The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
April
KANS.
1960
ONi· LY REVIEW
The Residential Mortgage Market
in 1959 . . . . . . . . . .
. page
3
Changes in the Use of Consumer Instalment
Credit- Implications for 1960 .
page
9
Current Statistics
.
.
.
. .
.
.
. page 16
FEDERAL RESERVE BANK
OF KANSAS CITY
S11hscriplio11s to tlie MoNTIILY H.Ev1r-:w are availahle to the public without charge. Additional
copies of any issue may be obtained from the
Research Departnient, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
The Residential Mortgage Market
•
in
N
national economy is
more dependent upon the availability of
credit than is the construction and sale of
homes. From lhe purchase of equipment hy
buildNs to the direct conslrucliou cosls and
on to the final buyer, large amounts of credit
are required. The housing market also depends upon credit to finance the turnover of
existing homes which is involved in the upgrading of space use. Demands for credit
from the various segments of this industry
have been stimulated throughout the postwar years by public policies which broadly
have eased the terms of finance and steadily
widened the market for homes. Rising real
personal incomes and their general cyclical
stability also have contributed to demand and
at the same time have lessened the apparent
risks for lenders. These changes therefore
have tended to weaken the restraints on housing demand which might otherwise have been
produced by real factors such as changes in
the rate of family formation and to concentrate attention upon the problems of financing as one of the central restraints upon a
greater level of activity. Thus, in the postwar years, restricted credit supplies have
been associated with declining housing construction and any easing of pressures in the
credit markets has been reflected promptly
in an expansion of construction.
Since residential construction has shown a
sens~tivity to interest rates, and since high
O INDUSTRY IN THE
Monthly Review •
April 1960
1959
rates were required in 1959 to bring into the
market the supply of loanable funds demanded, the occurrence of a third postwar
peak in homebuilding in th year s 'emcd to
represent a clcparlurc from earlier observ d
relationships. The volume of house construction during the year was all the more surprising in view of the large volume of individual
savings channeled directly into the securities
market, since this reduced the share of savings
flowing to financial institutions which customarily make large amounts available to the
mortgage market.
The failure of rising interest rates to set immediately in motion forces which constrict the
level of housing construction often has been
explained by the large volume of forward commitments which builders have secured from
lenders during periods of low rates. It is possible that the influence of forward commitments in accounting for the timing of these
actions has been overemphasized, for it suggests that lenders have little foresight in building up such commitments and little freedom
to curtail their lending on mortgages until this
backlog is worked down. In fact, if new commitments were reduced sharply as other interest rates increased, the volume of outstanding commitments would decline quite rapidly.
When they do not do so - as available evidence suggests was the case through the first
half of 1959 - it seems that a better interpretation would be that lenders continue to be
3
The Residential Mortgage Market
willing to make commitments on the prevailing terms.
The general mechanism through which residential construction is influenced by changes
of interest rates usually is explained in terms
of the institutional arrangements for financing
the sale of houses. The particular arrangements that have been regarded as most significant are those which have prevented interest rates on federally underwritten mortgages from adjusting readily to increases in
market interest rates, since their ceilings are
set by congressional action and administrative
policy. Rates on conventional financing, which
are negotiated b etween the borrower and tlw
lender, generally are free lo move in response
to changes in supply and demand. Although
liens underwritten by the Federal Housing
Administration or the Veterans Administration can sell at discounts from par which
compensate for the inadequacy of their nominal rates, extreme discounts have not proved
attractive to lenders. Moreover, the absorption of discounts by builders raises their costs
and reduces the profitability of construction.
Discounts also may narrow the market for
houses as this cost to sellers of ex is ting houses
tends to deter them from selling to acquire
new or larger existing houses.
This account of the linkage between movements of interest rates and residential mortgage construction is consistent with the view
that federa1ly underwritten mortgages are especially important to home buyers whose incomes and asset positions cause them to be
marginal to the housing market. Tightening
credit supplies therefore find them more responsive to changes in interest rates and to the
non price rationing devices employed by lenders
in discriminating among risks. Rationing under
these conditions takes such forms as increased
requirements of income to debt service, and
greater selectivity as to neighborhood , age of
borrower, source of income, and type of employment of the applicant.
4
In light of this general framework of relationships, the achievement of a high volume
of residential construction in 1959 was an interesting performance, particularly when compared with the previous peak in 1955. The
peak in seasonally adjusted housing starts in
the earlier period was reached in December
1954 and activity declined irregularly through
1955 despite the fact that interest rates, as
measured by the yield on high-grade corporate
bonds, rose only moderately. In 1958, housing
starts had been rising for only a few months before market interest rates began to rise sharply.
House construction continued at advanced levels to a peak in the spring of H).~9 even though
inlc-re.st rates had risen further and were above
the highs in 19.57. Yields on corporate hon<ls
at the peak in construction were about 60
basis points above their level at the start of
the expansion. The largest part of the increase in construction in 1958 was financed
through FHA and VA mortgages but the
further growth in 1959 was mainly under
conventional financing. Housing starts with
underwritten financing were 440,000 in 1959
compared with 670,000 in 1955, whereas starts
with conventional financing were 903,000 in
19.59 compared with 640,000 units in 1955.
The volume of housing starts under conventional terms has risen in each year in the intervening period except in 1956 when a nominal decline occurred.
