Full text of Economic Review (Federal Reserve Bank of San Francisco) : November 1961

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ALASKA

FEDERAL R E S E R V E B A N K OF S AN F R A N C I S C O

CALIFORNIA



TWELFTH

FEDERAL

RESERVE

T L o v sm J b sL fL

3 n

DISTRICT

1961

O k id

su e

Review of Business Conditions . . . .

page 222

Underlying Demand Factors
in the Housing M a rk e t....................page 230

UTAH

The Underlying Demand Factors
in the Fifties
Implications for the Future
Conclusions

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ARIZONA

Review of Business Conditions
in the periods betw een tu rn in g points
in the business cycle, w hen m ovem ents
in the econom ic indicators p resum ably should
be clearer, periods of u n certain ty can and do
develop. R ecen t developm ents in the eco n ­
om y are a case in point. A fter rising v igor­
ously fro m the low reached earlier in the year,
the econom y suffered a slight setb ack in Sep­
tem ber. A n u m b er of key m easures, including
the indu strial p ro d u ctio n index, registered d e ­
clines, while o th ers, such as retail trad e, failed
to show im provem ent fo r the period. W hile
it is tru e th a t the m onth was not w ithout its
b right spots and th at the d o m in an t cause of
the setb ack ap p ears to have been a co m b in a­
tio n of in d u strial strife and the w eather, such
a sp u tterin g m ovem ent clearly in tro d u ced a d ­
d itio n al elem ents of u n certain ty in to the
econom y. T h e ex p ansion th a t h ad tak en place
to th a t p o in t was to a considerable degree the
result of a tu rn ab o u t in inventory investm ent,
w hich, how ever, h ad begun to show som e
signs o f slow ing dow n. A tten tio n was being
increasingly focused on final dem and as the
source o f ad d itio n al expansion. W hat S eptem ­
b e r events d id was to obscure som e of the
im p o rtan t tren d s in final dem and th a t m ight
have been developing. M ore recen t d ata
(m o st of it p relim in ary ) give us som e ad d i­
tio n al insight as to the p ath th e econom y is
cu rren tly traversing. T he pictu re is by no
m eans clear, but there have been several fa ­
vorable developm ents. P relim inary d ata in d i­
cate th a t retail sales in O cto b er rose 2 p e r­
cent, after a p erio d of ap p ro x im ately 5 m onths
in w hich they show ed little change. T h e U n it­
ed States D ep artm en t of C om m erce estim ates
th a t sales rose to nearly $ 18.6 billion in O cto ­
ber, the highest figure since the record volum e
o f $ 1 8 .9 billion in A p ril 1960. T he O cto b er
increase is a ttrib u ted to larger new car sales
coupled w ith rising sales of ap p arel and gen­
eral m erch an d isin g stores. O cto b er sales of
new cars increased su b stantially ov er the S ep­

E

222

ven




tem b er level b u t w ere still 1 p erce n t below the
to tal fo r O cto b er 1960. It is possible, how ­
ever, th at the u n certain ties crea ted by the
series of strikes affecting this industry m ay
have been a restrain in g facto r on sales, for
exam ple, creatin g u n certain ty as to delivery
dates on certain m odels, so th a t the sales in
the com ing m onths m ay rep resen t a b etter
test of new car dem and.
In d u strial p ro d u ctio n recovered in O cto ­
b er to the A ugust level of 113 p ercen t from
112 in Septem ber. A u to assem blies increased
ab o u t o n e-fo u rth in O cto b er. A lthough there
w ere w ork stoppages at som e m a jo r auto as­
sem bly p lants and supplying industries during
the first two w eeks of the m o n th, the effect of
these stoppages was less th a n in S eptem ber.
B o th business and defense eq u ip m en t o u tp u t
rose fu rth er in O cto b er to a level ab o u t 5
p ercen t above th e p revious reco rd high
reached in m id -1960. Iro n and steel o u tp u t
show ed little rise, b u t the p ro d u ctio n of m ost
o th e r m aterials rose in O cto b er from the te m ­
p orarily red u ced levels in S eptem ber.
T o tal em ploym ent, according to p relim ­
inary figures, increased in O cto b er to a rec­
o rd 67.8 m illion (seasonally a d ju ste d ). M ost
o f this increase, how ever, was in th e agricul­
tu ral secto r of the econom y w hich w as ad ­
versely affected by the unusual w eath er co n ­
ditions in the p rio r m onth. It is possible,
th erefo re, th a t this m o n th ’s gain represents
a re tu rn to m ore n o rm al conditions. U nem ­
ploym ent (u n a d ju ste d ) fell below the 4 m il­
lion m ark fo r the first tim e this year, b u t it
usually declines d u rin g O cto b er and the sea­
sonally adjusted u n em ploym ent rate rem ained
at 6.8 percent. T h ere w ere a n u m b er of
changes in the B u reau of E m p lo y m en t Secu­
rity ’s classification of the m ajo r lab o r m ark et
areas during O cto b er, all in the direction of
im provem ent. F o u r of these areas (B altim o re,
St. L ouis, Seattle, and F lin t) w ere reclassified
to areas of “m o d erate u n em p lo y m en t” from

November 1961

MONTHLY REVIEW

th e “ substantial u n em p lo y m en t” category.
T h e n u m b er of m ajo r areas of “ su b stan tial
u nem p lo y m en t” now stan d s at 68 co m p ared
w ith the alltim e high of 101 during M arch and
A pril of this year.
T he to tal dollar volum e of co n stru ctio n
p u t in place declined slightly in O cto b er due
to a m in o r reduction in p rivate co n stru ctio n
activity. T he estim ated $ 5 8 .4 billion was 0.3
p ercen t below the reco rd level attain ed in
S eptem ber.
D evelopm ents in the m oney an d capital
m arkets seem ed to reflect the seasonal n atu re
of the recent changes in the nonfinancial sec­
tors, although prices in the stock m ark et, after
a n u m ber o f reverses in S eptem ber and O cto ­
ber, advanced sharply in th e second w eek of
N ovem ber. T he U nited States T reasu ry con­
tinued to dom inate th e m oney an d capital
m arkets, w ith borrow ings co n d u cted in the
p erio d from S eptem ber th ro u g h N o v em b er
expected to cover all of the large deficit in the
calen d ar year. D em ands fo r b o th long- and
sh o rt-term private credit have been m o d erate,
w ith b a n k cred it developm ents in recent
w eeks influenced m ainly by T reasu ry financ­
ing. D uring the four-w eek p erio d ended N o ­
v em ber 1, loans adjusted an d investm ents at
w eekly rep o rtin g m em ber ban k s increased by
$1.3 billion. T he business loans of these b anks
rose by only a m odest am o u n t ($ 3 0 9 m il­
lio n ), and m ost of this increase cam e in th e
final w eek of the period. In O cto b er an d th e
early p a rt of N ovem ber, th e average level of
req u ire d reserves of all m em b er b an k s was
higher th a n in S eptem ber, w hile free reserves
declined som ew hat. W ith co n tin u ed ease in
b a n k reserve positions an d only m o d erate
p rivate credit dem ands, in terest rates show ed
little change in m ost of this p erio d . S h ort-term
rates did, how ever, m ove u p ap p reciab ly in
the second w eek of N o v em b er as the p re s­
sures of additional T reasu ry bill issues and
a less easy reserve po sitio n w ere felt.




