A N K O F A T L A N T A 9




1978

The u n e m p l o y m e n t rate f l u c t u a t e d bet w e e n 6.2 and 6.8 percent t h r o u g h o u t
t h e year after falling sharply in 1977.

GROWTH OF NONFARM EMPLOYMENT BY INDUSTRY
SEPTEMBER 1977—SEPTEMBER 1978
(thousands, seasonally adjusted)

Industry

September
1977

September
1978

Amount
Increase

Percent
Increase

Total Nonagriculture
Construction
Manufacturing
Durables
Nondurables
Transportation and Public

9.449.6
550.6
2,057.5
902.4
1,155.1

9,766.9
586.4
2,131.4
958.1
1.173.3

317.3
35.8
73.9
55.7
18.2

3.4
6.5
3.6
6.2
1.6

Utilities
Wholesale and Retail Trade
Finance, Insurance, and
Real Estate
Government
Federal
State and Local

571.4
2,173.8

590.5
2,236.0

19.1
62.2

3.3
2.9

500.2
1.850.7
344.7
1,506.0

511.1
1.920.4
348.4
1,572.0

10.9
69.7
3.7
66.0

2.2

3.8
1.1
4.4

V

savings and loan inflows e x c e e d e d yearago levels in three of t h e first five months
since their i n t r o d u c t i o n .
A l t h o u g h residential c o n s t r u c t i o n and
mortgage l e n d i n g r e m a i n e d stronger
than o n e m i g h t nave expected in 1978,
some t r o u b l e for these activities remains
o n the h o r i z o n . Usury ceilings have b e g u n
to constrain c o n v e n t i o n a l mortgage
loans in each of the southeastern states.
Further rapid increases in m o n e y market
rates since t h e s u m m e r have already b e g u n
to have their effects o n l o n g - t e r m rates
( i n c l u d i n g mortgage rates) and o n
savings and loan associations' ability t o
c o m p e t e for funds. These efforts certainly
w i l l raise t h e costs of mortgage funds
and may l i m i t their availability to some extent. Nevertheless, basic housing and
mortgage d e m a n d factors remain strong
and very likely w i l l u n t i l i n c o m e g r o w t h
slows or inflation abates.
JOB G R O W T H SLOWER IN 1978
District e m p l o y m e n t g r o w t h over the first
nine m o n t h s of 1978 slowed considerably
f r o m t h e c o m p a r a b l e 1977 period. M o n t h l y
gains in 1978 averaged o n l y 14.3 thousand,
w e l l b e l o w t h e 22.4-thousand m o n t h l y
increase d u r i n g 1977. The table shows
e m p l o y m e n t gains by industry.

10




The District's labor force also grew
at a slower rate than in 1977. A f t e r increasing an average of over 30,000 per m o n t h
in 1977, the District's labor f o r c e g r o w t h
slowed to only 22,000 per m o n t h last
year. Slower labor f o r c e g r o w t h e n a b l e d
the u n e m p l o y m e n t rate to fall despite
slower j o b g r o w t h . By September 1978, t h e
District u n e m p l o y m e n t rate had been
cut by a full percentage p o i n t f r o m
September 1977. O n tne o t h e r hand, the
m o n t h l y i m p r o v e m e n t t o t h e District
joblessness was not as impressive as yearover-year comparisons. A f t e r r e d u c i n g
the level of u n e m p l o y m e n t by a p p r o x i mately 2,000 per m o n t h in 1977, the
southeastern e c o n o m i c g r o w t h was not
sufficient t o reduce t h e n u m b e r of
people jobless last year. Instead, t h e
n u m b e r of persons u n e m p l o y e d rose an
average of 2,000 per m o n t h in 1978.
M a n y have speculated as to the
reasons w h y e m p l o y m e n t g r o w t h has been
sluggish. Tne advanced age of t h e
c u r r e n t e c o n o m i c expansion and fear
of a s l o w d o w n in 1979 have p r o b a b l y
h a m p e r e d District e m p l o y m e n t g r o w t h .
H o w e v e r , we are of t n e o p i n i o n that
the boost of t h e Federal m i n i m u m wage
f r o m $2.30 to $2.65 per h o u r was a primary