Institutional Sources of Mortgage CrP-d·t
In view of the importance generally attributed to underwritten mortgages as a major
mechanism through which the influence of restricted credit supplies is transmitted to residential construction, the predominance of
conventional financing in 1959 might seem
to account for the sustained level of construction in the face of sharply higher interest
rates. Such an interpretation has some support
in the fact that underwritten mortgages might
encounter restraints, as a result of interest rate
The Residential Mortgage Market
Housing Starts, Bond Yields, and Industrial Production
BOND
YI f LO
HOUSING
STARTS
PERCEil
TIIOUIHDS
5.50
1500
500
1400
4 50
1300
400
1200
3.50
PRIVATE
NONFARM
1100
~HOUSING STARTS
SEASONALLY ADJUSTED
ANNUAL RATE
3 00
YI LO ON
l000
900
CORPORATE Aoo BONDS
MO DY'
1953
'54
'55
'56
relationships, earlier in a period of rising rates
than would conventional liens. On the other
hand, there are both legal and economic
restrictions upon the ability of institutional lenders to raise the rates paid on
savings so as to continue to attract funds
which can be employed in the mortgage market. Legal restrictions on the rates paid for
savings by commercial and mutual savings
banks arc applied by regulatory authorities.
Economic restraints exist in the fact that balances placed with banks and savings and
loan associations are short-term claims and
consequently any increase in the rate paid
applies not just to new savings but to all existing accounts. But the yield received by institutions on mortgages is the average of the
entire portfolio and not simply the loans made
at the currently prevailing rate of interest.
This relationship of costs and returns tends
to inhibit advances in the rate paid for savings, but in a highly competitive situation, increases of rates hy one institution, by attracting balances from others, may force these institutions to make similar increases which
Monthly Review •
April 1960
'57
'58
'59
'60
0
raise the general level of rates to uneconomic
levels. A development which may partly offset some of these effects occurs when a high
turnover of homes leads to a large volume of
prepayment of old mortgages, freeing funds to
be recommitted to the market at higher rates.
These considerations are of especial importance to an examination of the mortgage
market since the largest part of all residential
finance is supplied by institutional lenderssavings and loan associations, mutual savings
and commercial banks, and life insurance
companies. At the end of 1959, this group of
institutions held approximately 83 per cent
of the outstanding debt on 1- to 4-family nonfarm homes. At the end of last year, the Federal National Mortgage Association held about
4 per cent and the remainder was accounted
for primarily by individuals and nonprofit
organizations.
Data on the sources of funds to finance nonfarm 1- to 4-family residences in 1955-56 and
in 1958-59 arc presented in the accompanying
table. A marked shift in the sources of mortgage funds between the earlier and later pe-
5
Th
RPsidential Mortgage Market
et Sources
f
Psidential Mortgage Credit
Loans on nonfa rm, 1- to 4-family residences
Dec.31, 1954 Dec.31, 1957
to
to
Dec. 31, 1956 Dec. 31, 1959*
(Billions of Dollars)
Total
Commercial banks
Mutual savings banks
Savings and loan associations
Life insurance companies
Federal National Mortgage
Association
Individuals and others
23.3
2.9
4.0
9.0
4.9
23.7
2.9
2.8
11.7
2.2
0.6
1.7
1.2
3.0
*Preliminary estimates.
SOURCE: Housing and Home Finance Agency .
riods is clc ar]y indicat 'cl. The share.' of mutual
savings banks and life i11sura11cc coinpanies was
reduced quite sharply but the total was sus-
tained by increased participation by savings
and loan associations, individuals and nonprofit organizations, and the Federal National
Mortgage Association. The behavior of institutional lenders could reflect either an altered rate of growth in their total assets or a
change of investment preferences. Both were
involved, as a further examination of the details will indicate.
The share of gross private financial savings
of individuals flowing through life insurance
companies and mutual savings banks combined decreased from 34 per cent in 1955-56
to 28 per cent in 1958-59. Thus, the volume
of additional assets acquired by these institutions was not materially larger in the latter
period, despite a substantially higher level of
i,ndividual savings. This redirection of savings flows tended to restrict their residential
mortgage lending. At the same time, the investment preferences of life insurance companies were shifting in such a way as to favor
other employment of funds. Enlarged mortgage portfolios of these companies accounted
for 61 per cent of the growth in their total
assets during 1955-56, but the percentage fell
to about 31 in 1958-59. Both life insurance
6
companies and mutual savings banks, moreover, appear to have concentrated their mortgage investments during 1958-59 to a greater
extent in liens on multiple-family dwellings
and commercial buildings.
Savings and loan associations maintained
their share of gross private financial savings
of individuals from 1955-56 to 1958-59, ancl
consequently their lending ability rose along
with the expansion in individual savings.
Since savings and loan associations consistently held around 82 to 85 per cent of their
total assets as mortgage investments, the
supply of funds available to the mortgage
market was less afTected than might have been
expected as a result of th<' declining share of
savings placed with mutual saviugs banks and
life insurance ·ompanics.