Meanwhile, back in the District
C ivilian em p lo y m en t1 in the Pacific C oast
States, w hich rose 0 .2 p ercen t in Septem ber
fro m A ugust, increased an ad d itio n al 0 .4 p e r­
cen t in O ctober. U n em ploym ent in these
states d ro p p ed by alm ost 3 p erce n t in O cto ­
ber, low ering the rate of u n em p lo y m en t to
6.8 p ercen t of the la b o r force, th e sam e as in
th e nation. O cto b er was th e first m onth since
F e b ru a ry 1961 th a t th e ra te of u n em ploy­
m en t on the W est C oast h ad been u n d er 7.0
p ercen t. T he n u m b er of unem ployed, how ­
ever, was m o re th a n 5 p ercen t above F e b ru ­
ary, in co n trast to a d ro p o f 1 p ercen t in the
n atio n as a w hole. In su red unem ploym ent
u n d er the state p ro g ram s reach ed a high
n ationally in F eb ru ary an d has b een falling
steadily since. In th e D istrict the co m p arab le
p e a k did n o t o ccu r until July, and although
th ere was a 4 p ercen t d ro p in S eptem ber, in ­
sured em ploym ent w as still 5 p erce n t greater
th a n in F eb ru ary . P relim in ary d a ta fo r O cto ­
b er show ed th a t in su red un em p lo y m en t in
th e D istrict fell co n siderably an d was below
the co m p arab le 1960 level fo r the first tim e
this year.
D istrict n o n ag ricu ltu ral em ploym ent in ­
creased in S eptem ber by 0 .4 p erce n t to an alltim e high of 7.2 m illion w orkers, w hich was
2 p ercen t above F e b ru a ry 1961. G ains oc­
cu rred in every in d u stry group except the
tra n sp o rta tio n an d p u b lic utilities category.
A lthough the largest m onthly increase was in
co n tract co n stru ctio n em ploym ent, this was
chiefly the resu lt of a recovery fro m th e effects
of la b o r disputes in th e Pacific C oast States
d u rin g July and A ugust. C o n stru ctio n em ­
p loym ent in th e D istrict in S ep tem b er was
still below th e F eb ru ary level (0 .6 p e rc e n t),
and average em ploym ent in th e industry d u r­
ing the first nine m onths of 1961 w as 9,6 0 0
less th a n th e average during the com parable
p erio d in 1960. O nly co n stru ctio n and tran s1 Em ploym ent data are seasonally adjusted except as noted.

223

FEDERAL RESER VE B A N K OF SAN F R A N C I S C O

N u m b e r o f w a g e a n d s a la r y
w o rk e rs a n d to ta l m a n h o u rs of
production workers in Pacific Coast
manufacturing continue to increase
Index, 1 9 5 7 -5 9 = 100

Note: Data are seasonally adjusted.
Source: State departm ents of employm ent.

p o rtatio n em ploym ent were below the Sep­
tem b er 1960 levels; the largest y ear-to -y ear
increase was in governm ent em ploym ent (4 .6
p e rc e n t), particu larly state an d local.
In O cto b er, no n ag ricu ltu ral em ploym ent
in the Pacific C oast States rose 0.3 percent.
A ll in d u stry groups show ed gains except
tra n sp o rta tio n and public utilities, w here em ­
ploym ent was affected by the W est C oast
m aritim e lab o r dispute, and m ining and trad e,
w here em ploym ent was unchanged. T h e larg ­
est gain was in co n tract co n stru ctio n caused
in p a rt by a co n traseaso n al rise in activity in
C aliforn ia. M an u factu rin g wage and salary
em ploym ent increased 0.5 percent as em ploy­
m ent in b o th d u rab le and n o n d u rab le goods
m an u factu rers rose above S eptem ber.
M an u factu rin g p ro d u ctio n w orkers in the
D istrict earn ed $ 2 .7 0 p e r h o u r and w orked
a n average of 39.5 hours d u rin g S eptem ber,

224

a d ro p of 0 .2 hours from A ugust and the
shortest w orkw eek since M arch of this year.
F ew er hours w ere w orked in lum ber and w ood
pro d u cts, fu rn itu re an d fixtures, p rim ary and




fab ricated m etals, an d all the n o n d u rab le
goods industries.
T he B u reau of E m p lo y m ent S ecurity in
O cto b er reclassified Seattle, W ashington
from an area of su b stan tial unem ploym ent
(6 .0 p ercen t to 8.9 p e rc e n t) to one of m o d ­
erate unem ploym ent (3 .0 p ercen t to 5.9 p e r­
c e n t). A sh arp rise in tra n sp o rta tio n e q u ip ­
m ent m an u factu rin g em p lo y m ent was one of
the p rin cip al factors u n derlying this reclassi­
fication. O f the 15 m ajo r la b o r areas in the
D istrict, 8 now rem ain classified as areas of
su b stan tial un em p lo y m en t (6 .0 to 8.9 p e r­
c e n t) ; they are F resn o L os A ngeles-L ong
B each, San B ern ard in o -R iv ersid e-O n tario ,
San D iego, Stockton, P o rtlan d , S pokane, and
T acom a.

Construction up in September
C o n stru ctio n co n tracts in the am o u n t of
$591 m illion w ere aw ard ed in the D istrict
du rin g S eptem ber, u p 5 p ercen t fro m the c o r­
responding m onth last year. This is in co n ­
tra st with the nation as a w hole, w here co n ­
tracts let w ere 4 p erce n t below S eptem ber
1960. This difference was due to the fact th a t
residential co n tracts rose a little m ore in the
D istrict ( + 16 percent co m p ared w ith -(-8
percent in the n a tio n ), and nonresidential
aw ards fell som ew hat less ( — 6 percen t co m ­
p ared with — 13 p e rc e n t), as did co n tracts
let for public w orks an d utilities construction
( — 5 p ercen t co m p ared w ith — 11 p e rc e n t).
T h e decline in n o n resid en tial aw ards in the
D istrict o ccu rred p rincipally in the e d u c a ­
tional and science building category. This
m ay have been in the n atu re of an erratic
m ovem ent, how ever. O n a cum ulative basis,
the level of aw ards fo r this type of co n stru c­
tion is still above 1960. T h e low er level of
co n tracts let fo r public w orks an d utilities
co n stru ctio n was due to a decline in utilities
co n tracts. S treet an d highw ay contracts
aw arded w ere slightly above a year ago. T he
increase in residential co n tracts was reflected

MONTHLY REVIEW

November 1961

C o n stru ctio n im p ro v e s m o re in
D istrict than in the nation
P t r o n l Change

been in large m easure responsible fo r the
fact th a t the tren d in overall D istrict co n ­
struction in the cu rren t recovery and ex p an ­
sion has com p ared favorably with the p rio r
one. C urrently, how ever, this type of co n ­
stru ctio n activity ap p ears to be providing less
im petus.

