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October 1956
Oil Expansion in the
Western District States
. .
page 3
Residential Mortgage Market
page 9
Current Charts and Statistics
page 15
FEDERAL RESERVE BANK
OF KANSAS UITY
Subscriptions to the MONTHLY REVIEW are available to the public without charge. Additional
copies of any issue may be obtained from the
Research Department, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
Oi I Expansion
in the
Western District
of crude oil production
.l in the Tenth Federal Reserve District is
indicated by the industry's substantial conb·ibution to the area's total output of goods
and services. The value of 1955 crude production- estimated at $1.3 billion- was about
two fifths the amount District farmers rcccive<l for their products last yc,lr. Moreover,
crude oil accounted for about 70 per cent
of the value of all minerals produced in the
District during 1955.
The District's crude oil industry is also of
considerable significance to the national economy. In 1955, District activity included 30
per cent of all well completions in the Nation,
20 per cent of total crude output, and 10 per
cent of the operating refinery capacity. Although the District once enjoyed a much
greater share of the Nation's crude production, its present status represents a steady recovery from the 1944 low when the area supplied only 16 per cent of domestic output.
Crude oil production gains in the Mountain
States area- Colorado, Wyoming, western Nebraska, and northern New Mexico-have been
instrumental in increasing the District's share
of domestic output. Over the past 20 years,
this region has increased its contribution to
District output from 6 to 34 per cent. On the
other hand, production in Kansas and Oklahoma during the past decade has just kept
pace with national gains. The steady 13-14
per cent of the Nation's annual output supplied by the District's Mid-Continent states
reflects the impact of conservation laws which
permit adjustment of output to estimates of
r-J"IIE IMPORTANCE
Monthly Review •
October 1956
demand. Kansas and Oklahoma output has
been subject to control through state crude
oil production allowables for many years.
The sustained high level of demand for
domestic crude has been an important factor
in the growth of the Mountain Region's oil
industry. While local refinery demand for
crude oil has not been sufficient to support
the growth in production, outside markets
have taken increasing amounts of the area's
crude. Major outside markets have been midwest refineries and Utah and Montana plants.
The area has been fortunate in that much
of the output consists of high gravity crude
which compares favorably in quality with oil
from the Mid-Continent fields. Modem trends
in demand have favored high gravity oils
because they yield a high ratio of gasoline and
dksPl fuels. However, the heavy black oilsTHE DISTRICT'S SHARE OF U. S. OIL PRODUCTION
PEA CENT
30
25
20
10
1935
OKLAHOMA ANO KANSAS
'60
NOTE : 1956 estimate based on data for first six months.
SOURCE: U. S. Bureau of Mines and Oil and Gas Journal.
3
Oil Expansion in the
typical of many Wyoming fields-also have
found a substantial market. These low gravity
crudes yield a relatively high percentage of
residual fuel oil, road oil, and asphalt.
The Midwestern refineries have been the
most important outlet for Mountain States
crude and now utilize much of the output
from Wyoming, Nebraska, and eastern Colorado fields. Salt Lake City refineries, which
have drawn h avily on western Colorado production, have gained a larger share of the
vVest Coast market in recent years. Montana
processors, who get much of their crude oil
from northern \Vyoming, also ship petrolc-um
products to th \Vest.
The Ho(-ky Mountain refiners have hcen
able to scll 1norc products in the Pacific Coast
region h cause California rdin ries hav been
pressed to cope with th increased demand
for gasoline and diesel fuel which has accompanied the influx of population and the
growth of industry. The problem for California processors arises from the fact that
much of the local crude is of low gravity and
yields sufficient quantities of the needed
products only by creating burdensome inventories of heavier fuel oils.
Western District Oil in 1935 and
o Decade of Progress
Wyoming produced nearly 90 per cent of
the western region's modest output in 1935,
with about half the state's oil coming from the
Salt Creek field in the P0wder River Basin.
Although it remained the area's leading oil
pool until 1939, Salt Creek already had experienced a two-thirds reduction in output
from the peak rate of the mid-1920's. Fields in
the Big Horn Basin represented the second
most important producing area in the stateaccounting for about one fourth of the state's
crude oil output.
Colorado's 1935 crude production-just over
1.5 million barrels-amounted to about 10 per
cent of the Mountain Area's total output. Al-
4
though the state reported production from
several oil fields, the Iles pool in Colorado's
portion of the Green River Basin accounted
for much of the total. Crude output in northwestern New Mexico was relatively insignificant in 1935 and the western ebraska area
had not yet been developed.