J A N U A R Y / F E B R U A R Y 1979, E C O N O M I C

REVIEW

cause of slower j o b g r o w t h last year.
In a previous issue of the Economic
Review, 2 w e argued that t h e increase
in t h e m i n i m u m wage c o u l d constrain
e m p l o y m e n t g r o w t h in t h e District by
nearly 160,000 by midyear. O t h e r studies
reached similar conclusions for t h e
nation. A c c o r d i n g t o o u r study, s o u t h eastern e m p l o y m e n t g r o w t h was m o r e
adversely affected by t h e increase in the
m i n i m u m wage, since a large f r a c t i o n
of o u r w o r k f o r c e earned m i n i m u m wages
or less. M o r e o v e r , t h e " b u m p i n g - u p "
effect of t h e m i n i m u m wage h i k e intensified the p r o b l e m . O u r study f o u n d
that the January increase in t n e m i n i m u m
wage s h o u l d not have a significant
effect o n t h e overall u n e m p l o y m e n t rate
but w o u l d adversely affect u n e m p l o y m e n t
of youths. Therefore, in view of our
earlier findings and those of others, the
slower g r o w t h of southeastern e m p l o y ment was not surprising. In a d d i t i o n ,
o t h e r effects such as r e d u c e d o v e r t i m e
and shorter w o r k w e e k s have resulted
f r o m the m i n i m u m wage hike.
Secondly, studies designed to examine
the effect of higher m i n i m u m wages
o n labor f o r c e p a r t i c i p a t i o n c o n c l u d e
that higher m i n i m u m wages r e d u c e
labor force participation. This, it is argued,
is d u e to t h e r e d u c t i o n in e m p l o y m e n t
d e m a n d caused by higher wages. Thus, t h e
r e d u c t i o n in labor f o r c e participation
d u e to lack of j o b availability is a plausible
explanation for slower labor f o r c e
g r o w t h last year. Reduced labor f o r c e
g r o w t h is not l i m i t e d to r e d u c t i o n in labor
force participation but also to slow
g r o w t h of the w o r k i n g - a g e p o p u l a t i o n .
The Bureau of the Census had p r o j e c t e d
earlier that a slower p o p u l a t i o n g r o w t h
w o u l d begin in 1978.
A t h i r d possible explanation for slower
g r o w t h in e m p l o y m e n t is technical
rather than e c o n o m i c . B e g i n n i n g in
January 1978, the Bureau of Labor Statistics instituted a new p r o c e d u r e to estimate
e m p l o y m e n t and u n e m p l o y m e n t in
states and local areas. Tne new p r o c e d u r e

2

Charlie Carter. " T h e New M i n i m u m Wage: A Threat to Southeastern J o b s . "
Economic Review, M a r c h / A p r i l 1978.

F E D E R A L RESERVE B A N K O F




ATLANTA

was designed to reduce year-end revisions.
U n d e r the o l d p r o c e d u r e , c u r r e n t
estimates of e m p l o y m e n t w e r e revised
d o w n w a r d at year-end to reflect t h e
so-called D e c e m b e r e m p l o y m e n t b e n c h
marks. Evidence f r o m an earlier study
shows that use of t h e new p r o c e d u r e will
r e q u i r e fewer d o w n w a r d revisions in
t h e e m p l o y m e n t estimates at year-end.
What's in store for 1979? U n f o r t u n a t e l y ,
t h e new year w i l l b r i n g m u c h of t h e
same. The m i n i m u m wage has just been
raised f r o m $2.65 t o $2.90 per h o u r ,
again constraining e m p l o y m e n t g r o w t h
and labor force participation. H o w e v e r ,
since the 1979 increase in the m i n i m u m wage is less than last year's increase,
t h e adverse e m p l o y m e n t effects are
not expected to be as severe. The Bureau
of the Census projects even slower
increases in t h e w o r k i n g - a g e p o p u l a t i o n
this year, w h i c h w i l l mean slower labor
f o r c e g r o w t h . Secondly, since state labor
d e p a r t m e n t s will be in their second year
of the new p r o c e d u r e for estimating
e m p l o y m e n t , t h e year-over-year c o m p a r i sons w i l l not be distorted. Third, this
year's increase in Social Security taxes w i l l
take a larger p r o p o r t i o n of w o r k e r s '
w e e k l y earnings and raise business costs.
STRONG CREDIT G R O W T H BEGINS T O
PRESS DISTRICT BANK LIQUIDITY
D u r i n g t h e f o u r t h year of e c o n o m i c
advance, District m e m b e r banks contin-ued to
experience substantial requests for credit. By
c o n t i n u i n g to lend, h o w e v e r , banks faced
increasing l i q u i d i t y pressures, as deposit
gains failed to keep pace w i t h credit
extensions. As a result, l i q u i d i t y pressures, as measured by the l o a n - t o - d e p o s i t
ratio, advanced f r o m 0.69 t o 0.73 t h r o u g h
the year. Despite the increasing l i q u i d i t y
pressures, District banks were able to
a c c o m m o d a t e their existing customers
and generally r e p o r t e d strong i n c o m e
gains.
District bank credit rose an estimated
$5.5 b i l l i o n d u r i n g 1978, nearly 14 percent.
By far, t h e largest part of the increase
was c o m p r i s e d of new loans, but holdings
of m u n i c i p a l securities also advanced at a
solid pace. Deposits, h o w e v e r , gained o n l y
$3.2 b i l l i o n , aoout an 8 - p e r c e n t increase.
To acquire these funds, banks had to attract