Vacancy rate trends and the multiple
dw elling unit construction “ boom”

N ote: D ata are the value of construction contracts for both the
D istrict and the nation. T he percent changes are based on a
comparison of the cum ulative m onthly totals for this year with
the corresponding periods in 1960.
Source: F . W. Dodge Corporation.

in b o th single-fam ily and m ultiple u n it dw ell­
ings.
O n a cum ulative basis th ro u g h Septem ber,
y ear-to -y ear com parisons of co n tracts aw ard ­
ed still show m ore vigor in D istrict co n stru c­
tion activity th an in the nation as a w hole
( - |- 16 p ercen t vs. + 3 p e rc e n t). T his is due
to the fact th a t nonresidential co n stru ctio n
has been holding up b etter in the D istrict
( + 7 p ercent vs. — 1 p e rc e n t) an d because
heavy engineering constru ctio n has expanded
m ore in the D istrict ( —
| - 16 p ercen t vs. -f-3
p e rc e n t). T he rap id increase in the la tte r has
COMPARATIVE RATES OF CHANGE IN DISTRICT
CONSTRUCTION CONTRACTS LET, FIRST 5 AND 9 MONTHS
OF 1961 AND 1960 AND CORRESPONDING PHASES
OF 1958 AND 1957

Construction

1961
1961
1958
1958
(Jan.-May) (Jan.-Sept.) (March-July)(March-Nov.
1960
1960
1957
1957
(Jan.-May) (Jan.-Sept.) (March-July)(March-Nov.

12.1

16.3

9 .0

7.5

Residential

1.6

5.5

28.1

Nonresidential
H eavy
Engineering

6 .7

6.8

5.8

28.0
8.0

4 8 .0

15.9

Total

N ote: D a ta are not seasonally adjusted.
Source: F. W. Dodge Corporation,




-1 2 .5

-2 0 .7

S eptem ber d ata recently available on v a­
cancy rates and the unsold inventory of new
hom es in the P o rtlan d area indicate som e im ­
p rovem ent in th e m ark et for single-fam ily
hom es from M arch 1961. O n the o th e r hand,
ap artm en t vacancies in th a t area increased
over th e sam e period. W hile m ore recent d ata
on vacancy conditions in m ost o th e r m etro ­
p o litan areas in the D istrict are n o t yet avail­
able, th ere is sim ilarly evident in those areas
increasing levels of m ultiple u nit co nstruction
and a level of single-fam ily u nit co nstruction
th at is below 1960.
W hile there is no sim ple ex p lan atio n fo r in ­
creasing ap artm en t co n stru ctio n in the face
of relatively high vacancy rates, som e of it
m ay be due to the m obility of th e po p u latio n
and industry. In San D iego, fo r exam ple, it is
rep o rted th at the high vacancy rate in ap a rt­
m ent buildings is having little effect on m ul­
tiple dw elling unit co n stru ctio n because v a­
cancies are in buildings th a t are lo cated in
areas w here fam ilies do n o t w ant to live. It
is also suggested th at som e of the im petus m ay
be com ing from builders w ho are finding it
difficult to m ake m oney by building single­
fam ily units o n high-priced land. T h eir solu­
tion ap p aren tly is to build “ u p .” F inally, there
is a hypothesis th a t m uch of the stim ulus
com es from o u r tax laws w hich have m ade in ­
vestm ent in m ultiple dwellings attractive b e­
cause of an accelerated d epreciation provision
th a t was in tro d u ced in the m id -1 9 5 0 ’s.
W h eth er o r not ap artm en t construction in
the D istrict (as in the n atio n ) is solidly based

225

FEDERAL RESERVE BAN K OF S A N F R A N C I S C O

is difficult to judge. T h ere is, how ever, one
long-term facto r th a t augurs well fo r th e fu ­
tu re, and th a t is th e likelihood th a t the su b ­
stan tial increase in household form ations ex ­
p ected to begin in the m id-sixties will add
households to o u r p o p u la tio n w ho will be
ap a rtm e n t dw ellers, initially at least. F u rth e r
discussion of housing prospects is co n tained
in the co m p an io n article in this R eview .

Lumber production cutback in October;
prices up
P relim in ary figures indicate a cu tb ack in
D istrict lu m b er p ro d u ctio n d u rin g the m o n th
of O cto b er. D ouglas fir o u tp u t during the
m o n th fell 4 percent below S eptem ber p ro ­
d uctio n and, co n trary to previous experience,
w as below new o rd ers received d u rin g O cto ­
ber. W estern pine mills ap p aren tly k ep t p ro ­
d uctio n below new orders also, b u t, acco rd ­
ing to these p relim inary figures, pine o u tp u t
in O cto b er w as slightly above the S eptem ber
level.
L u m b er prices, w hich h ad fallen in the
early p a rt of O cto b er to a level eq u al to the
w inter low of last year, picked up du rin g the
la tte r p a rt of the m onth. T he price of green
fir tw o-by-fours, an im p o rtan t hom e-building
item , rose to $60 a th o u san d b o ard feet from
a $57 price in early O cto b er. This price in ­
crease w as ap p aren tly due to the b etter m a r­
ket b alan ce achieved by cu tbacks in p ro d u c­
tio n ra th e r th a n to any noticeable im p ro v e­
m ent in d em an d according to industry rep o rts.
T h ere has b een no indication of a change in
the $ 6 0 sanded fir plyw ood price established
in early O cto b er.

District steel production steady;
scrap copper prices fall

226

A fte r increasing d uring the first tw o w eeks
of O cto b er, D istrict steel p ro d u ctio n leveled
off d u rin g the next three-w eek period. A l­
thoug h th e W estern index fell to 116 d uring
the w eek en d ed N o v em b er 4 fro m 121 in th e




p rio r w eek, over the entire th ree-w eek period
the w eekly p ro d u ctio n d a ta indicate little
change from the early p a rt of O ctober. Steel
p ro d u ctio n in the n atio n declined slightly
o ver the sam e period. W hile there has been
considerable specu latio n ab o ut the prospects
of a p ickup in d em an d fro m the au to industry
and of cu sto m er in ventory b uilding p artly as
a hedge against a possible steel strike next
year, n eith er is ex p ected by the in d u stry to
have m uch im m ediate effect on steel p ro d u c ­
tion eith er in the n atio n o r in the D istrict.
T he price of scrap co p p er has declined in
recent weeks. A t th e end of the first w eek in
N ovem ber, sm elters w ere rep o rte d to be b id ­
ding 2 4 Ya to 25 cents a p o u n d fo r scrap co p ­
per. T he price of refined co p p er m ade from
scrap at these prices is estim ated to be ab o u t
30 to 30V4 cents a po u n d . H ow ever, the p ro ­
d u cer price fo r refined co p p er rem ain ed a t 31
cents. T he d em an d fo r co p p er du rin g recent
w eeks is said to be less active th a n it has been,
b u t p ro d u cers still hope th a t N ovem ber sh ip ­
m ents will m atch th e relatively high level of
O ctober. This hope seem s to be based, in
p art, on the expectatio n th a t dem ands from
th e autom obile in d u stry will pick up.