Commercial banks arc much less closely
associated with mortgage lending than with
other forms of credit demand. Their extensions of mortgage credit tend to contract
when other borrowers increase their demands,
and their lending on home mortgages tends to
vary more than their loans on farm land and
business real estate. These characteristics of
bank lending on real estate are related to the
fact that the individual depositor has much
Jess reason to Jook to his bank to finance a
home purchase than a large business account
has to expect mortgage credit or other forms of
accommodation. In addition , the long maturities of home mortgages make them an important object of heightened credit rationing when
bank liquidity is reduced. The variability of
bank participation in mortgage credit is illustrated by the fact that large amounts of residential mortgages were absorbed by banks in 195556, but in 1957 the amount shrank to a negJigible vo]ume. A large growth of time and
savings deposits in 1958, a]ong with weakness
in other credit demands , apparently revived
banks' interest in mortgages as their holdings
increased $1.4 bi]lion. Even in 1959, however,
when time deposit growth dropped to a lower
The Residential Mortgage Market
rate an<l when the reserve positions of banks
were strained by the pressure of other loan
demands, banks acquired sizable amounts of
mortgages. It is too early to form any definite
view as to the combination of elements which
sustained bank loans on mortgages in 1959 or
the changes which might lead to an alteration
of this policy.
A final feature of financial institutions' participation in the residential mortgage market
in 1959 was that both mutual savings banks
and savings and loan associations raised their
mortgage holdings by amounts distinctly in
excess of the growth of their deposits an<l
shan' capital. 'The acl ion of the mutual savings hanks may 11:tV(' hccn 1111i111<'11tion:1l
rather tlia11 the result of policy decisions.
Their deposit growth was interrupted by the
response of their depositors to rising market
rates of interest at a time when their commitments to acquire mortgages still were at
high levels. The action of the savings and
loan associations followed the same pattern
as that in 1955 when they borrowed from the
Federal Home Loan Bank and commercial
banks to acquire mortgages while rates were
favorable.
Other Sources of Mortgage Finance
A growing source of mortgag<' credit, indicated by data in the Fe(kral Reserve System's
flow of fonds accounts, is the consumer and
nonprofit organization sector of the economy,
which includes the rapidly growing pension
funds. Net annual increases in total mortgage
holdings by this group rose from $1.3 billion in
1954 to $2.1 billion in 1957 and then receded to
$1.8 billion in 1958. In the first 9 months of 1959,
preliminary estimates indicatC'cl a growth of
$2.1 billion, raising the possibility that a new
record would he set in the year. Acquisitions
in the first 9 months wer<' equal to about 14
per cent of available mortgage funds. While
not all of these investments arc in mortgages
on 1- to 4-family residences, an expanded inMonthly Review •
April 1960
terest in various types of mortgage loans by
this group of investors would be reflected in
the supply of funds available for financing
purchases of smaller dwelling units.
Although there is a distinct upward trend
in the participation of these lenders, there
also is evidence of a response to high yields.
Taken in conjunction with the declining percentage of private gross financial savings of
individuals placed with mutual savings banks
and life insurance companies, this development may mean that individual savings were
being placed directly in the mortgage market
without moving first to a savings institution.
It is clo11htf11] that this interpretation fully explains llic growth, liowcv<'r, for pension f1111cls
hav<' shown a rising inl<'resl in this for111 of
i11vcstmc11t.
Additional sources of mortgage credit in
1959 were Government agencies, of which the
most important was the Federal National
Mortgage Association. While the expansion
of its mortgage portfolio accounted for less
than 10 per cent of the total increase in mortgages, the concentration of FNMA purchases
in underwritten liens meant that its growth
amounted to about 40 per cent of the increase
in these forms of mortgages. In the absence
of th is support, residential constrnction unclC'r
these forms of financing would have been
much lower, given the ceiling rates on these
mortgages.
Summary and Interpretation
To an important extent, the supply of funds
flowing to the residential mortgage market
was sustained at a high level in 1959 by extraordinary sources of funds and by unusual
hank interest in this form of credit. The scale
of borrowing hy savings and loan associations
and the unusually large acquisitions of mortgages hy FNMA constituted a channeling of
funds from op<'n-market sources to the mortgage market by way of sales of securities
by the Federal Home Loan Bank Board and
7
The Residential Mortgage Market
FNMA and by use of authority to borrow
from the Treasury. Further uses of these
sources in the current year will depend upon
the investment policies of savings and loan
associations, the lending policies of the Federal
Home Loan Banks, and congressional action in
expanding the authority of FNMA to purchase
guaranteed and insured mortgages.
Against the background of developments in
1959, it seems that the analysis of the relation
between residential construction and interest
rate movements which centers on the changing investment status of underwritten mortgages should be extended to incorporate the
influ nee of rising market interest rates upon
the flow of savings to and among lending institutions. Such an extension of the analysis
is made the more desirabl as a growing
volume of total construction finance takes the
form of conventional mortgages. Otherwise
the shift to this form of finance may lead to
overemphasis on the improved competitive
status of mortgages and on the extent to which
restraint on the flow of savings to residential
construction has been reduced. While it may be
granted that a tendency of this kind may exist,
8
substantial elements of instability remain in the
flows. The alternate borrowing and repayment by savings and loan associations and
the volatility of commercial bank participation in this market are examples of probable
continuing sources of instability. Additional
evidence that conventional financing may not
produce the expected effect is the new and
heretofore unimportant restraint encountered
in the form of usury laws which became a
matter of growing importance during 1959
in some 11 Eastern and Southern states. Finally, mutual savings banks can lend beyond
the geographical limits defined by state regulatory authorities only on underwritten liens.