The cru<le pipeline system which served the
Mountain States during the early 1930's was
little more than a skeleton of the present network. Local <lemand in the sparsely populated region had stimulated little pipeline
construction. Colorado's pipeline facilities
consisted solely of short lines which conJH'cted the fr\\ producing fields to nearby n•{i1H'rics. The crude oil transportation sysl<'lll
in Wyoming; was mor<' ackcp1at \ with Jines
linking major oil-produdHg areas to refining
centers. Ilowcv r, the state's only pipeline
link with an outside market had been closed.
In the 5-year perio<l 1935-1939, crude production in the Mountain States area increased
nearly 50 per cent, with Wyoming gaining an
even greater share of the area's output. The
most significant development was the marked
growth in production at Lance Creek-near
Wyoming's eastern border- and the accompanying extension and rehabilitation of the
crn<lc pipeline system.
To facilitate production of Lance Creek
crude, the pool was linked to the old Douglas,
Wyo.-Freeman, Mo., trunk line which in turn
connected with Stanolind's eastbound pipeline system south of Kansas City. The Wyoming-Missouri line had been built in the
early 1920's to move Salt Creek and Teapot
Dome crude to midwestem refineries, but except for portions leased for natural gas transmission, the facility had been out of scrvicc
for several years. Lane Creek crude began
flowing through two additional outlets in 1938
- a 232-mile trunk line connectC'd the field
with refineries at Cheyenne and Denver, and
a shorter line was e"Xtendc>d to the Glenrock,
Wyo., refinery.
Western District States
A major trunk line from Ft. Laramie to Salt
Lake City, completed in 1939, also provided
a significant market outlet for Wyoming
crude. In addition to serving as an immediate
outlet for Wyoming production, this line later
contributed to the development of the Wilson
Creek and Rangely fields in Colorado, since
its proximity to the two fields permitted the
eventual construction of linking pipelines.
Production in Wyoming also was stinmlatcd
by crude transmission lines which xten<led
from the more isolated fields in the Big Horn
and Laramie Basins to railroad loading stations and refincriPs. In contrast lo thP Wyomin~ gains, output in 11ortlwrn <'\\' ~Ic,ico
and Colorado d<'dincd during the lat<· I n:10's.
J\ lthough the Distric:t's sltarc of the Nation's annual ·rude output had shrunk to
nearly 18 per c nt hy 1940, production in the
Mountain States area continued to climb.
Colorado's output increased sharply in 1944,
due primarily to gains at Wilson Creek field
in the Uinta Basin. This upturn in production
accompanied the construction of a pipeline
from \Vilson Creek to \Vamsutter, Wyo.,
where it connected with the Ft. LaramiP-Salt
Lake City trunk line. As a result of the n<'w
market outlet to the Salt Lake City r<'fin eries,
Wilson Cr ·ck crude output nearly tripled hl'twcen 19.43 and 1945.
Produ tion at Wyoming's Lance Creek
field began to diminish in the early 19-10's.
This loss, as well as the dwindling contribution at Salt Creek, was more than offset by
increases in output at other fields in the state.
The Big Horn Basin pools made substantial
gains in production during the period as new
pipeline outlets were completed to Casper,
Wyo., and Billings, Mont. Increasing output
at new fields in the Wind River Basin also
added to the gain in Wyoming.
Rangely Leads the Postwar Boom
With the sharp gains in Colorado production added to the substantial growth in
Monthly Review •
October 1956
Wyoming, the Mountain States area had increased its share of the District's crude output to 15 per cent by the end of the war. It
was also at this point that the Disb·ict's share
of total crude output began to increase.
The outstanding development of th late
forties was the phenomenal growth in production at the Rangely fi<=•ld after it gained an
adequate market outlet. Accompanying the
construction of a 10-inch line to the Ft. Laramie-Salt Lake City b·tmk line, procluctioll
quadrupled between 1944 and 1945 and incrC'asccl fivC'fold the following year. To further
supplement tlw transportation of Rangely
crnch', a direct line was laid to Salt Lake City
in WtR. \Vith tlw fi<'ld's gr<'al prod11ctive
(':tpacity unleashed hy tlH' addition of th<' new
transportation facility, Hang<,]y oil supplied
more than 8.1 p •r cen t of Colorado's crude
output in 1949. The state's share of the Mountain Area production increased from 12 per
cent in 19•15 to 3,'3 per cent in l 949.