October department store sales down
from September
D istrict d ep artm en t store sales in S eptem ­
b e r rose 8 p ercen t above the A ugust level to
reach a new record high fo r the seasonally a d ­
ju sted series. M uch of this increase appears
to have resulted fro m su b stan tial gains th a t
o ccu rred in m e tro p o litan areas w hich h ad
new store openings an d from p rom otional
sales w hich w ere held generally th ro u g h o u t
th e D istrict. P relim in ary seasonally adjusted
estim ates fo r O cto b er indicate th a t sales
d ro p p ed about 5 p erce n t fro m the S eptem ber
level, though they w ere 3 p erce n t above a year
ago. T he areas w ith new stores continued to
show gains co m m en su rate w ith those in Sep­
tem ber, b u t this w as m ore th a n offset by de­

November 1961

MONTHLY REVIEW

clines in o th er areas, p articu larly the L os
A ngeles-L ong B each area. N ationally, d e p a rt­
m ent store sales for O cto b er w ere up ab o u t 1
p ercen t from Septem ber.
D aily average new car registrations in
C alifornia during S ep tem b er w ere at th eir
low est level for the year, 1,484. In the first
h alf of the m onth, daily average sales w ere
above the A ugust daily average, b u t during
the second half of the m onth they d ropped
substantially, in spite of the intro d u ctio n of
new m odels to w ard the end of the m onth.
C alifornia consum ers, how ever, evidently b e­
gan to resp o n d to the new m odels in the first
p a rt of O ctober, because d u rin g the first ten
days of the m onth, daily average sales reached
2 ,116.

Farm income flow continues to rise;
use of credit also higher
R etu rn s from D istrict farm m arketings
d uring Septem ber w ere up 6 p ercen t from a
y ear earlier. This increase help ed raise to tal
receipts for the first three q u arte rs of the y ear
to an am ount only slightly below th e co m p ar­
able period of 1960. D uring the first half of
the year, the receipts of D istrict farm ers were

Fa rm in co m e in the D istrict p icks
up in r e c e n t m o n t h s

dow n ab o u t 4 p ercen t from a y ear earlier, b u t,
w ith gains occurring in retu rn s from bo th
crops and livestock m arketings d uring the
th ird q u arter, practically all of the incom e
deficit at m idyear has been elim inated.
R esponses to a recent inquiry am ong banks
in the D istrict indicate th a t th ere has been an
increase in the volum e of credit extended to
farm ers by m erchants and dealers as well as
by com m ercial banks. D espite the larger vol­
um e of credit ou tstan d in g th a t is held by com ­
m ercial banks, loans are generally considered
in good co ndition w ith delinquencies and carryover$ at a m inim um . H ow ever, there were
som e exceptions in localized areas. A n in ­
crease in the carry o v er of loans is expected
in the w h eat-producing areas of eastern
W ashington and in the dryland farm ing areas
of U tah because of unfavorable grow ing co n ­
ditions. O f all th e types of m ajo r farm en te r­
prises in the D istrict, sheep p ro d u cers are ap ­
paren tly in the m ost depressed financial co n ­
dition, w ith prices continuing to sag. A fu r­
th er increase in the carry o v er of loans to such
p ro d u cers is anticipated, as well as an increase
in the carry o v er of loans to farm ers in areas
of A rizona w here shortages of g round w ater
have occurred. A n o th er w inter O f subnorm al
m oisture m ay be expected to sp read financial
difficulties over a b ro ad er area of the D istrict.

M il lio n s of D o lla r s

Loans, investments, and deposits
increase at District banks

N ote: M onthly farm income in 1961 compared with correspond­
ing m onth in 1960.
*The same as in M ay 1960.
Source: U nited States D epartm ent of Agriculture.




F ro m m id-S eptem ber to th e first of N ovem ­
ber, to tal b an k credit o u tsta n d in g 1 at w eekly
rep o rtin g m em b er ban k s in the Tw elfth D is­
trict rose nearly $450 m illion. T h e gain was
ab o u t equally divided betw een loans an d in ­
vestm ents. B usiness borrow ing w as the m ost
im p o rtan t facto r co n trib u tin g to the loan in ­
crease. Seasonal dem ands of food, liquor and
tobacco processors, and of com m odity d eal­
ers, w holesalers, and retailers augm ented a
general increase in business loan d em an d in
1 Adjusted to exclude valuation reserves and loans to domestic
commercial banks.

227

FEDE RAL RE S ER V E B A N K OF S A N F R A N C I S C O
C H A N G E S IN S E L E C T E D B A L A N C E S H E E T IT E M S O F
W E E K L Y R E P O R T IN G M E M B E R B A N K S IN L E A D IN G C I T I E S
(dollar amounts in m illions)
Tw elfth D istrict

From Sept. 20, 1961
to Nov. 1, 1961
Dollars
Percent

ASSETS:
Total loam and investments
Loans adjusted and investmentst
Loans adjusted1
Commercial and industrial loans
Real estate loans
Agricultural loans
Loans for purchasing and
carrying securities
Loans to non-bank financial
institutions
loans to domestic commercial
banks
Loans to foreign banks
Other loans
U. S. Government securities
Other securities
LIABILITIES:
Demand deposits adjusted
Time deposits
Savings accounts

+
+
+
+
+
—

346 +
443 +
192 +
130 +
20 +
7 —

1.37
1.78
1.23
2.40
0.37
0.93

United States

From Nov. 2, 1960
to Nov. 1, 1961
Dollars
Percent

+ 2,258
+ 2,299
+ 568
+ 246
52
+
54
+

+
+
+
+
+
+

9.69
9.97
3.72
4.65
0.97
7.79

From Sept. 20, 1961
to Nov. 1, 1961
Dollars
Percent

+ 1,647
+ 1,547
+ 818
+ 159
+ 119
65
+

+
+
+
+
+
+

1.40
1.33
1.15
0.50
0.91
5.68

From Nov. 2, 1960
to Nov, 1, 1961
Dollars
Percent

+ 8,421
+ 8,323
+ 2,203
+ 235
+ 405
+ 109

+ 7.62
+ 7.63
+ 3.16
+ 0.74
+ 3.15
+ 9.90

+ 7.26

+

964

+ 27.00

162

— 2.94

+

37

+ 18.88

+

76

+ 48.41

+

+

16

+

1,98

+

18

+ 2.24

—

16 — 0.30

—

— 97 — 32.33
+
6 + 2.96
— 4 — 0.13
+ 268 + 3.91
— 17 - - 0.71

—

+

+

—

100 + 7.51
27 — 4.89
211 + 1.30
906 + 2.73
177 — 1.51

+
—

703
299
459

+ 1,633
+ 6,499
n.a.

+ 303
+ 149
+ 206

+ 2.61
+ 1.14
+ 1.97

41 — 16.80
30 + 16.76
114 + 3.73
+
+ 1,376 + 23.96
+ 355 + 17.58
+ 517
+ 1,707
+ 1,043

+ 4.54
+ 14.80
+ 10,86

+

+
—
+
+
+

307

+ 1.12
+ 0.73
+ 1.57

98 + 7.35
164 — 23.80
+
929 + 5.98
+ 4,400 + 14.82
+ 1,720 + 17.52
+ 2.64
+ 18.72
n.a.

n.a. N o t available.
1 Exclusive of loans to domestic commercial banks and after deduction of valuation reserves; individual loan items are shown gross.
Sources: Board of Governors of the Federal Reserve System and Federal Reserve Bank, of San Francisco.