11

m o r e expensive and interest-sensitive
m o n e y market funds. In a d d i t i o n , t h e
c o u n t r y banks sharply r e d u c e d their
sales of Federal funds.
The large banks also issued sizable
amounts of l a r g e - d e n o m i n a t i o n certificates
of deposit and o t h e r large deposits t o
acquire f u n d s for l e n d i n g . W n i l e these
funds are technically deposits for liquidity
purposes, they resemble more closely other
forms of b o r r o w e d funds such as Federal
funds and securities repurchase agreements because of their short m a t u r i t y and
interest-sensitivity. Therefore, greater
reliance o n these funds may t e n d t o limit
t h e l i q u i d i t y of some banks in ways that d o
not readily show up in the more traditional
measures of bank l i q u i d i t y .
Strong Credit Expansion. Last year
marked t h e second year of solia l e n d i n g
gains for t h e larger banks and over t h r e e
years for the m o d e r a t e and smaller size
banks. There were some shifts in the sources
of t h e loan strength. Fueled by a strong
d e m a n d for auto loans, consumer credit
rose nearly 20 percent. Real estate
l e n d i n g also c o n t i n u e d to rise at a brisk
pace. H o m e buyers c o n t i n u e d t o seek
mortgage loans to purchase homes, and
business firms used bank credit to finance
c o n s t r u c t i o n of new projects and to
finance investments in commercial property.
Business b o r r o w i n g in general was strong
but advanced at an irregular pace. Interest
rates o n business loans rose sharply d u r i n g
the year; the p r i m e rate m o v e d f r o m 73A
percent to 113/4 percent, w i t h most of
t h e advance c o n c e n t r a t e d in the f o u r t h
quarter. D u r i n g the year, banks became
m o r e selective in a p p r o v i n g loan c o m mitments t o b o t h new and existing
customers and have t r i e d to maintain high
credit standards. The lessons of t i g h t credit
in t h e mid-70s w e r e not f o r g o t t e n by
bankers as they again felt t h e pressures
of monetary restraint and t h e p r o b l e m s
that c o u l d occur if loan c o m m i t m e n t s
rise excessively.
At the larger banks, business loans w e r e
u p at o n l y an 8 - p e r c e n t annual rate, a b o u t
three-quarters of 1977's pace. O n l y in
loans t o wholesale and retail trade
firms, service firms, and textile and apparel goods manufacturers d i d gains
a p p r o a c h those of t h e previous year. In

12




contrast, c o n s t r u c t i o n firms, businesses
involved in m i n i n g and o t h e r extractive
lines, and d u r a b l e goods manufacturers
sharply c u r t a i l e d t h e g r o w t h of their
bank b o r r o w i n g in t h e Southeast. Bank
loans to sales and personal finance
companies posted small gains d u r i n g the
year ( f o l l o w i n g t w o years of reductions),
but bank l e n d i n g to o t h e r financial institutions fell by nearly 25 percent.
The c o n t i n u e d strength in l e n d i n g
caused banks to redirect t h e acquisitions
for their security p o r t f o l i o s . Bank h o l d ings of U.S. G o v e r n m e n t securities
d e c l i n e d modestly as banks f o u n d l e n d i n g
to be a m o r e p r o f i t a b l e use for their
funds. Banks made p o r t f o l i o adjustments
by t r i m m i n g their holdings of Treasury
bills and some m e d i u m maturity c o u p o n
issues and by a c q u i r i n g a d d i t i o n a l higher
yielding, longer m a t u r i t y g o v e r n m e n t s .
They o b t a i n e d better yields but r e d u c e d
their holdings of the m o r e l i q u i d assets.
District banks sharply increased t h e
a m o u n t of new state and local g o v e r n m e n t
securities. Not since t h e early Seventies
have District banks' earnings been
strong e n o u g h to justify a d d i n g nearly
$1 b i l l i o n in such investments in a single
year.
Deposit Gains Slow. Deposit inflows
remained sizable but at a slightly slower
pace than in 1977. Slower deposit g r o w t h
at this stage of a business cycle is not
unusual. D e m a n d deposits, n o w e v e r , cont i n u e d q u i t e strong, advancing at nearly
a 10-percent rate. Gains in t i m e deposits
w e r e varied, reflecting the m o r e attractive yields available o n alternative
investments. H o u s e h o l d passbook savings
accounts, w h i c h for t h r e e years had p r o v i d e d District banks w i t h tne bulk of
their t i m e deposit inflows, advanced only
slightly. By late February, small o u t flows f r o m these 5-percent accounts had
b e g u n at the larger banks. In contrast,
s m a l l - d e n o m i n a t i o n t i m e deposits (under
$100,000) rose over $1.25 b i l l i o n . The major
factor a c c o u n t i n g for the strong s h o w i n g
in these accounts was t h e i n t r o d u c t i o n
of the s i x - m o n t h m o n e y market t i m e
certificates in June. These t i m e deposits,
issued in $10,000 m i n i m u m s w i t h rates tied
to the s i x - m o n t h Treasury bill a u c t i o n
rate, t o t a l e d over $1 b i l l i o n by year-end.