Although \Vyoming experienced nothing as
dramatic during the late 1940's as Colorado's
Rangely development, the state's crude output
was boosted by production from several
new field<.; in the Wind River, Big Horn,
Hanna, and Powder Tiiv<'r Basins. Older
pools in the Big Horn rc-gion also continued to record sizable gains in output. This
growth in crude production was accompanied
by extensive additions to th~ area's pipeline
system, including a 208-mile link between
the Wind River Basin fields and Ft. Laramie
and a larger crude line to replace the old connection between Cheyenne and Denver. Expansion of the transportation facilities for
Wyoming oil also included a 267-mile products line from Casper to Cheyenne and Denver, extensions to new fields, and an outlet
for Big Horn oil northward to Billings.
The number of operating refineries in the
Mountain States declined rapidly from the
peak reached in the early 1940's and by the
end of that decade there were no more
5
Oil Expansion in the
THE OIL INDUSTRY IN THE DISTRICT MOUNTAIN STATES
lO
GCENOIVE,
1,10111
KEY
WYOMING
-
POWDER
CRUDE OIL
PIPELINES
PRODUCTS
PIPELINES
MAJOR REFINING
CENTERS
0
NEBRASKA
E R
U I NT A
8 A SIN
'\
\
'\
\
'\
\
SAN
\
'\
LU IS
\
BASIN
SAN
~
8/STI-
~it:/(
I
\
1
I
J
I
I
GAL UP •
6
BASIN
UAN
\
/
A
RATON
I N
\
COLCXlADO
'
KANSAS
Western District States
in the area than in 1935. Nevertheless, the
crude capacity of the remaining refineries
had more than doubled since the mid-thirties.
This trend toward fewer but larger refineries
has continued into 1956 and parallels the behavior of the refining industry throughout the
Nation. The 40 per cent reduction in the number of plants in the District since 1935 has
been accompanied by a 75 per cent increase
in crude capacity. A similar drop in the number of refineries has been recorded for the
Nation, while total capacity has more than
doubled in the past 20 years.
More Outlets for New Dis ov rics
Despite expanding crude production in
Kansas and Oklahoma, the Mountain Slates
area had increased its share of the District's
output to nearly one fourth by l 950. However, with the discovery of new reserves in
Wyoming and the opening of the DenverJulesburg Basin, the output potential of the
area exceeded the capacity of existing market
outlets. It became clear that further increases
in production would be contingent on the addition of new facilities for shipping the crude
to regions outside the Rocky Mountains.
In an effort to market the growing supply
of cmde, a group of major oil companies with
interests in the region formed the Platte Pipeline Company to build a second outlet to
Midwestern refineries. The Platte system extends from the Big Horn and Wind River
Basins through Casper and Ft. Laramie and
on to Wood River, Ill. The new outlet fostered
a 24 per cent increase in the area's crude production between 1952 and 1953-permitting
expansion of Wyoming output and lending
impetus to the development of the DenverJulesburg Basin. Western Nebraska output
more than doubled following completion of
the Platte system, while Colorado and Wyoming production rose about 20 per cent.
Extensive products pipeline building also
characterized the Mountain States petroleum
Month ly Review • October 1956
industry in the early 1950's. In January 1953,
the first shipment of products was delivered
through a new line that connected the Sinclair, Wyo., refinery with Salt Lake City.
Later that year, contracts were let for a products line between Cheyenne and North Platte,
Nebr.
Highly significant to the region's petroleum
industry was the construction in 1954 of two
more trunk lin es which provided additional
outlets to eastern crude markets. The longer
of the two projects was the Service Pipeline
Company's new line between Ft. Laramie and
Freeman, Mo., which replaced the old trunk
line constructed hC'twcen the two points in
1923. At the same time\ th<' Arapahoe Pipeline Company built a new line from Merino,
CoJo., to Great Bend, Kans., and modernized
the existing section between Great Bend and
Humboldt, Kans., where the line connected
with Sinclair's eastbound trunk system. Subsequently, a network of smaller pipelines in
the Denver-Jules burg Basin was connected
to the eastbound trunk lines.
The Denver-Julesburg Basin
Stimulated by the extensive additions to the
crude oil transportation system - especially
those which expanded the eastern market
potential for Rocky Mountain oil - the area's
drilling activity and production gains have
soared to new highs. Much of the recent
activity has accompanied the development of
the Denver-Jules burg Basin which encompasses southeastern Wyoming, nortlieastern
Colorado, and southwestern Nebraska. Oil
was first discovered in the region in 1862,
but the current boom dates from the Ohio
Oil Company's 19.19 discovery near Gurley,
Nebr. Within a few months, millions of acres
were leased on the eastern flank of the basin
and wildcat drilling boomed in the Nebraska
and Colorado portions.