228

the last w eek o f O cto b er to b ring ab o u t the
largest w eekly rise in business loans so far
this year. L o an s to petroleum and m ining
firms also rose early in O cto b er w hen a n u m ­
ber o f D istrict banks p articip ated in a n a­
tional bank loan syndicate w hich financed the
p u rch ase of a large p etroleum com pany. F o r
this six-w eek perio d as a w hole, there is som e
o v erstatem en t in the total net change in b usi­
ness loans due to adjustm ents m ade to c o r­
rect for loans previously m isclassified in bank
reports. In the accom panying table, the “ all
o th e r lo a n ” classification, w hich is chiefly
consum er loans, shows a sm all decline. W hen
adjustm en t is m ade fo r previouly m isclassi­
fied loans, how ever, this category show s an
actu al u p tu rn in the la tter p art of O ctober.
T his w ould indicate th a t the usual seasonal
increase in consum er borrow ing at this time
of year is tak in g place. R eal estate loans co n ­




tin u ed to rise during the la tter half o f Sep­
tem b er and in O cto b er b u t at a som ew hat
slow er pace th an in the preceding four-w eek
p erio d . Securities dealers reso rted m ore h eav ­
ily to b an k borrow ing as a consequence of
T reasu ry financing o p eratio n s, and loans to
sales finance com panies w ere also up during
this period.
T he increase in U nited States G o vernm ent
security holdings at D istrict w eekly reporting
banks in the la tter half of S eptem ber and in
O cto b er was co n ce n trate d in T reasu ry bills
and in securities in the 1-5 year m aturity
range. T he latter increase was a result of
bank acquisitions of the 3 J/ i percent notes of
M ay 15, 1963 in the T rea su ry offering of
O cto b er 11. A sizeable reduction occu rred in
holdings in the u n d er-o n e-y ear range, and,
as is usual at this tim e o f year, there were
num erous switches by individual banks be-

November 1961

MONTHLY REVIEW

tween m aturity categories, in part for tax
purposes.
D istrict .banks were generally in a tighter
reserve position in the last half of September
and in O ctober, as higher reserves were re­
quired to cover increases in tax and loan ac­
counts resulting from purchases of Treasury
securities in the recent offerings. O n balance,
however, D istrict banks were net sellers of
F ederal funds for the period as a whole.
Total deposits of weekly reporting m em ber
banks registered a substantial gain in this pe­
riod. D em and deposits adjusted were up $300
million. The continued sharp rise in savings
deposits more than offset reductions in time
deposits of states and political subdivisions
and of other time deposits.
As illustrated in the accom panying table,
the percentage increase in loans, investments,




Percent change from March 1, 1961
to September 27, 1961
U. S. less
Twelfth District
Twelfth District

Loans, net
Investments, total
U. S. securities
Other securities
Total deposits
Demand deposits
adjusted
Time deposits

2 .8 7
13,5 6
13.79
12.92
5 ,2 7
4.0 9
8.41

2.82
8.66
9.46
1.08
3.55
2.56
9.19

and deposits at all Twelfth D istrict member
banks from the business trough in February
through Septem ber continued to exceed that
for all m em ber banks in the rest of the nation.
O n the basis of weekly reporting m em ber
bank data, the D istrict in O ctober continued
to outpace other weekly reporting banks in
gains in investments and deposits, but
dropped behind the rest of the country in the
percent increase in net loans.

R e v ise d In d e x e s of Em p loym en t
(1 9 4 7 -1 9 4 9 =

100)

The index bases for Twelfth D istrict total nonagricultural em ploym ent and total m anufacturing em ploym ent
have been adjusted to reflect the revisions necessitated
by the changes in the 1957 Standard Industrial Classifi­
cation codes.

229

Underlying Demand Factors
in the Housing Market

N a n earlier article in this R e v i e w it was
suggested that potential housing dem and
did not appear to be as strong as it was earlier,
and that this m ight be an im pedim ent to a
strong upswing in residential construction
com parable to those which began during the
periods of overall econom ic decline in the
years 1949, 1954, and 1958. The course of
events during the past year has supported this
view. R esidential construction has picked up
since the beginning of 1961, but the expan­
sion that has taken place is of modest p ro p o r­
tions. The average num ber of housing starts
in the third quarter of this year was only 3
percent above the level which prevailed
when business activity turned dow n in M ay
1960, w hereas in prior cycles, after a simi­
lar tim e interval, home building was sub­
stantially above the level which existed at the
preceding peak in business activity (30 p er­
cent in 1958 and 28 percent in 1 954). C er­
tainly there is nothing novel about the point
that underlying dem and conditions are less

I

230

1 See “ The Current Housing Situation in Perspective,” Federal
Reserve Bank of San Francisco M onthly Review, September
I960.




buoyant than they were earlier in the postw ar
period, nor is it likely th at many people have
been surprised by the relatively m odest ex­
pansion in home building that has taken place
since the beginning of the year. N um erous
statem ents have been m ade that housing de­
m and is w eaker than it was earlier, but there
are relatively few systematic and detailed
analyses of why this is so. While it is im por­
tant to be right in judgm ents, if the right an­
swer is reached for the wrong reasons, judg­
m ents concerning future prospects can easily
miss the m ark.
The purpose of this article is to consider
in some detail the underlying dem and con­
ditions in the housing m arket, with particu­
lar em phasis on experience in the decade of
the fifties. The concern with recent historical
experience is partly a m atter of necessity due
to the incomplete and im precise nature of
current housing dem and m easures. It is also
a m atter of choice, however, because of the
relevance of th at experience to an evaluation
of the current period. In some respects, events
in the housing m arket during the fifties appear

November 1961

MONTHLY REVIEW

to be unique in term s of our overall historical
experience. F or exam ple, although popula­
tion and replacem ent factors are usually con­
sidered the main sources of new housing de­
m and over longer periods of time, the level
of home building was well above the expand­
ing physical requirem ents generated by those
two factors. The relevance of this to current
discussions of housing dem and arises from the
fact that the magnitude of the “ need” for new
housing these two factors are expected to
generate during the next three to four years
does not differ significantly from that of the
fifties. Consequently, if the peak levels of ac­
tivity that were attained during the past dec­
ade are to be reached again in the m ore im m e­
diate future, the level of new construction will
have to rise above these requirem ents. Is this
likely to happen? The perspective gained
from the analysis in this article is intended to
help in evaluating the likelihood of w hether it
will.

THE UNDERLYING DEMAND FACTORS
IN THE FIFTIES
Demographic factors and
replacement demand
The overall dem and for housing depends,
fundam entally, on the size of the population
and on how it chooses to organize itself into
separate social units. Because of the size of
our housing stock, however, m ost of this de­
m and is satisfied by existing dwelling units.
New construction is usually dem anded only
when there is population growth or when
units are removed from the existing stock.
T hat is why dem ographic factors and the dem ­
olition of existing units are em phasized as
“ underlying” forces in the study of new hous­
ing dem and. D em ographic factors refer to all
those things which affect the size of the house­
hold population, the most im portant of which
are the changing size and age com position of
the population. The focus is on households
simply because the household is the social




unit occupying the dwelling unit. R eplace­
m ent dem and arises, of course, when units
are removed from the existing stock, either
intentionally or unintentionally, with inten­
tional removals growing in im portance in re­
cent years due to the expansion of u rban re­
developm ent, slum clearance, and highway
construction program s.
How im portant were dem ographic and re­
placem ent factors in the decade of the fifties?
A lthough our inform ation is incomplete, data
from the 1956 N ational Housing Inventory
indicate they were the two prim ary sources
of housing dem and from A pril 1950 through
D ecem ber 1956. D uring that period the sum
of net household form ations plus the num ber
of housing units rem oved from the stock was
equal to m ore than 80 percent of the total
num ber of units added to the stock (Table 1 ).
The m ost revealing aspect of these figures,
however, is that they show the sum of these
two to be less than the total. Thus, the 1956
N ational Housing Inventory indicates there
were sources of dem and other than the ex­
pansion in physical requirem ents generated
by dem ographic and replacem ent factors d ur­
ing the first seven years of th at period.
The course of events over the rem aining
three years was undoubtedly much the same.
Household form ations and replacem ent de­
m and provided the basis for most of the new
construction, but not all of it. W hen units are
added to the stock at a rate which exceeds
the expansion in the physical requirem ents,
the result is a rise in the num ber of vacant
units in the existing stock, as clearly hap­
pened during the period covered in the 1956
N ational H ousing Inventory (T able 1 ). The
steady rise in the vacancy rate over the last
three years of the fifties, therefore, suggests
that the level of new construction rem ained
above the level of household form ations and
replacem ent dem and during that period.
The rate of construction can, and often
does, rise above the rate of household for-