The failure of these institutions to ·ontinue
their former rates of growth may have be n a
factor in the growth of conventional financing
since this form is commonly employed when
financing is extended by local savings institutions. In a number of regions, local institutions
have not developed rapidly enough to meet
local needs and, while this problem may eventually be resolved, it constitutes a temporary
obstruction to the flow of capital to the residential mortgage market.
Changes m the Use of
Consumer
Instalment
Credit
credit has played an
important role during recent y<'ars in
cl<'vating c011s11nwr outlays during 1wriocls of
general ·conomic L!xpansion. In 195,5, new ('Xtensions of instalment credit rose $8 bi11ion
above the previous year and amounted to 15.2
per cent of total personal consumption expenditures. In 1959, the increase in new extensions from the previous year was $7.7 billion and the total volume of new extensions
equaled 15.6 per cent of consumer purchases.
While the net increase in instalment credit
outstanding was about the same in 1959 as
in 1955, consumer credit analysts have noted
significantly different sources of growth in instalment credit during the two periods. A
large part of the expansion in 195,5- when new
passenger car registrations totaled 7.2 million-was in automobile paper. Total new car
registrations in 1959 amounted to 6.0 million,
and as a result of this and other factors, auto
loans outstanding did not increase at a rate
similar to that in 1955. About 56 per cent of
the total increase in instalment credit during
1959, in fact, was in types of loans other than
for auto purchases.
With the increase in 1959 in types of instalment credit other than auto loans, and
with auto sales in 1960 promising to rise from
last year's level, it may be expected that
changes in instalment credit outstanding be'1 oNSUMEn INSTALl\fENT
(
...4
Monthly Review • April 1960
I Implications
for
1960
tween 19,59 and 1960 wi11 not re peat the seInstalnwnl credit in 1956
grew by $2 ..5 hillion less than in HJ5,5, in part
because of the decline in new car sales hetween those years . A continuing high rat of
advance during 1960 would have important
implications for those institutions supplying
credit to consumers, and it has larger significance relating to the pressures in the financial markets that may emanate from consumer uses of borrowed funds. Consequently,
it is desirable to obtain as accurate an appraisal as possible of the prospects for growth
in instalment credit in the current year. With
this objective in mind , the present artick' first
reviews the cyclical variations evident in instalment credit data during recent years and
then turns to an examination of some shifts in
the uses of instalment credit by consumers
over the postwar period. The final section discusses the volume of new instalment loans
which might be extended during 1960 and
indicates, on the basis of historical evidence,
the change in instalment credit outstanding
which would be associated with varyiug levels
of new Joan extensions.
q11c11cc of 19.5,5-56.
Cyclical Changes in O t tandin
Fluctuations in the growth of instalment
credit outstanding may be viewed in the
broadest sense as a normal concomitant of
9
Consumer Instalment Credit -
cyclical variations in consumer spending. Although personal consumption outlays have
continued to advance in every postwar year,
the rate of growth has altered from one year
to the next in general conformance with
changes in aggregate economic activity.
Growth in new extensions of instalment loans
parallel to the relative movements of total
consumer outlays would have been sufficient
to produce pronounced variations in total
credit outstanding, since repayments are influenced by other factors which change more
slowly. Because a variety of additional factors
affect both the volume of new extensions and
the pattern of dwngc's in consunwr i11clchtccl rn·ss, l1owcvcr, fl11ctuations in consumer credit
outstan<ling ncccl 11ot follow closely the cyclical pattern in consumer purchases or in general business activity.
Chart 1, which shows the quarterly changes
in instalment credit outstanding since 1954
on a seasonally adjusted annual rate basis,
indicates the cyclical pattern present during
recent years. The period of rapid growth in
outstandings during 1954-55 was initiated
about 2 months after the general business reChart 1.
Cyclical Changes in Instalment
Credit Outstanding
BILLIONS OF DOLLARS
+9
SEASONALLY ADJUSTED ANNUAL RATES
+6
covery, and the maximum rate of advance was
reached as early as mid-1955. Thereafter, the
growth rate diminished until, in the first quarter of 1958, a decline in outstandings was recorded. During the 1958-59 economic upswing which b egan in the spring of 1958, instalment credit outstanding did not display a
significant uptrend until the final quarter of
1958. The increase in outstanclings during the
following 12 months was similar in magnitude
to the change in 1955, but the relative gain
was appreciably less. The $5.4 billion growth
in ontstanclings during 1955 represented a 22.9
per cent increase, hut because it began from
a higher base, the $.5.4 billion advance which
occurred during 1959 amounted to only 1.5.9
per cc_'nt.
The earlier turning point in instalment
credit during the 1954-55 period quite clear]y
reflects the varying response of auto loans to
the stimulus of economic recovery. Auto loans
outstanding began to rise sharply in the fall
of 1954 and by the first quarter of 1955-the
second full quarter of the business expansion
-were increasing at a seasonally adjusted annual rate of $3.5 billion. The year 1955 as a
whole witnessed a $,3.7 billion rise in outstanding auto paper, in response to a greatly
expanded level of new car sales and a marked
relaxation of credit terms. Stimuli of comparab]e magnitude were not present in 1958 or
1959, and auto paper outstanding has yet to
duplicate the rate of advance witnessed in
1955.