While the proximity of the major trunk
lines and the rapid development of a crude
7
Oil Expansion in the Western District States
CRUDE OIL PRODUCTION IN DISTRICT STATES
MILLIONS
OF
BARRELS
SEMI-LOG
SCALE
400.0
200.0
1.0 -
.2
MEXICO
.I.__.___.___.___._......._...__...__.___.___._.........._,_..__.__...__.__.__.___._....
1935
'40
'45
'50
'55
NOTE: On a semi-logarithmic graph, equal slopes indicate
equal rates of change.
SOURCE: U. S. Bureau of Mines and Oil and Gas Journal.
gathering system have done much to encourage activity in the region, a favorable
land-leasing situation and relatively fast and
inexpensive drilling also have proved very attractive to operators. As a result of the extensive wildcat program in the basin, the producing area now includes Banner, Cheyenne,
Deuel, Kimball, and Morrill Counties in Nebraska; Adams, Logan, Morgan, Washington,
and \Veld Counties in Colorado; and Goshen
and Laramie Counties in Wyoming. Although
the Colorado portion has been the most productive, the focal point of Denver-Julesburg
exploration has shifted to western Nebraska
where well completions so far this year are
running 50 p ~r cent ahead of the 1955 pace.
Dramatic and successful though the Denver-Julesburg development has been, recent
oil interest in the District Mountain States
8
has not been confined to it alone. Another
fast-growing area is the San Juan Basin in
northwestern New Mexico. Although the
basin is better known for its natural gas production, exploration for oil in the Bisti-Black
Rock area is attracting much attention. At the
end of August, the field boasted 30 wells
completed and an equal number in various
stages of development. Prospects for a new
refinery at Gallup and a crude pipeline connection with Salt Lake City have added impetus to the basin's development.
Summary
The story of growth in th~ oil foclustry of
the Mountain Stat 'S is primarily a tal of the
development of a trausportation system for
the area's oil. As market conditions warranted
the construction of pip lin s to tap proven
crude supplies, the presence of the new outlets encouraged further search for new fields .
In turn, as these fields developed, additional
lines were needed.
The rapid development of new producing
areas in the District's western region is indicated by well completion and production data
for recent years. Colorado operators completed more than 1,500 wells last year- 15
times the number drilled in 1950- whilc Nebraska drilling increased £iv fold and Wyoming recorded a 50 per cent gain over the
5-year interval. Northwestern New Mexico
also reported a marked increase in drilling
activity but gas well completions accounted
for much of the gain.
Crude production in the area has climbed at
a remarkable rate, with 1955 output nearly 90
per cent greater than the 1950 level. This rate
of growth far outshines both the one-third
gain reported for the Tenth District during
the period and the one-fourth increase for the
Nation. Data for the first six months of 1956
indicate that Mountain States crude output
was about 16 per cent higher than during the
same period of last year.
r/?eJiJential
MORTGAGE MARKET
<.·011slnt<:tio11
fro111 tlw liigli 1,·\<•ls; attained in IH.SS has
lw('ll 011<' of tlw pri1H'ipal :tr<':tS of weakness
ill a g('ll('r:tlly (''\pa11di11g ('l'OIIOIIIY ill rnsG.
HE
DL< ' LINE
tN
n •-; idcntial
D11ri11g the first seven months of H)5G, hc)Using starts ,, ere J8 per cent sma11c·r than the
number in tlw corresp011ding months of last
year and the value of new resi<l<>ntial construction was 15 per cent lower. The commonly cited reasons for this decline, in the
face of rising personal income, have been the
short supply and high costs of building sites,
local overbuilding in 195,5, the shortag(' of
mortgage fund-;, and th(' inability or unwil lingness of huy<' rs to pay the higher pri c,•-; for
homes proc.111<.·<·<l b y rising land , 1nall'riak a11d
lahor costs. To this list could 1)(' adcl<·d th<'
fact that housing construction last year was
at an exceptional1y high rate and may han·
reached such a level on the strength of uuusually favorable conditions. Construction
activity this year compares favorably with
that of 1951, 1952, and 1953, and this should
be the seventh consecutive year when more
than on million privately owned housing
unit,;; arc started.
Whatever other points of disagr<'cmcnt
have hc<.•n cxpr('ssccl hy tht• rcpn'S('ntatives
of the housin g industry, there is a consc'nsus
that a gr atC'r availability of credit would
hav strcngthc11cd the market this year. Exe pt for local con<litions, it is unlikely that a
Monthly Review •
October 1956
strong case could he pn'S nt cl against such
a viC'w, particularly sinC'<' the housing martct
depends for much of its volume 011 sales of
ltonH'S 011 liheral ('l'C'dit l<'rllls. At the same
time, however, factors peculiar to the financing of the housing industry also have operated to restrict the supply of available funds.