J A N U A R Y / F E B R U A R Y 1979, E C O N O M I C

REVIEW

Decreases in these deposits came partly
at the expense of bank savings and o t h e r
short maturity t i m e deposits. The gain in
m o n e y market certificates represented to
some extent new funds for l e n d i n g . Consumer t i m e deposits m a t u r i n g in f o u r
years and over rose over $400 m i l l i o n .
O U T L O O K FOR 1979
This t i m e last year, forecasts for
t h e national e c o n o m y w e r e calling
for 4 to 5 percent real g r o w t h and a 5to 6-percent increase in prices. Both
p r o v e d t o be t o o optimistic. Inflation
nas been m u c h worse than was forecast,
and real g r o w t h was under 4 percent.
For the Southeast, d e v e l o p m e n t s have
been less of a surprise, except possibly for
f o o d prices. E m p l o y m e n t was up, n o n residential b u i l d i n g i m p r o v e d , and
consumer s p e n d i n g was strong for the first
half of the year.
As w e l o o k ahead to 1979, there are
some dark clouds o n the h o r i z o n . Interest
rates have risen to near r e c o r d levels,
inflation has g o t t e n worse, and households
have taken o n debt at record rates. These
d e v e l o p m e n t s are a n y t h i n g but auspicious.
M a n y iorecasters are n o w calling for a
recession in 1979.

FEDERAL RESERVE B A N K O F A T L A N T A




In the Southeast, w e still have a heavierthan-national dependence o n construction,
and that c o u l d be a p r o b l e m if interest
rates remain at present levels or go higher.
A slowing in c o n s t r u c t i o n activity c o u l d
severely h a m p e r j o b g r o w t h in 1979.
If housing, capital spending, and auto
sales slow nationally, as many expect they
w i l l , d u r a b l e goods e m p l o y m e n t , w h i c h
e n j o y e d a g o o d year in 1978, w i l l almost
certainly be weak if not d o w n in 1979.
Service e m p l o y m e n t g r o w t h , w h i c h seems
t o be less sensitive to e c o n o m i c fluctuations, will probably c o n t i n u e u p w a r d .
Fortunately, n o n d u r a b l e goods e m p l o y ment is less sensitive to business
cycle fluctuations and m u c h of southeastern m a n u f a c t u r i n g is in the
n o n d u r a b l e category.
Livestock producers are expected to
benefit f r o m higher animal prices. O t h e r
farmers may not get t h e kind of increase
in receipts they had in 1978, but w i t h
favorable weatner, s h o u l d have a g o o d
year. Retailers of d u r a b l e goods such as
autos are probably g o i n g t o have a slower
year in 1979 than they have had in the
past t w o years.
In sum, 1979 may be the slowest year
w e have had since 1 9 7 5 . 1

13

INFLATION AND
HOME BUYING

only 36 percent. In the p e r i o d f r o m 1966
t o 1977, prices of new single-family homes
sold m o v e d up 128 percent and c o n s u m e r
prices, 87 percent. So, w h i l e house
prices are still increasing m o r e rapidly
than consumer prices, tne margin of
d i f f e r e n c e has n a r r o w e d .
TABLE 1
MEDIAN SALES PRICES
Year

Rapid a p p r e c i a t i o n of house values continues t o make h o m e o w n e r s h i p a g o o d
way to c o p e w i t h inflation. Rising incomes
ana available credit have allowed American
families to take advantage of this investment o p p o r t u n i t y , w h i l e longer mortgage
maturities have h e l p e d keep their repayment obligations w i t h i n their means.
Some of those w h o already o w n homes
have used their inflated equities to finance
purchases of a variety of goods and
services as well as new or existing housing.
A l t h o u g h inflation tends t o redistribute
real i n c o m e or w e a l t h f r o m savers to
b o r r o w e r s and investors in real p r o p e r t y ,
the upsurge in mortgage b o r r o w i n g has
left h o u s e n o l d balance sheets i l l i q u i d
and d e b t heavy.
A G O O D INVESTMENT
Investment in single-family residences
has been heralded as o n e of t h e best
protections against inflation's assault o n
one's standard of living and w e a l t h . A
home's effectiveness as an inflation hedge,
of course, depends o n the extent to
w h i c h the increase in its value exceeds
t h e overall inflation rate.
That h o m e prices have risen rapidly
can be verified readily. In 1949, the median
sales price of a new single-family h o m e
was $8,800. Bv 1977, t h e price had reached
$48,800, a 450-percent increase (see
Table 1). Over the same p e r i o d , consumer
prices rose 154 percent. M u c h of the
house price g r o w t h relative to consumer
prices o c c u r r e d f r o m 1949 to 1966, w h e n
m e d i a n house prices advanced 143
percent w h i l e c o n s u m e r prices gained
14




New Homes

Existing Homes*

1949
1954
1955
1956
1959
1963
1965
1966
1968
1970
1974
1976
1977

by Charles J. Ha ulk

$ 8,800
12,300
13,700
14,300
15,200
18,000
20,000
21,400
24,700
23,400
35,900
44,200
48,800

$20,100
23,000
32,000
38,100
42,900

"No data available for years earlier t h a n 1968
Sources: New H o m e s - Bureau of the Census: Existing H o m e s National Association of Realtors.