Growth of Instalment Credit by Type
+3
0
-3
..L__,_l
1954
1.
'55
1.
1
_l
'56
J__l~_.l_
'57
~ l
'58
l-Ll
'59
SOURCE : Board of Governors of the Federal Reserve System.
10
It is apparent, therefore, that the 1959 repetition of the 1955 growth in total instalment
credit outstanding was more heavily dependent upon nonautomobile loans. As indicated
by the data in Table 1, increases in all other
major categories of instalment credit were
substantial1y ]arger in 1959 than 4 years
earlier, and comprised a much larger share
of the total. "Other consumer goods paper"
Implications for 1960
Table 1.
Chart 2.
Distribution of Increases in Instalment
Relative Shares in Outstanding
Instalment Credit
Credit by Type of Loan
PER CENT
1955
Type of loan
Auto paper
Other consumer goods
paper
Repair and modernization loans
Personal loans
1959
Change
Per Cent
(Millions) of Total
Change
(Millions)
Per Cent
of Total
60
t
END OF YEAR
50
$+3,663
68.0
$+2,353
43.6
+883
16.4
+1,320
24.4
40
+73
+ 771
1.4
14.3
+354
+1,375
6.6
25.5
30
20
and personal Joans each accounted for about
2,5 per cent of the 19.59 advance in outstandings ; in 19,5.5 their C'omhincd share was only
31 per cent.
The strong pcrforn1:1ncc of 11onauto loans
in l95~J relative to W55 invites considcrnlion
of whether forces of a long-run character may
have been involved. It may he noted, in this
regard, that 1955 was an exceptional year in
the consumer markets-a year in which individuals' use of credit to purchase new cars
was stimulated greatly by the relaxation of
credit terms which took place. The distribution by types of Joan in the growth of instalment credit during 1955 wou lcl thus tend to
deviate from th(' more typical pattern.
Trends in the shares of consumer instal ment credit oulslancli11g hy type sine(' 19,50,
as shown in Chart 2, reveal several interesting features of recent experiPnce. The share
of instalment credit accounted for by personal
loans has risen noticeably since 1950 to its
present level of 25 per cent. Personal loans
outstanding recorded an advance of 254 per
cent from 1950 to 1959, in contrast to a rise
of 169 per cent in total instalment credit. Auto
paper outstanding and repair and modernization loans show no distinct 11pwarcl or clmvnward trend as a share of the total ovN the
last 9 years as a whole, although the unusually
large increase in auto credit during ] 9,55 is
quite evident. Other consumer goods paper
moved down to about one fourth of outstandMonthly Review •
April 1960
FIGURES
PERSONAL LOANS
REPAIR ANO MODERNIZATION LOANS
,o ~
0
1950
l
'53
'5
'57
'59
SOURCE · Bo,ird of Governors of the rederal Reserve System
ings in 1959 from about one third in ] 950.
Taken together, all instalment loans outstanding other than auto paper, therefore, do not
show any significant advance as a proportion
of total instalment credit over the past 9 years.
Moreover, the relative shares of each type of
loan in the grO\vth of outstandings during
19.59 do not appear to he exceptional, hut are
quite close,. lo the magnitudes which might
have hccn cxpccl<'cl on the basis of the distribution oF outstanclings at the encl of 1958
and the geueral changes in this distribution
since 1950.
It would he helpful to have detailed information on the forces at work in promoting
so rapid a growth in personal loans since 1950
and in curbing the advance of other consumer goods paper. Unfortunately, available
data arc too sketchy to permit more than a
fcv: hroacl generalizations. The failure of
other consumer goods paper to advance as
rapidly as the remaining types of consumer
time-payment loans appears to reflect, in large
measure, the declining share of the consumer's dollar devoted to outlays for clurahlcs
other than autos-particularly the furniture
11
Consumer Instalment Credit -
and household equipment group. Such outlays have advanced, percentagewise, about
half as much as total consumer spending since
1950, in part because of the relatively mild
increase in prices on these articles in comparison with other items in the consumer
budget. Had it not been for a marked increase
in the use of credit for durable goods purchases since 1950, the share of instalment
credit represented by other consumer goods
paper would have declined further. New extensions of other consumer goods paper have
risen nearly 90 per cent since 1950, while
consumer spending on durables other than
autos has advanced approximately 4,5 per cent.
Th<' phenomenal <'Xpansion of personal loans
over the past 9 years is more diffic11lt to interpret. Negatively viewed, the trend cannot
be ascribed primarily to the promotional efforts of any particular type of financial institution, for commercial banks, sales finance
companies, and other financial institutions
( including credit unions) each have witnessed increases of 200 per cent or more in
their personal loans to individuals since 1950.
Nevertheless, the emergence of credit unions
as important lenders to individuals, recognizing their specialization in th e personal loan
field, has provided added impetus to the
growth of this type of credit. It may be, also,
that the well-advertised spread of the use of
consumer credit to finance vacations, other
recreational types of outlays, and a variety of
services has added significantly to the growth
of personal loans, although this possibility
must remain conjectural, since there are no
comprehensive sources of information on the
purposes for which personal loans are incurred.