These influences would not have been entirely removed by less restriction of aggregate loanable funds, unless a more generous
flow of savings had been available to the
institutions which absorb a large share of
residential mortgages. The appetite for credit
developed by the housing industry, though
llt'ver small in years of high business activity',
has grown to such a magnitud<.' as to warrant
PRIVATELY FINANCED HOUSING STARTS
THOUSANDS OF UNITS
1500
TOTAL
1000
1000
CONVENTIONAL
-
!500
FHA
o - - - - - ~ - ~ - ~ - _ _ . __ _.__....__ _,__,o
19• 6
SOURCE
'49
'52
Department of Labor, Federal Housing
stration, and Veterans Administration .
'55
Admini-
9
Residential Mortgage Market
re-examination of its sources and uses of funds
and the market structure through which available capital is allocated.
The broader outlines of the problem to be
examined can be observed in the accompanying chart which shows the volume of housing
starts by years since the end of the war and,
in the period since 1949, the disb·ibution of
these starts between those financed under
Government insurance and guaranty programs and those financed conventionally. It
is clear that most of the instability in house
construction over the past 6½ years has occurred in the first of these categories. The
contraction in 1951 was largely conrcntratcd
in houses financed under the Federal Homing Administration, while the sharp rise in
1954-55 was confined almost entirely to VAfinanced activity. Total housing starts focreased by 240,700 between 1953 and 1955
and those financed under the Veterans Administration accounted for 236,300 of the
gain. Both FHA- and VA-financed construction were curtailed much more in the first half
of 1956 than were conventionally financed
dwellings. The instability of construction financed by FHA and VA can he explained,
in part, by variations in the extent of Government assistance and by additions to the veteran population. But variation9 in the flow
of credit also have played a significant and
increasingly important role as the terms of
these mortgages have been extended towards
greater liberality.
Supply of Mortgage Credit
Under the favorable conditions of postwar
economic stability and growth, the demand
for housing and the accompanying demand
for mortgage credit have reaclwd record
levels. Nonfa1m mortgage debt increased
more rapidly in these years than any other
major form of debt. During 1955, the growth
of mortgages on 1- to 4-family houses exceeded the new money security offerings of
10
corporations by 50 per cent and surpassed
the gross security offerings of state and local
governments by 100 per cent. Annual increases in house mortgages averaged $7 billion in the four years 1950-53, then stepped
up to $9.6 billion in 1954, and set a new peak
in 1955 with an expansion of $12.7 billion.
Since individual savings have been the major
source of funds in this market, these magnitudes can be visualized more clearly in relation to the flow of savings. In 1952-53, the
growth of home mortgages was equal to
about 25 per cent of total liquid savings of
iuclividnals, hut in 1955 the proportion rose
to 47 pc-r C('nt. If consumer short- ancl intermcd intc-tcrm creclil arc added to the growth
of mortgag,~ credit, the combined e'Cpansion
of the two forms of debt in 195,S would he
equal to almost 70 per cent of individuals'
liquid savings.
While the supply of savings from individuals and other sources varies from year to
year, the changes are not sufficient to accommodate swings in demand on a scale such as
occurred in 1954-55 and the flow of funds
into this market was augmented in a number
of ways. One of these was the commercial
bank practice of buying mortgages from life
insurance companies and mortgage brokers
under resale agreements and of extending
credit to th ese institutions with mortgages as
collateral. Total credit extended to all real
estate mortgage lenders by weekly reporting member banks increased $1 billion
between August 1954 and November 1955.
These loans, together with their usual additions to mortgage portfolios, increased the
proportion of residential mortgage credit
fornishccl by banks from around 10 per
cent in 1953-54 to about l9 per cent in
1954-55. A second source was the Federal
Home Loan Bank which increased its loans
to member associations $550 million in 1955.
Of this amount, $380 million were on loans
maturing in one year or less. Other extra-
Residential Mortgage Market
ordinary supplements to this flow of capital
were made available by life insurance companies and savings and loan associations,
which increased the percentage of their total
assets invested in mortgages. Even if these actions represented a permanent shift in investment preferences, any further change in the
same direction appears less probable as a
further source of funds. For example, holdings
of Government bonds by insured savings and
loan associations at the end of 1955 were close
to the minimum required.
Not only were these funds obtained from
sources that could not he tapped as readily
ag.1in in the c·mTcnl year, hut they were also
parlia11y temporary, carrying an obligation to
he repaid i11 the near future. Retirement of
deht to the Federal }Iome Loan Bank
amounted to $300 million in the first seven
months of this year. Mortgages warehoused
by hanks contracted $274 million from November 1955 to May 1956, although the
volume had increased somewhat by August.