V

J

Rapid price increases have not been
l i m i t e d t o new homes. The m e d i a n sales
price of existing homes rose f r o m less
than $20,000 in 1967 to $43,000 in 1977. This
e n o r m o u s gain in h o m e prices, c o m b i n e d
w i t h a r e c o r d rate of h o m e c o n s t r u c t i o n ,
has pushed t h e estimated value of the
nation's single-family housing stock f r o m
$890 b i l l i o n in 1970 to $1,905 b i l l i o n
in 1977.1
As an investment alternative, the singlefamily h o m e has, o n average, p e r f o r m e d
extremely well c o m p a r e d to o t h e r
readily available investment o p p o r t u n i t i e s .
The National Association of Realtors
has estimated returns o n investment for
various alternatives, 2 w e i g h i n g their
average earnings or price a p p r e c i a t i o n

1

2

Existing Home Sales, 1977, National Association of Realtors,
Washington, D C., p. 22
Ibid.

JANUARY/FEBRUARY

1979, E C O N O M I C

REVIEW

against inflation. These estimates, s h o w n
b e l o w , indicate that h o m e o w n e r s h i p is
probably the best investment a family could
nave made in t h e past decade.
VALUE OF ONE DOLLAR INVESTED IN 1967
Investment

Purchasing Power of the Dollar
1967

1977

$1.00
1.00
1.00
1.00
1.00

Single-Family H o m e
Corporate Bond
Savings Account
C o m m o n Stock
Cash

1972
$1.14
1.13
1.04
1.08
.80

$1.23
1.18
.93
.80
.55

S o u r c e : N a t i o n a l A s s o c i a t i o n of Realtors

H o w e v e r , because t h e quality of newly
c o n s t r u c t e d homes changes over time,
prices alone d o not necessarily reflect
the true a p p r e c i a t i o n in t h e value of
homes. Houses built in 1977, by and large,
are bigger and i n c l u d e m o r e amenities
than houses built in 1967.3
A n o t h e r measure of investment perf o r m a n c e is t h e i m p l i c i t r e t u r n o n equity.
Henry Kaufman's estimates of r e t u r n t o
house e q u i t y , listed b e l o w , take account of
interest payments and tax breaks as w e l l
as price appreciation. These rates of
r e t u r n c o n t r i b u t e f u r t h e r evidence that
housing is an excellent investment.

e x p l a n a t i o n for this is that t h e ratio of
n e w - h o m e prices to median family income
has t e n d e d t o stay in a fairly n a r r o w
range (see Table 2). In 1970, a heavy
v o l u m e of c o n s t r u c t i o n of lower priced,
subsidized houses caused the ratio t o d i p
t o 2.37; otherwise, t h e ratio's range seems
t o be c e n t e r e d o n 2.90. In t h e most recent
years, t h e ratio has m o v e d up f r o m its
l o n g - t e r m average. The ratio of existingh o m e prices to family i n c o m e , available
f r o m 1968 f o r w a r d , has e x h i b i t e d an
u p t r e n d as w e l l . At its recent rate of
increase, it c o u l d reach t h e l o n g - t e r m
average of t h e n e w - h o m e - t o - i n c o m e ratio
in a f e w years.
TABLE 2
RATIOS OF MEDIAN SALES PRICE
TO MEDIAN FAMILY INCOME
Year
1949

1963

2.94
3.09
2.98
2.80
2.88

1965

2.87

1966

2.88
2.86
2.37
2.78

Implicit Return on House Equity

Existing H o m e s *

2.83

1954
1955
1956
1959

1968
1970
1974
1976

Year

New Homes

1977

2.95
3.05

2.32
2.33
2.48
2.54
2.68

(percent)
1974
1975
1976
1977
1978 ( S e p t e m b e r )

11.1

21.2
12.3
24.3
21.3

S o u r c e : H e n r y K a u f m a n , a d d r e s s to A m e r i c a n B a n k e r s A s s o c i a t i o n . A n n u a l
C o n v e n t i o n . O c t o b e r 25, 1978.

F I N A N C I N G THE INVESTMENT
O n e w o u l d be t e m p t e d to believe that
the fantastic g r o w t h in house prices w o u l d
have p r i c e d many p o t e n t i a l h o m e buyers
out of t h e housing market. In fact,
h o w e v e r , this has not been the case. O n e

3

M y t h a n k s to F r a n k K i n g for c a l l i n g a t t e n t i o n t o this i m p o r t a n t point.

FEDERAL RESERVE BANK OF ATLANTA




* N o d a t a a v a i l a b l e for y e a r s e a r l i e r t h a n 1968.
S o u r c e s : C a l c u l a t e d f r o m d a t a p r e s e n t e d i n T a b l e 1 a n d e s t i m a t e s of
m e d i a n f a m i l y i n c o m e f r o m B u r e a u of t h e C e n s u s .