Expansion in Consumer Reliance
Upo11
Chart 3.
fl
an E
f
o Expenditure
Extensions of Personal Loans and Other Consumer Goods
Paper Relative to Consumer Nonautomotive Outlays
PEA CENT
12
10
8
6
4
redit
Although the relative shares in the 1959
growth of instalment credit accounted for by
the various types of credit do not seem atyp-
12
ical in historical perspective, it may still be
asked whether the substantial gains in loans
other than auto paper represent a significant
departure from past patterns. Did consumers, in other words, resort to the use of
credit in exceptionally large amounts to
finance a growing level of outlays for
goods and services other than autos? This
question is dealt with preferably by reference
to new extensions of credit rather than to
changes in outstandings, for extensions are
the most direct measure of the dependence of
consumers upon credit facilities. Because new
extensions of repair and modernization loans
have changed very little from one year to the
tH'\I and ar<' small ah.-ol11tcly, attention needs
lo he co11c(•ntrated primarily upon personal
loans and other consumer goods paper.
Chart 3 presents the ratio of new extensions
of personal loans and other consumer goods
paper to expenditures for consumer goods
and services other than autos and accessories, for the period 1946-59. While it is obvious
that the ratio of new extensions to outlays
has increased substantially over the postwar
period, closer observation reveals that the
2
1946
'49
'51
'53
'55
'57
'59
SOURCE: Board of Governors of the Federal Reserve System; U. S.
Department of Commerce.
Implications for 1960
average annual increase has been considerably smaller since 1952 than in previous years.
From 1946 to 1952, the average yearly rise
was 0.61 percentage points; from 1952 to 1959,
0.25 percentage points. Thus, the trend
since 1946 indicates a continuing movement
in the direction of increased use of credit,
but at a decelerated rate.
Perhaps a more interesting feature is the
suggestion of a cyclical pattern in consumers' use of credit facilities since 1952. Prior
to 1952, there was little deviation from the
upward trend except for a slowdown in 1951
and a speedup in 1952- attributab]e largely
to thC' C'xistencc of Rcgu]ation W in 19.5] and
its removal in May 19.52. In the subsequent
yC'ars, howc'vcr, increases in the ratio of extensions to outlays were particularly sharp
during 1955 and 1959 - when economic activity advanced rapidly from previous recessionary levels and the volume of individual
disposable income, adjusted for price changes,
improved markedly. Favorable economic and
income developments in 1956 also were accompanied by a rise in the extensions-to-purchases ratio, but by significantly less than in
1955 and 1959. When general recessionary
conditions prevailed during part of a yearsuch as in 1953, 1954, 1957, and 19,58- the
ratio showed little advance or a decline.
The hypothesis of cyclical variations in
consumers' reliance upon credit can be advanced only tentatively, since firm judgments
cannot be made from the evidence of only 7
years. But until further evidence demonstrates the contrary, it seems appropriate to
attribute the increased use of credit facilities
by consumers during 1959 - for acquiring
goods and services other than autos-in large
measure to the general improvement in economic conditions and the expansion of individual incomes. It may be noted, also, that
an increase in the ratio of extensions to outlays as large as in 1959 has not occurred twice
in succession during the postwar period.
Monthly Review •
April 1960
The postwar growth in the dependence of
consumers upon credit facilities to acquire
goods and services other than autos appears
to have been evident in the automotive field
as well. A comparison of new loan extensions
with expenditures for automobiles cannot
easily be made, however, since new extensions of auto loans are for both new and used
car purchases, while available data on expenditures are not designed to measure gross
consumer outlays for new and used cars.
Fortunately, some fragmentary evidence is
available relating to the percentage of new
automobiles sold on credit and to the average size of new loans extended to purchase
new and used cars. Since 1947, the percentage
of 1ww cars sold on credit appears lo have
risen from about 45 per cent to 63 per cent,
and the average new car contract has in creased from about $1,100 to about $2,600.
Growth in the average size of new car loans,
it will be noted, was substantially larger in relative terms than the increase in unit outlays
per new car-reflecting the reduction in downpayments. In the used car market, on the
other hand, the relative volume of credit buying apparently has not shown an upward
trend over the postwar period. Estimated
growth in the average size of used car loans
also has been relatively moderate- an increase
of about 60 per cent between 1947 and 1959
contrasts with a rise of about 135 per cent in
the average size of new car contracts.
Of considerable interest in evaluating prospects for automobile instalment loans in the
years ahead is the fact that reliance upon
credit facilities to acquire new cars apparently has not increased appreciably since the
middle 1950's. Between 1954 and 1956, purchases of new cars on credit arc estimated to
have grown from 57 to 67 per cent of total
new car sales, but the high 1956 figure was
not exceeded in the past 3 years. Between
1954 and 1957, the average size of new car
contracts advanced about 30 per cent, but
13
Consumer Instalment Credit -
there was little additional increase from 1957
to 1959. The lack of further gains in the average size of new car contracts since 1957 reflects, in part, the increased share of total
new car sales attributable to imports and domestically produced smaller cars. In addition,
the reduction in minimum clownpayments initiated hy lenders in late 1954 and early 1955
continued to spread through the market in
1956 and 1957, hut this source of growth in
the average contract size weakened with the
absence of significant further liberalization of
minimum downpayment requirements.