F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O

T

a b le

1

N E T C H A N G E S IN H O U SIN G

IN V E N T O R Y

1950 through 1956
(thousands of dwelling units)
Total number of dwelling
units added to stock

New construction
Conversions

Other sources*
TOTAL

Sources of demand

10,920

Net household formations

7,04 8

708

Units removed from stock
Demolitions
Merger
Other means**

3,2 1 6
1,131
672
1,413

943
12,571

Increase in vacancies
TOTAL

2 ,3 0 7
12,571

‘ Units created from nonresidential space, units created from living quarters classified as nondwelling unit quarters in 1950, etc.
**Units lost by change to quasi-dwelling unit, by change to nonresidential space, etc.
Source: United States Bureau of the Census.

m ations and replacem ent needs during rela­
tively short periods of time, but this is usu­
ally associated with the cyclical movements
that characterize the industry. W hen it con­
tinues over an extended period of time, how ­
ever, as it did in the 1950’s, there must be
additional sources of dem and. Such dem and
in the fifties accounted for nearly one-fifth of
the total. Obviously, during th at period a large
num ber of “established” households moved
from units in the existing stock into newly
constructed ones. It is necessary, therefore,
to analyze why these households chose to
move. M uch has been made of the im por­
tance of income and credit factors as deter­
m inants of dem and through this period, and
rightly so. Rising incomes along with the in ­
creased availability of mortgage funds at more
liberal term s undoubtedly had much to do
with bringing families into the housing m ar­
ket, but this statem ent leaves unansw ered the
fundam ental question that arises in consid­
ering the underlying sources of this dem and.
Why were there so many families ready to
take advantage of these favorable income and
credit conditions?

Unsatisfactory housing arrangements
as a source of potential demand

232

There are a num ber of reasons which,
when coupled with the evidence that is avail­
able, suggest that most of the dem and in the




fifties came from families who found their
housing arrangem ents wanting both in term s
of size and “quality.” These families entered
the m arket to buy bigger and better homes,
thereby upgrading their housing standards.
Throughout o u r history there have always
been families who were dissatisfied with their
housing arrangem ents; they are with us now
and undoubtedly will continue to be with us
for some time to come. There were, however,
relatively more of them at the beginning of
the fifties.
The seeds of much of this dissatisfaction
appear to have been sown a num ber of years
before. O ne factor, for exam ple, that u n ­
doubtedly generated some of the dissatisfac­
tion was the relatively low level of hom ebuilding during the period 1930 through
1945. Average annual housing expenditures
during that 15-year period were not quite onehalf the average for the twenties and only 13
percent of the average throughout the post­
war period, although a considerable p art of
the difference in the latter is attributable to
the postw ar rise in prices. It is unlikely that
many families did much to im prove their
housing arrangem ents given this level of con­
struction, although few probably even con­
sidered the possibility during the depression
years of the 1930’s. As a consequence, how ­
ever, some “ pent u p ” desire for im proved
housing was being built up over the period, a

MONTHLY REVIEW

November 1961

T

able

2

HOM E O W N E R S H IP S T A T U S O F NONFARM F A M IL IE S 1
(Percentage Distribution)
Age of
head
of family

18-24
2 5 -3 4
3 5 -4 4
4 5 -5 4
5 5 -6 4
65 and
over

Owns

Rents

24
37
46
59
58

71
57
50
37
35

64

29

1950

1949

1948

1951

Owns

Rents

Neither-

5
6
4
4
7

22
35
53
59
61

64
61
43
37
35

14
4
4
4
4

18
33
51
60
65

76
62
45
35
28

6
5
4
5
7

15
37
52
65
68

79
58
45
30
28

7

60

31

9

65

30

5

65

30

Neither-

Owns

Rents

Neither-

Owns

Rents

1952
Neither-

Nei­
ther2

Owns

Rents

4
3
3
2
4

16
41
52
62
67

80
56
45
36
29

6
5
4
5
7

7

65

28

5

1 Includes one-person families.
2 Families or spending units who live with relatives, received housing as part of compensation, live temporarily in housing they have
sold, etc.
Source: Selected Surveys of Consumer Finances published in the Federal Reserve Bulletin.

desire that became manifest under the condi­
tions of economic prosperity which prevailed
in the post W orld W ar II period.
The strong dem ographic pressures m ani­
fested between the years 1946 through 1950
were another factor (C hart I ) . These pres­
sures not only had im m ediate repercussions
on dem and evidenced by the sharp rise in new
construction in this same period, they also
turned out to be a reservoir of potential de­
m and that had repercussions on new con­
struction throughout most of the 1950’s.
M any of this relatively large num ber of new
households form ed in the im m ediate post­
w ar period became a part of m arket dem and
in the fifties because they grew dissatisfied
with their initial housing arrangem ent and
subsequently re-entered the m arket. One m a­
jor factor giving rise to this dissatisfaction
was the fact that many of these households
lived initially in rental housing but would
have preferred to live in their own home.
M uch of the increase in household form a­
tions after the war resulted from a spurt in
the num ber of marriages am ong younger p er­
sons, and studies of postw ar family housing
behavior have indicated that most young new­
ly m arried couples lived in a relatively small
rented unit. No doubt this was partly a m at­
ter of choice due to such things as their ap­
parent desire to acquire other goods in pref­
erence to housing (autom obiles, household




goods, e tc .), their mobility anticipations, and
their limited space needs. It was also a m atter
of necessity since their income and savings
were probably not sufficient to perm it them
to buy the kind of housing they really wanted.
M ost of them , however, probably did not
consider their apartm ent quarters to be any­
thing m ore than a tem porary living arrange­
ment and looked forw ard to the day when
they could live in their own home. As time
passed, many of them undoubtedly became
C

hart

1

N e t household fo rm atio n s reach
peak in late forties; much lower
since then
T h o u s a n d s of H o u so h o ld s

Note: Data plotted are three-year moving averages.
Source: United States Bureau of the Census.