Increases in the p r i c e - t o - i n c o m e ratios
have been accommodated by a lengthening
in t h e maturity of c o n v e n t i o n a l mortgage
loans and an increase in t h e l o a n - t o price ratio. A f t e r averaging just u n d e r
74 percent t h r o u g h o u t the Sixties for
n e w - h o m e loans, t h e l o a n - t o - p r i c e ratio
fell t o 71.7 p e r c e n t in 1970. It quickly ret u r n e d to 76 percent and has been at least
that high d u r i n g most of t h e Seventies.
Years t o maturity o n new mortgage
loans reached 27.9 in 1977, an adclition of
nearly 3 years since 1970 and about 3.5
years longer than the average of t h e
Sixties. C o m p a r a b l e increases in maturity
15

REGIONS SHOW WIDE DIFFERENCES IN NEW-HOME PRICES
Médian Prices of New Homes, by Région

1962*
Northeast
North Central
South
West
All U.S.

$21,300
18,500
16,100
18,100
17,900

1967
$25,400
25,100
19,400
24,100
22,700

1972

1977

1978"

$31,400
29,300
25,800
27,500
27,600

$51,600
51,500
44,100
53,500
48,800

$68,000
59,900
49,400
65,100
55,600

Percent Changes in Prices for New Homes

1962-67
Northeast
North Central
South
West
U.S.

1967-72

1972-77

1962-77

19.2
35.7
20.5
33.1

23.6
16.7
33.0
14.1
21.5

64.3
75.8
70.9
94.5
76.8

219.2
223.8
206.8
259.7
210.6

26.8

" F o u r t h quarter data.
• ' P r e l i m i n a r y July estimates.
S o u r c e : D e p a r t m e n t of C o m m e r c e , B u r e a u of the Census.

New-home prices and the rates at which they have appreciated vary considerably among regions of the
country, as the tables above illustrate. The Northeast's new homes remain the costliest, on average, but
new-home prices have risen most rapidly in the western region. Inflation of new-home values in the
South has lagged other regions, except in 1967-72, keeping this region's new-home price a little more than
10 percent below the national average. No allowance was made for quality changes.

\

J

and the l o a n - t o - p r i c e ratio have o c c u r r e d
for existing houses. M o r t g a g e interest
rates have also risen; recent postings
have been about three percentage points
above mid-Sixties rates.
Therefore, h o m e buyers are b o r r o w i n g
m o r e per dollar of house value purchased
and paying a higher rate over a longer
t e r m . The ratio of h o m e mortgage d e b t
outstanding to disposable personal income,
after rising rapidly t h r o u g h the m i d Sixties. leveled off t h r o u g h t h e early
Seventies and started t o increase again
after 1972. The share of disposable i n c o m e
g o i n g t o repay principal and interest
nas risen since 1970 as well. 4 The
longer maturities have acted t o h o l d
d o w n t h e r e p a y m e n t s - t o - i n c o m e ratio,

4

Charles A. Luckett and David Seiders, " H o u s e h o l d B o r r o w i n g in the
Recovery," Federal Reserve Bulletin, March 1978, p. 159.

16




but n o w that the average maturity o n new
loans is a p p r o a c h i n g 30 years, it is unlikely that m u c h f u r t h e r help in h o l d i n g
d o w n repayments can be expected f r o m
a d d i t i o n a l l e n g t h e n i n g of maturities.
Leveraging. In a d d i t i o n to rising m o r t gage interest rates, longer maturities, and
higher l o a n - t o - p r i c e ratios, there has
been a n o t h e r significant change in the
U.S. housing market. Since the early
Seventies, there has been a substantial increase in the rate of e x i s t i n g - h o m e sales
relative to n e w - h o m e sales. In 1972, t h e
ratio of existing- to n e w - h o m e sales was
about three to o n e after reaching as high
as f o u r t o o n e for short periods d u r i n g
1969 and 1970. From 1973 u n t i l 1975, the
ratio of existing- t o n e w - h o m e sales
c l i m b e d steadily t o well over f o u r t o o n e
as n e w - h o m e sales p l u m m e t e d . The ratio
has r e m a i n e d at or above f o u r t o o n e
since, even t h o u g h n e w - h o m e sales have
JANUARY/FEBRUARY