Implications for 1960
lmplicalions of th<' pr<'cccling cliscmsion for
the growth of instalment C'rcdit in 1960 may
he drawn hy indicating first thC' growth in
instalment credit which would he associated
with varying levels of new instalment loans
extended during the year, and then considering the volume of new extensions which might
be anticipated.
Table 2 contains hypothetical figures for
new extensions of auto loans and total instalment credit during 1960 and the change in
outstandings which would be expected to
result from different levels of new extensions.
( The smallest Egure for new extensions repTable 2.
Expected Re lationship of New Instalment
Credit Extensions to Changes in
Outstandings During 1960
Total Instalment Credit
New
Change in
Extensions Outstandings
48.5
53.0
54.0
55.0
55.5
56.0
57.0
+3.3
+0.7]
+3.9
+4.5 + 0.6*
+4.8
+5.1
+5.6
Automobi I e Paper
New
Change in
Extensions Outstandings
18.0
19.0
20.0
20.5
21.0
22.0
23.0
1+0.31
+0.9
+ 1.5
+ 1.8 ± 0.6*
+2.1
+2.6
+3.2
J
*This term is _an error figure which applies to each stated change
,n outstand,ngs, and expresses a range within which actual
changes reasonably can be expected to fall.
14
resents the actual volume in 1959.) Changes
in outstandings associated with a particular
level of new extensions are based on historical
relationships evidenced over the postwar
period; the interested reader will find a technical note outlining the method of estimation
at the conclusion of this article.
It is evident that a repetition in 1960 of
last year's growth in in talment credit would
requfrc a marked increase in the volume of
new extensions from the 1959 level because
of the increase in repayments associated with
prior growth of outstamhngs. With clue allowance for a potentially high estimate of repayments in 1960, il app<'ars that r<'asonahk
assma,icc of d11pliC'ati11g lhc H),50 incrcasc in
a11to paper 011tsta11cli11g ( $2.4 hill ion) clming
HJGO would require that new extensions of
auto loans rise to at least $20.5 billion in the
year-some $2.5 billion above the 1959 level.
If this magnitude of increase in auto loan
extensions were to take place, growth in new
extensions of nonauto loans also would be
required if the 1959 increase in total instalment credit outstanding ( $5.4 billion) were
to be duplicated or exceeded. Total new ext<:>nsions of instalment loans in 1960 must rise
to a level of $.5,5.,5 billion or highcr- which
would mean a rise of $7 billion or more above
the J9.59 level- to provide reasonable assurance of generating a $,5.4 hillion or larger advance in total instalment credit during 1960,
after alJowing for a potential overestimate of
repayments.
With respect to automobile loans, a growth
of $2.5 billion in new extensions between 1959
and 1960 would be a smaller rise than the
$3.7 billion gain between 1958 and 19,59.
However, it should he noted that the rise hctv.rccn 19.58 and 1959 was sufficicnt to finance
an increase in ncw passenger car registrations
of 1.4 million and to permit a marked improvement in the used car market. A compara h]c ri e of new and used car sales from
1959 to 1960 would imply a 1960 volume of
Implications for 1960
new car registrations exceeding that of 1955
-an improvement in consumer auto purchases
which would surpass even the more optimistic
industry forecasts. It appears quite possible
that growth in new auto sales to the magic 7
million figure in 1960 might be accompanied
by a comparatively moderate rise in new
auto loan extensions. In fact, if the percentage of new cars sold on credit and
the average size of new car contracts were
unchanged from 1959 to 1960, sales of 7
million new cars apparently would imply
an increase in new auto loan extensions
of less than $2 billion from the 1959
level. Any rurthcr increase' would have' to
c·nwnat<' fro111 loans to acq11irc 11secl autos,
from a larger vol111rw or new car sale's, or from
a pronounced inercase in the use of credit to
purchase automobiles - either through a
marked rise in the percentage of credit sales
or a significant reduction in downpayments,
such as took place in 1955. A sharply increased dependence upon credit may be regarded as a real possibility, but it could not
be confidently expected on the basis of recent
trends. in the use of credit to acquire new
autos.
Tt was indicated previously that extensions
of personal loans and other consumer goocls
paper, as a per cent of consumer outlays
oth r than for autos, appear to have fluctuated in recent years in response to cyclical
variations in consumer incomes, or, more
broadly, in general economic activity. Thus,
any change in the ratio to be expected in 1960
would seem to depend on prevailing economic
conditions. The further advance in the overall level of economic activity widely expected
for 1960 perhaps suggests some additional increase in consumer reliance upon credit facilities to pnrchase goods and services other
thau autos, but a rise in the ratio of Joan extensions to consumer purchases as large as in
1959 has not been repeated in any two consecutive poshvar years. An increase of the
Monthly Review •
April 1960
magnitude which took place between 1955
and 1956 would indicate a level of new extensions of personal loans and other consumer goods paper in 1960 equaling approximately 10.0 per cent of consumer outlays
other than for autos. A repetition in 1960 of
the $15 billion advance in these types of consumer outlays from 1958 to 19,59, together
with a rise to 10.0 per cent in the extensionsto-purchases ratio, would suggest a growth
in new extensions of personal loans and other
consumer goods paper of about $2.5 billion
from the 1959 volume.