233

F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O

progressively m ore dissatisfied with their rent­
al quarters.
The pervasiveness of this “desire to ow n”
am ong renting families has been corroborated
in studies m ade of family attitudes tow ard
their housing during this period. T h at it pro­
vided the basis for a num ber of the housing
adjustm ents m ade in the fifties is certainly
suggested by the shift into home ownership
that took place (C h art 2 ) and by studies
which indicate that the “desire to own hom e”
was an im portant motive underlying the home
purchase plans and actual purchases of rent­
ing families during this period (Table 3 ).
Space pressure th at was associated with
increased family size was another im portant
reason why many families became dissatis­
fied with their housing. In fact, the so-called
“ baby boom ” was one of the m ost significant
factors underlying housing dem and through­
out the entire postw ar period. The m ajor im­
pact was on relatively young families who
were likely to have been m arried for a short
period and who probably had a housing ar­
rangem ent that could not accom m odate much
of an expansion in family size (T able 4 ). The
T

a b i .k

3

C O N S U M E R R E S P O N S E TO S T A T E D
N E E D F O R C H A N G E IN HOM E
1955
(Spending units stating need as a percentage of nonfarm
spending units within groups indicated)
Plans to buy a home or to make
additions or repairs
Owners
Renters1 0thers;

Need For Change
Present home too large
Present home too small
Unsatisfactory neighborhood
or location
Operating expense too high
Other unfavorable features
Desire to own home
Expect change in job
location

234

5
29

2
29

—
19

17
2

10
10
9
66

8
2
8
54

4

6

14

12

'In c lu d e s only spending units responsible for rent of entire
dwelling unit.
2 Spending units th at jointly rent home, live with relatives, rent
rooms from nonrelatives, receive housing as part of compensa­
tion, live temporarily in houses they have sold, etc.
Source: “ 1955 Survey of Consumer Finances,” Federal Reserve
Bulletin, August 1955.




C hart 2

N o tice a b le sh ift to hom e ow ner*
ship in postwar period
Porcontaao D istributio n

100

----

----

----

----

Doc. 1956

A pril I9 6 0

80 -

Nov 1945 A p ril 1950

Source: United Slates Bureau of the Census.

“baby boom ” also reversed, tem porarily at
least, the traditional pattern of larger families
prim arily among the low income, nonwhite
families in the population. The increased num ­
ber of births occurred in white as well as non­
white families (T able 5 ) and affected families
in all income groups (T able 6 ). These two as­
pects of the boom were particularly im por­
ta n t because they m eant that many of the
families whose size was being increased were
in a better position to m ake a subsequent
space adjustm ent than had been the case
before. There was less constraint im posed
upon their actions by virtue of the color of
their skin and they were better able financial­
ly to do something about the space problem s
th at increasing size created.
Increasing family size, of course, led to
the need for more living space, particularly
for bedroom s. The space pressures thereby
generated were not easily accom m odated by
m aking adjustm ents w ithin the housing in
which they resided at the time. H ousing space
adjustm ents, then as now, usually involve a
change in residence. T h at these pressures (in
the sense of inadequate space) gave rise to
dissatisfaction and thereby brought families

MONTHLY REVIEW

November 1961

T

able

4

B IR T H R A T E S B Y A G E O F M O TH ER
1 9 4 0 -1 9 5 8
(Birth rate per thousand females)
Age Groupings

1940
1941
1942
1943
1944
1945
1946
1 947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

0.2
0.2
0.3
0.3
0.3
0.3
0.3
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0,4
0.4
0.4
0.4
0.1

45.3
47 .6
51.8
52.1
45.3
42.1
50.6
69.8
71.1
72.1
70.0
75.5
74,3
76.5
78.5
78.6
83.0
85.3
81.1

131.4
141.6
162.9
161.1
147.9
134.7
179.8
207 .9
195.5
194.6
190.4
206.5
2 12.9
218.9
229.4
233.7
244.1
250.4
248.3

123.6
130.1
145.6
150.7
137.7
133.1
164.0
179.1
163.9
165.2
165.1
173.1
179.2
181.8
186.0
188.0
192.1
197.3
195.3

83.4
85.2
92.3
100.2
98.2
100.5
1 10.0
1 13.0
103.6
101.5
102.6
107.0
1 1 1.7
1 1 1.2
1 14.2
1 13.4
1 13.3
1 14.6
1 12.9

45.3
45.1
47.2
52.2
54.1
56.3
58.4
58.4
53.5
52.2
51.4
52.5
54.7
55.6
56.8
57.2
57.7
58.3
56.0

15.0
14.3
14.1
15.0
15.5
16.0
15.9
16.1
15.2
14.6
14.5
14.5
14.6
14.7
15.1
15.0
15.2
15.3
14.8

1.6
1.4
1.3
1.3
1.2
1.4
1.3
1.2
1.1
1.1
1.0
1,0
1,0
1.0
1.0
1.0
0.9
0.9
0.9

Note: Data are for white females and are adjusted for under registration.
Source: United States D epartm ent of Health, Education, and Welfare.

into the housing m arket is clearly reflected
in all postw ar studies of family mobility (see
Table 3, for exam ple). There were, however,
two aspects to this dissatisfaction. The initial
or im m ediate effects associated with the ac­
tual expansion in family size undoubtedly
brought a large num ber of families into the
m arket seeking larger homes during the peak
period of the “baby b oom .” if these families
had acquired, at that time, a housing arrange­
m ent that would have provided for all of their
future space needs, then the m ajor im pact of
this boom would have occurred during those
years. M ost of the families, however, p ro b ­
ably did not make this kind of adjustm ent.
N ot only is it unlikely th at they acted with as
m uch foresight as this implies, but they were
probably not in a financial position to do so.
They were young and their incomes were low
in relation to the peak levels likely to be at­
tained as they grew older. In addition, their




expanding size undoubtedly increased the
need for expenditures in other directions, such
as on food and clothing, thereby reducing the
am ount of income they had available to spend
on housing. Thus, m any of these families u n ­
doubtedly found that they had another space
problem when their size reached its maxim um
and their children began to m ature. The
“ aging” of the children was particularly im ­
portant since m aturing children usually in­
crease the need for m ore bedroom s, especially
in those families whose children consist of
both boys and girls. This incentive, Coupled
with the fact that many of these families were
now in a better financial position to pay for
larger and otherwise more satisfactory hous­
ing, m ust have brought many families into
the m arket for another “ space” adjustm ent.
These secondary effects probably reached
their peak around the m iddle p art of the fif­
ties in view of the fact that the increase in

235

F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O

T able 5

B IR T H R A T E B Y C O L O R O F M O TH ER
1940 - 1958
(Birth rate per thousand families)
White

1940
1941
1942
1943
1944
1945
1946
1947
1948
1 949
1950
1951
1952
1953
1954
1955
1956
1957
1958

18.6
19.5
21.5
22.1
20.5
19.7
23 .6
26.1
24 .0
23.6
23.0
23 .9
24.1
24.0
24.1
23.8
24.0
24.1
23.4

Color

Nonwhite

27.3
27.7
28.3
27.4
26.5
27.4
26.5
28.4
31.2
32.4
33.0
33.8
33.6
34.1
34.9
34.7
35.4
35.2
34.2

Note: D ata are adjusted for under registration.
Source: United States Departm ent of Health, Education, and
Welfare.

the num ber of m aturing children (5 through
14 years) in the population reached a maxi­
m um at that time (C h art 3 ) . The im pact of
the “ baby boom ” on housing dem and thus ex­
tended well beyond the time at which the
boom in babies began to level off.
The preference for the “suburban way of
life” was another factor that was ostensibly
responsible for bringing m any families into
the housing m arket throughout the fifties. Its
actual im portance is open to question, how­
ever, since it reflects in considerable degree
the influence of the desire for home ownership
and for more space. A m erican families did
not merely want to move to the suburbs; rath ­
er they w anted to own homes of the kinds
which were usually available in the suburbs.
Nevertheless, some of the movements to the
suburbs may have been for reasons other than
these, for exam ple, escape from the conges­
tion of the city, so that this locational pref­
erence was undoubtedly in itself a source of
some new housing dem and throughout that
236

period.