Despite this partial liquidation of temporary financing obtained in 1955, estimates
indicate that mortgages outstanding on 1- to
4-family nonfarm homes increased $5.8 billion in the first six months of 1956, compared
with a u£?:rowth of $6.5 billion in the same
mmiths of 1955. Among the major lenders,
life insurance companies furnished a greater
absolute amount, but commercial banks and
savings and loan associations purchased a
smaller share. Mutual savings banks acquired
the same amounts in each of the two half
years.
This brief consideration of the rate at
which capital rec€'ntly has flowed into the
housing market raises questions as to whether
the flow of total savings is sufficient to support a sustained high volume of house construction, especially if the sale of houses requires that an important proportion of the
loans be made on very liberal terms. The flow
of savings is more stable than the combination
Monthly Review •
October 1956
of mortgage and other requirements, and the
strong demands from other users of credit
are able to divert funds from the housing
market. The resources of institutions can be
expanded temporarily in meeting such developments, but the possibilities of obtaining
flexibility in this way are limited.
Demands for Mortgage Credit
While the flow of savings into the housing
market has accelerated to a point where
severe competition with other demands is
generated, recent changes in the demand for
mortgage funds have required a rising supply
to support a given number of housing starts.
Among the mor important influences leading
to this expansion have been the growing
volume of financing employed in the market
for existing houses, rising costs of construction, easier mortgage terms, and the financial
requirements of builders. The accompanying
chart compares the value of new house construction and the annual growth of mortgage
debt in recent years, indicating the more
rapid growth of the latter.
Transfers of the ownership of existing
houses generate a requirement for mortgage
credit when the equity of the buyer is less
VALUE OF CONSTRUCTION AND CHANGES
IN MORTGAGE DEBT, 1949-1955
81LLION5 OF DOI.LARS
Bl LL IONS OF DOI LARS
20
20
■ ~RIVATE NONfARM
RESIDENTIAL CON~TRUCTION
•
CHANGE lN MORTGAGE DEBT OUTSTANDING
ON I-TO 4-FAfllll..T PROPERTIES
15
15
10
10
0
0
1949
'50
'51
'52
'53
'54
'55
SOURCE: Department of Commerce, Department of Labor,
and Board of Governors of the Federal Reserve
System.
11
Residential Mortgage Market
than the equity of the seller. As individuals
accumulate an equity in their homes, through
amortization and rising prices, and as their
housing requirements grow, their houses are
sold to buyers having less extensive needs
and the equity is employed to aid in financing a new and more expensive dwelling. If
the buyer of the existing house should he a
veteran who makes no or a low down payment, the total demand for funds to finance
both the sale of the new and the existing
dwelling may approach the value of the addition to the stock of housing represented hy
the value of tlw n<'w hous<'. To the C'\tC'nt
that sellers of existing hous<'s do 11ot c-hoos<'
lo r<'invest their cntin• <'qnity in th<' pur<'hasc
of a Hew hous<', the need for credit in thl'
housing industry from other sources is expanded further.
An active housing market will produce
substantial demands for funds to finance
purchases of both new and existing houses,
but transfers of existing houses constitute a
larger share of the demand in some years
than in others. In 1919, the loans made in
financing purchases of existing houses under
FHA and VA programs constituted 42 per
cent of the total under th('SC programs. In
succeeding years, the proportion ranged
between 30 per cent in 1951 and 43 per cent
in 1955. In the three years 1953-55, about
$8.9 billion was employed under these programs in financing purchases of existing
houses and an unknown additional amount
was used for the purpose under conventional
programs.
During certain periods, the volume of
credit employed by the construction industry
may be a factor of some importance in the
aggregate demand generated by the housing
industry. Information on this demand is quite
fragmentary, but the data for savings and
loan associations show that construction loans
increased from $2,475 million in 1953 to $4,041 million in 1955 and have continued at
12
approximately the same rate this year. These
loans have short maturities and the volume
of loans made, therefore, does not accurately
indicate the amount of capital employed.
But when a weakening market forces builders to hold larger inventories of unsold units,
the length of these loans probably increases
and the capital used in carrying the stock is
expanded. The information reported by
larger banks on their loans for consh"uction
purposes generally confirms the data from
savings and loan associations. Bank loans
outstanding to builders rose hy almost $100
miJlion from 19,53 to thP end of 1955.