It appears, therefore, that- in the absence
or a rnarkccl advance in c011sumc•r outlays beyond that which has been generally <'XJWC'lc'cl
or an increase in consurnc'rs' 11se or credit
representing a distinct clcparlure from rccent
trends- the growth of instalment credit outstanding during 1960 would fall short of the
1959 advance. Such a development need not
result from a disappointingly small rise in
consumer expenditures or a reduction in the
percentage of consumer outlays financed by
instalment credit; the dominant factor tending to hold down the increase in outstandings
may be no more than the inexorable rise in
repayments which fo1lows close upon the
heels of a previous growth in outstandings.
TECHNICAL NOTE
The equation used for estimating the change in total
instalment credit outstanding, given the volume of extensions, is of the form: X1 1,972
.419 X2
.626 X3 + .145 X,, where X1 represents repayments,
X2 new extensions, Xa outstandings at the end of the
previous year, and X4 change in outstandings during
the previous year, all expressed in millions of dollars.
The equation was fitted to annual data for 1946-59,
excluding 1951 and 19.52- during which years the existence of Rcgnlation \V caused a deparlme from the
more typical relationships among the variables. All of
the independen t variables arc statisticall y significant
at the .05 leve l for a single-tailed lest. The multiple
correlation coefficient was .9996 and the standard
error of estimate $310 (millions).
To estimate the change in outstanding auto paper,
an allcmpt was made to add a fifth variable rcpre-
=
+
+
15
Consumer Instalment Credit - Implications for 1960
senting an estimate of average contract duration in
months, at the end of the previous year. Again an
equation was fitted to the period 1946-59, excluding
1951 and 1952, which was of the form: X,
674 +
.426 x~
.547 Xa
.145 X, - $4.05 X;;. (X, - - -X, are
defined as indicated above.) The additional variable
improved the fit scarcely at all, however, presumably
because the technique employed to derive an estimate of average contract duration did not produce
sufficiently reliable estimates. For this equation, the
multiple correlation coefficient was .9987 and the
standard error of estimate $261 (millions).
A remark is in order concerning the variable X, .
Tbe logic of factors affecting repayments would suggest a negative coefficient for X, , on the grounds that
growth in outstandings tends to lengthen the average
maturity of contracts outstanding and thus to reduce
the relative volume of repayments attributable to outstandings in the st1bscq11cnt yea r. A n·asonahle explauatiou of the positive coC'fficicn t lies in the fact
that tht' early postwar years witucssed very sharp per-
+
=
+
centage gains in outstandings and, correspondingly,
an unusually low volume of repayments attributable
to outstandings, in relative terms. As the growth in
outstandings slowed down in percentage terms, repayments out of outstandings would tend to rise in
relation to outstandings. Assuming this to be the case,
the variable X, improves the fit by acting as an expression of the growth trend in outstandings since
1946. Care must be used in interpreting the variable,
therefore, for this argument suggests that the regression equation would tend to overstate repaymentsand understate the growth in outstanclings- in years
following a marked upsurge in outstandings. Allowance
for this has been made in the textual commentary
relative to Table 2 by assuming th at the equations may
tend to understate repayments in 1960 by about the
maximum amount indicated in the error term. It may
he noted, in this connection, that the error terms given
in that table arc larger than the maxim11m deviation
l)('twccn act11al and co111pu tcd val11cs of X,, in all of
the y<'ars to which the qualion was fitted .
PRICE INDEXES, UNITED STATES
BANKING IN THE TENTH DISTRICT
Loans
Reserve
District
Jan.
1960
Feb.
1959
(1 947-49 = 100)
125.6
125.4
123.7
(1947-49=100)
119.4
119.3
119.5
Prices Rec'd by Farmers (1910-1 4= 100)
233
231
243
Prices Paid by Formers (1910 -14 = 100)
299
299
297
Consumer Price Index
Reserve
City
Country
City
Country
Member
Member
Member
Member
Banks
Banks
Banks
Banks
and
States
Feb.
1960
Index
Deposits
Wholesale Price Index
February 1960 Percentage Change From
TENTH DISTRICT BUSINESS INDICATORS
Jon. Feb. Jon. Feb. Jon. Feb . Jan . Feb.
1960 1959 1960 1959 1960 1959 1960 1959
Tenth F. R. Dist.
t +10
+1
+9
-1
-4
-1
t
Colorado
-1
+13
+2
+12
+1
+1
t
+1
Kansas
-2
+s
t
+4
-2
-5
-2
-1
Missouri*
Nebraska
New Mexico*
Oklahoma*
Wyoming
t +10
+1
+16
-1
-4
-3
+3
+1
- 1
+9
-2
- 3
- 3
-4
- 1 +10
**
**
t
- 1
+2
Value of
Check
Payments
Percentage change- 1960 from 1959
Year
Feb.
Tenth F. R. District
Denver
Value of
Department
Store Sales
to date
Feb.
Year
to date
+7
+3
-3
-2
+13
+s
0
+1
Wichita
+3
+3
-12
-11
Kansas City
+s
+5
0
+2
Omaha
+1
- 1
+4
+1
**
**
+1
+10
+4
+1
t
- 6
- 1
+2
Oklahoma City
+6
+5
- 2
-5
**
**
+1
+9
**
**
t
+1
Tulsa
+s
+1
-8
-5
*Tenth District portion only.
t less than 0.5 per cent.
16
District
and Principal
Metropolitan
Areas
**No reserve cities in this state.
@FedFRASER