1979, E C O N O M I C

REVIEW

risen sharply f r o m the depressed levels
of 1974. In September 1978, t h e ratio
reached 5.8 t o 1. The annualized rate of
existing-home sales reached 4 million units
in the f o u r t h quarter of 1977 (and has
r e m a i n e d close to or above that level
since). This represents a sharp rise f r o m
t h e 2.0- t o 2.5-million rate w h i c h was prevalent f r o m 1971 to 1973 and t h e 1.5m i l l i o n rate of 1968 and 1969 (data for
e x i s t i n g - h o m e sales are not available for
years prior to 1968).
The increasing rate of e x i s t i n g - h o m e
sales and rising prices have a l l o w e d h o m e owners t o m o n e t i z e a c c u m u l a t e d equity
in large amounts. As a matter of fact,
since 1960, h o m e o w n e r s have raised m o r t gage f u n d s in excess of t h e a m o u n t s
e x p e n d e d o n new residential c o n s t r u c t i o n .
The table b e l o w gives estimates of
mortgage m o n e y generated t h r o u g h
resale, second mortgages, and refinancing
in excess of n e w c o n s t r u c t i o n expenditures
by households. 5 As a r o u g h check o n
these figures, the Federal Reserve Board's
estimates of excess net investment in new
residences are s h o w n for 1970-77. The
negative signs mean that funds have b e e n
EXCESS MORTGAGE BORROWING
($ billions)

Year
1950
1955
1960
1965
1970
1971
1972
1973
1974
1975
1976
1977

Mortgage Funds Raised
in Excess of New
Residential Expenditures
- 5.1
- 4.0
0.1
10.8
16.6
17.5
26.1
31.0
24.6
29.8
42.2
60.6

Excess Net
Investment in
New Residences

- 2.5
- 8.3
-15.7
-19.0
-12.3
-17.2
-28.4
-43.2

Sources: M o r t g a g e Funds in Excess of New Residential Expenditures,
1950-1970. estimated by B e r n a r d Gelb; 1971-77, estimated by
Charles J. Haulk; and Excess Net Investment in New Residences.
Federal Reserve Board. Flow of Funds Accounts.

taken o u t of h o m e e q u i t y ; i.e., the v o l u m e
of mortgage b o r r o w i n g has e x c e e d e d t h e
value of net additions to the housing
stock. M o r e o v e r , as David Seiders of
t h e Federal Reserve Board staff has p o i n t e d
o u t , the resale of homes may easily
generate increases in mortgage debt that
are larger than the capital gains realized. 6
E C O N O M I C EFFECTS
Some economists have argued that
some of the capital gains created by escalating house prices have f i n a n c e d c o n s u m e r
expenditures for goods and services o t h e r
than housing. Seiders has presented
evidence which suggests that large amounts
of mortgage funds raised against housing
equity have been used to bolster consumption expenditures since the last recession. 7
The excess funds raised by m o n e t i z i n g
equity, t h o u g h large in absolute a m o u n t ,
are small w h e n c o m p a r e d t o disposable
personal i n c o m e . For example, t h e
estimated excess $60 b i l l i o n raised in 1977
was about 4.5 percent of disposable inc o m e . Still, if all these funds w e r e spent
o n c o n s u m p t i o n , t h e result w o u l d be a
substantial increase, a c c o u n t i n g for a b o u t
half of t h e g r o w t h in e x p e n d i t u r e s f r o m
1976 t o 1977. It is very likely that m u c h
of the s p e n d i n g f i n a n c e d by excess
mortgage f u n d s was for expensive items,
such as cars, f u r n i t u r e , e d u c a t i o n , or
perhaps f o r e i g n travel.
Some b o r r o w i n g against h o u s i n g e q u i t y
may have been used t o retire consumer
d e b t that carried a higher interest rate
or t o purchase o t h e r financial assets in
order t o i m p r o v e h o u s e h o l d l i q u i d i t y .
H o u s e h o l d l i q u i d i t y has been d e c l i n i n g in
recent years, as families have sought to
invest in real assets such as c o n s u m e r
goods and houses t o protect themselves
f r o m inflation. The ratio of financial assets
to liabilities has d r o p p e d f r o m 5 to 1 in
t h e Fifties to 2.8 t o 1 in 1978. As inflation
continues, it generally becomes less and
less attractive t o h o l d financial assets.

6

5

Bernard Gelb. Mortgage Debt for Non-Real Estate Purposes,
The C o n f e r e n c e Board, New York, 1972. Gelb's estimates are gross
of amortization. T h e Federal Reserve estimates are net of amortization.

F E D E R A L RESERVE B A N K O F




ATLANTA

David Seiders, Mortgage Borrowing Against Equity in Existing Homes,
Measurement, Generations and Implications for Economic Activity,
Staff E c o n o m i c Studies. B o a r d of G o v e r n o r s of the Federal Reserve
System.

'

Ibid.