Equity requirements and tlw pri<"e-; of
ho111cs :tlso CX<'rt important influences i11 cstahlishing the volume of funds demanded.
Although equity requirements on conventional financing have been fairly stable, there
has been a trend in Government-sponsored
programs toward lower requirements and
higher maximum loan value. As this trend has
broadened the effective demand for houses,
it also has created large requirements for
mortgage credit. The price paid for houses
has advanced as a result of higher building
costs and increased family requirements that
have brought a demand for larg<'r, bettC'rcquipped units.
The combined effect of changes in equity
requiremC'nts and in housing prices on the
demand for funds can be illustrated with data
on VA financing of existing houses. In 1953,
VA loans closed averaged 82.1 per cent of
the purchase price of the dwelling, in comparison with an average of 88.4 per cent in
1955. The effect which this increase had
upon the demand for credit was further magnified by the advance in the average price of
homes financed from $10,717 to $11,343. The
average loan, therefore, increased from $8,800 to $10,027. If similar information were
available on the financing of new houses, it
probably would show an even greater increac;e in the average loan size.
Residential Mortgage Market
In summary, the demand for mortgage
credit has been expanded by liberal credit
terms, higher prices, the needs of construction
financing, and the increased amounts of
credit employed in trausfrrring the ownership of existing houses. Although sales of
new houses are stimulated by conditions
which improve the market for existing units,
the funds used to finance sal<'s of existing
units raise the aggregate demands of the
housing market and curtail the share available in the new house market.
Interest R t s
The varying d<'mands for mortgage fi11a11c·i11g pr<'ss against the supply of sa\ i11gs and
lc·ad to changes of inl<·n.·st ral<·s. Th<'S<'
changes, in turn, affect the ability and willingness of potential huycrs to obtain loans.
The long maturities under which many houses
are sold cause the cost of funds to be an important consideration in many cases. The
total interest paid on a 30-year loan of $10,000 at 4.5 per cent would be $8,232, but at a
5 per cent rate, the total would be $9,333.
Changes in interest rates also affect the
availability as well as the cost of funds under
the different types of financing. Since conventional loans are negotiated directly bC'tween the lender and the borrower, rates of
interest on these liens arc free to change in
response to fluctuations in market conditions.
This is not the case with FHA and VA loans,
for the laws under which these agencies operate prescribe maximum rates that can be
levied. In recent years, the rate has been
4.5 per cent for each type with an additional
charge of 0.5 per cent for FHA insurance.
When the market rate on long-term money is
equal to thc~e rates, lenders accept them at
par but when market rates exceed the permissible rates, guaranteed and insured mortgages will he pmchasC'd hy lC'nders only at a
discount.
The discount on insured and guaranteed
Monthly Review •
October 1956
liens will be determined by the spread between statutory and market rates and by the
maturity of the mortgage. For example, with
a market rate of 4.8 per cent, a 4.5 per cent
20-year mortgage for $10,000 sells for $9,800,
or at a discount of $200; a 30-year mortgage
carries a discount of $300. The two discounts
would he $400 and $500 if the market rate
of interest should rise to 5 per cent. Information on the average rate on mortgages in the
market is quite limited, for no agency systematically collects data on the rates for conV<'ntional or VA mortgages. The Federal
Housing l\clminislration has prc'parecl periodic
smv<'ys of the prc'va iling interest rates on
111ortgagcs liandl<'d hy its field offices. On th<'
hasi s of lh<'St' data, lh<' i11l<'rcst rate on 2.5ycar FI IA i11sure(l liens rose only from about
1.60 per cent in June 1954 to 4.64 per cent in
June 1955, hut in the following six months
rose more rapidly to 4.75 per cent. A further
small increase to 4.79 per cent had occurred
by August 1956. These swings of interest
rates are somewhat smaller than the changes
in yields of high-grade corporate bonds in the
same periods-perhaps indicating the imperfections of measurement resulting from widely different rates in various markets. But on
the assumption that these rates reflect with
reasonable accuracy the general movement
of rates in this market, the pinch on the supply of funds moving into residential mortgages appears to have been no greater than
that in other markets.
The appearance of discounts on insured
and guaranteed mortgages and their effects
upon the housing market have not been completely understood by the general public,
\\ ith the result that, at these times, lenders
have been accnsccl of malpractic<'s when they
were acting only in response to market forces.
[n turn, fear of the loss of good will on the
part of some lenders has caused the supply
of fund s to be restricted whf'n discounts prevailed on these loans.