17

In an e c o n o m y p r o d u c i n g w e l l b e l o w
p o t e n t i a l o u t p u t , b o r r o w i n g against equity
in homes for c o n s u m p t i o n purposes w o u l d
lead to a temporary increase in consumption
relative to i n c o m e , thus raising aggregate
d e m a n d and physical o u t p u t . In an
e c o n o m y o p e r a t i n g close to capacity, t h e
increase in d e m a n d w o u l d be inflationary
and generate little or no real o u t p u t increase. Income w o u l d then be redistributed
f r o m those w h o save t o those w h o choose
t o c o n v e r t w e a l t h in the f o r m of house
equity into c u r r e n t c o n s u m p t i o n . As
consumer prices rise faster than the value
of the l i q u i d assets of savers, b u y i n g p o w e r
is transferred t o those w h o c o n s u m e o u t
of house equity.
In an e n v i r o n m e n t of stable prices, consumers w o u l d f i n d little incentive to bec o m e less l i q u i d , so that t h e r e m a r k a b l e
upsurge in excess m o r t g a g e f u n d s w h i c h
w e have described w o u l d n o t have occurred.
D u r i n g t h e Fifties, w h e n house prices
w e r e rising at a m u c h faster rate than
overall prices and w h e n real incomes w e r e
m a k i n g solid gains, there was o n balance
no l i q u i d a t i o n of equity in housing.
H o w e v e r , in t h e Sixties and the Seventies,
w h e n price increases for goods and
services have approached the pace of home
price g r o w t h , w e have seen t h e p h e n o m e n o n of large amounts of money raised
t h r o u g h equity b o r r o w i n g .

18




H o w l o n g can t h e raising of massive
a m o u n t s o f funds t h r o u g h house equity
continue? If n o m i n a l family i n c o m e oegins
to slow relative t o house-price g r o w t h ,
t h e n a s l o w i n g of housing transactions w i l l
occur as credit w o r t h y b o r r o w e r s b e c o m e
scarcer. Further l e n g t h e n i n g of loan terms
or increases in l o a n - t o - p r i c e ratios w i l l
likely c o m e gradually, if at all, and p r o b a b l y
w o n ' t be large e n o u g h to offset the deterrent effect of rising h o m e prices and
interest rates. G o v e r n m e n t programs
w h i c h subsidize h o m e b u y i n g c o u l d help
c o u n t e r t h e effects of relatively slower
n o m i n a l i n c o m e g r o w t h , but t n e m o r e
robable impact of these programs w i l l
e a d d e d pressure o n h o m e prices. If the
new era in residential markets is t o last,
real interest rates o n m o r t g a g e loans must
remain low or negative. But p r o f i t a b l e
mortgage l e n d i n g requires a c o n t i n u e d
large w e d g e b e t w e e n t h e rates that savers
receive and the rates that h o m e buyers
pay, w h i c h f u r t h e r redistributes wealth
and i n c o m e f r o m savers t o mortgage b o r rowers. Should the highly inflationary
e n v i r o n m e n t of recent years c o m e u n d e r
control, it is likely that households w o u l d
reduce their leveraging activity and resume
a more normal pattern of behavior. •

J A N U A R Y / F E B R U A R Y 1979, E C O N O M I C

REVIEW

Federal Reserve Bank of Atlanta

OCCASIONAL PAPERS

The Federal Reserve Bank of Atlanta f r o m time t o t i m e prepares W o r k i n g Papers
and Research Papers. Most Research Papers examine technical aspects of monetary,
fiscal, and banking subjects. W o r k i n g Papers present tentative results of similar
technical projects. They are of special interest t o the economics profession.
The f o l l o w i n g papers are currently available u p o n request f r o m the I n f o r m a t i o n
Center, Research Department, Federal Reserve Bank of Atlanta, Atlanta, Georgia
30303. Please include a c o m p l e t e mailing address w i t h ZIP Code to ensure delivery.
Interested parties may also nave their names placed on a subscription list for future
studies.

Working Paper Series:
Brian D. Dittenhafer, Estimating Sixth District
Consumer Spending. September 1976.
William N. Cox, III, Small Banks and Monetary
Control: Is Fed Membership Important?, January 1977.
B. Frank King, Changes in Seller Concentration in
Banking M a r k e t s . March 1977.
William D. Toal, Regional Impacts of Monetary and
Fiscal Policies in the Postwar Period: Some
Initial Tests, June 1977.
Stuart G. Hoffman, Component Ratio Estimation of the
Money Multiplier, August 1977.
Robert E. Keleher, A Framework for Examining the
Small, Open Regional Economy: An Application of the
Macroeconomics of Open Systems, December 1977.

Robert E. Keleher, State Usury Laws: A Survey
and Application to the Tennessee Experience,
January 1978.

John M. Godfrey, Southern Banks and the
Confederate Monetary Expansion, April 1978.
David D. Whitehead, An Empirical Test of the
Linked Oligopoly Theory: An Analysis of Florida
Holding Companies, June 1978.
Robert E. Keleher, Of Money and Prices: Some
Historical Perspectives, August 1978.

Research Paper Series:

Robert E. Keleher, Fundamental Determinants of
Credit Volume: A Survey and Regional Application,

Stuart G. Hoffman, The Impact of Holding
Company Affiliation on Bank Performance: A Case
Study of T w o Florida Multibank Holding Companies.

December 1977.

July 1976.

David D. Whitehead, Holding Company Power and
Market Performance: A New Index of Market
Concentration, December 1977.

Joseph E. Rossman, Jr., and B. Frank King,

FEDERAL RESERVE B A N K O F A T L A N T A 19




Convenience and Needs: Holding Company Claims
and Actions. May 1978.