13
Residential Mortgage Market
In the new house market, builders have
found it necessary to sell the mortgages obtained through sales of houses at the discounts prevailing but have been limited by
regulation against passing on to the buyer of
the house more than one point of the discount. Thus, a small discount may be borne
entirely by the buyer but as the discount increases above 1 per cent, it is borne by the
builder. The seller of an existing house is
allowed to pay any discount necessary to
obtain a loan, but he is not permitted to add
this amount to the price of the house. The
appearance of this cost and the agent's commission in many cases arc sufficient to alter
the intention of the seller. Where this occurs,
the demand for mortgage credit and possibly
for new housing is reduced.
Concluding Comment
The annual growth of mortgage credit
recently has been greater than the increase
in the supply of savings, and the housing
14
market thus has absorbed a greater share of
total new capital. This position in the market
was attained when the demands of otherssuch as consumers, businesses, farmers, and
government units-were not strong, but its
maintenance has been increasingly difficult
as the demands of others have increased. The
curtailment of supplies has fallen more heavily on insured and guaranteed mortgages
than on conventional loans, and the market
for houses financed under these programs
has been weaker than for those financed conventionally.
While the annual growth of mortgage
credit has demonstrated the ability of savings
institutions to support the expansion of the
housing supply, an important part of the
credit is flowing into the financing of existing houses. Even though a healthy condition
in this market is essential to the housing industry, this use of credit intensifies the difficulties of obtaining sufficient financing to
maintain an active demand for new houses.
CONSUMER AND BUSINESS INVESTMENT
PERSONAL CONSUMPTION EXPENDITURES
United States
81LLIOr~s
United States
C,F DO-LAP~
?O
rLL,Ct,.;S
SEASOIIIAL._Y ADJl,STED
OF DOLLARS
Rl'.TE.S
- 70
ANNUAL
60 -
BILLIONS OF "(LLAR~
160
IL LlOtliS OF DOLLARS
160
SEASONA .. LY ,,DJUSTED ,\NtJUAL RATES
- €0
120
50
NOl 1 DURABLE
-
GOODS
-
120
50
J
40
40
80
40
40
- 20
],,:,
I
I
I
1948
I
1
I '
I
I
l
~ J__,_.___._
10
'54
'52
L_..Ltl_,__
0
'56
1948
BANKING IN THE TENTH DISTRICT
Loans
Reserve
City
Member
Banks
District
and
States
Reserve
City
Member
Banks
Tenth F. R. Dist.
Kansas
0
- 2
Missouri *
Nebraska
Oklahoma *
Wyoming
+1
-1 +16
Colorado
New Mexico
-2
1
+3
+2
0 +10
-2
-2
Consumer Price Index
Country
Member
Banks
ug.
956
955
0
0
+4
+1
-1
+1
-2
+3
+15
-1
- 3
+1
0
0
+7
- 2
- 2
0
'54
0
'!')6
Aug.
19.56
July
1956
Aug.
1955
(1947-49 = 100)
116.8
117.0
114.5
Wholesale Price Index (1947-49=100)
114.6
114.0
110.9
Prices Rec'd by farmers (1910-14= 100)
237
244
232 r
Prices Paid by Farmers (1910-14 = 100)
288
287
280 r
TENTH DISTRICT BUSINESS INDICATORS
Di,trid
and Principal
Metropolitan
Value of
Check
Payments
*Value of
Residential
Building Permits
Percentage chanae-1956 from 1955
Areas
Aug.
Tenth F. R. Dist.
Value of
Department
Store Sales
ItoYear
date
Year
Auq.
to date
AuA,
Year
to date
+6
+3
-6
-30
+3
+6
+1
Denver
+9
+10
+9
+8
-14
- 40
Wichita
- 1
-1
+4
+2
- 8
-43
Kansas City
- 2
+4
+2t
- l t +1ut
Omaha
- 2
+2
-3
-3
+106
+5
+5
+s
-18
- 38
-25
- 25
- 2
+ 8
0
+2
-1
- 5
+1
- 6
*"'
**
0
+18
**
**
-1
+3
- 3
+8
- 2
+16
- 5
+ 1
**
**
0
+ 6
**
**
«Tenth District portion only.
111,,~
I I I
I
r Revised.
July
+1
I
Index
August 1956 Percentage Change From
July Aug . July Aug. July Aug.
1956 1955 1956 1955 1956 1955
I,
PRICE INDEXES, UNITED STATES
Deposits
Country
Member
Banks
··,o
0
+5
+1
+4
,;, ,, No reserve cities in this state.
Okla. City
Tulsa
*City 011ly.
+13
+4
+8
--
+9
I
+8
tKansos City, Mo., only.
- 7t
+48
:tKansos City, Mo., and Kans.
15
@FedFRASER