Housing demand and new construction
The presence of a large num ber of fam i­
lies who were dissatisfied with their housing
arrangem ents may explain why a large num ­
ber of families.would enter the housing m ar­
ket during periods in which income and credit
conditions were favorable, but there rem ains
the question of why this dem and has such a
m ajor im pact on new construction. Because
of the large size of the existing stock of hous­
ing facilities, the m ajority of the great num ber
of housing adjustm ents that are m ade each
year involves “ used” housing. W hat takes
place in the housing m arket each year is som e­
w hat analogous to the game of musical chairs.
A large num ber of moves are m ade that re­
sult in residence “exchanges,” not literally,
but in the sense of A moving into B ’s resi­
dence who in turn moves into C ’s residence,
and so on. Thus, many of the housing adjust­
ments made by “dissatisfied” families through­
out the 1950’s were undoubtedly accom ­
plished by a series of residence “exchanges.”
A large num ber of them , however, involved
a move into new housing and did so because
of the preference for such housing.
T

a b le

6

N U M B ER O F C H IL D R E N B O RN P E R 1 ,0 0 0
W OM EN C L A S S I F IE D B Y
H U S B A N D ’S IN CO M E, M A RCH 1 9 5 7
AND A P R IL 1 9 5 2
Husband’s Income in
Previous Calendar Year
Total Reporting

Standardized for age1
1957
1952
2,335
1,966
2
2

Under $ 1,0 00
$ 1 ,0 0 0 to 1,999
2 ,0 0 0 to 2,99 9

2 ,8 8 9
2,47 2

2 ,1 6 5
2 ,0 1 3

3,0 0 0 to 3,999
4 ,0 0 0 to 4,99 9

2 ,3 6 0
2,21 5

1,901
1,814

5 ,0 0 0 to 6 ,9 9 9
7,0 0 0 and over

2 ,2 2 0
2 ,1 6 0

1,9 29
2,0 0 8

1 Standardization is the statistical procedure which seeks to reduce
the effect of intergroup difference in the distribution by age.
This permits comparison of (standardized) fertility rates with
assurance that such differences are not simply the result of one
group having relatively more or less women than another group
at certain ages.
2 Standardized rates not shown where several component 5-year
age groups contain fewer than 150.000 women.
Note: D ata relate to women 15 years old and over, married, and
still living with husband.
Source: United States Bureau of the Census.

November 1961

MONTHLY REVIEW

A part of this preference for new homes
arose from the fact that they were easier to
buy than “existing” ones. Term s on mortgage
credit favored the purchase of new housing.
Permissive down paym ents and the length of
the am ortization period, for exam ple, were
usually less stringent on new houses, there­
by m aking them more accessible to prospec­
tive buyers. The seller’s m arket th at prevailed
through most of the period may have been a
factor since it created prices for used houses
that often appeared high relative to the age
of the house. Perhaps the m ost im portant
reason, however, was the fact th at the fam i­
lies who made the adjustm ents could not find
in the used housing available to them the
kind of housing they w anted. A t least this is
strongly suggested by the available evidence
on the characteristics of new dwelling units
constructed since the end of the w ar (Table
7 ) . Increasingly large and more expensive
units were built over the period, which cer­
tainly suggests that the units available in
existing stock were not well suited to the
dem ands for “bigger and better” housing. In
addition, a very large num ber of single-fam­
ily homes were built to accom m odate the
shift into ownership housing that occurred.
T he fact that many of the families who bought
these homes were renting at the time of their
purchase is particularly im portant. Their
moves had im portant repercussions on new
construction because the possibilities of resi­
dence “exchange” were much less likely.
These “exchanges” take place when there is
some correspondence between the kind of
housing families dem and and the kind they
make available upon entering the m arket.
While the extent of correspondence depends
on a variety of factors, it is clear that when
there is a substantial shift in tenure arrange­
ments like that which occurred in the postw ar
period, there is apt to be little correspond­
ence. U nder those circum stances, the fam i­
lies who enter the m arket are interested in




C

hart

3

N u m b e r of persons und er 14
in creased ra p id ly in postwar period
T h o u sa n d s of p erson s

Note: Data plotted are three-year moving averages.
Source: United States Bureau of the Census.

buying a home, whereas they are making rent­
al units available.

IMPLICATIONS FOR THE FUTURE
The conclusion suggested by this review
of events in the fifties is that the level of new
construction during this period appears to
have been m aintained above the physical re­
quirem ents generated by dem ographic and
replacem ent factors because of the dem and
that cam e from families who were dissatis­
fied with their housing and who had the finan­
cial capacity to do som ething about it. In
other words, there was a substantial am ount
of upgrading during this period which had a
significant im pact on the volume of new con­
struction because of the preference for new
housing.
In looking tow ard the future, it is obviously
im portant to consider the question of whether
or not more of the same is to be expected, a
question that concerns the num ber of fam i­
lies who might make such housing adjust­
ments. A lthough precise estimates cannot be
made, when the factors discussed in the fore­
going analysis are exam ined in their current

237

F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O

T able 7

C H A R A C T E R IS T IC S O F N EW O N EF A M IL Y HOM E T R A N S A C T IO N S
IN S U R E D B Y T H E F E D E R A L H O U SIN G
A D M IN IS T R A T IO N U N D ER
S E C T IO N 2 0 3
(selected years)
FHA estimated
value1
(Median)

1950
1952
1954
1955
1956
1 957
1958
1 959
1960

7,69 3
8,4 15
8,87 6
9 ,4 7 7
10,203
1 0,8 20
10,682
10,429
10,456

Calculated area
square feet
(Median)

838
923
961
1,022
1,064
1,105
1,092
1,095
1,091

Number of
rooms
(Average)

4.6
5.3
4.9
5.1
5.2
5.3
5.4
5.4
5.5

1 These estimates have been deflated using Boeckh’s index of
construction cost for residences.
Source: Federal Housing Administration.

238

setting, it seems clear that their num ber is
less. As indicated above, the large increase
in the num ber of m arriages in the im m ediate
postw ar period was a particularly im portant
dem and factor throughout the 1950’s. These
pressures began to subside in the early p art
of this period, however, and have been rela­
tively w eak since then. The average num ber
of m arriages throughout the fifties, for ex­
ample, was close to one-fourth less than the
average of the four-year period immediately
following the end of the war. In recent years,
therefore, there have been relatively small
additions to the num ber of those families who
provide the type of potential dem and dis­
cussed above, that is, the dem and arising
from those who will re-enter the m arket, p er­
haps m ore than once, to upgrade some aspect
of their housing standards. Since a large num ­
ber of the families who were a p art of this
reservoir of potential dem and earlier did
som ething about it, the total num ber of these
families has to be less now than it was ten
years ago.
It is also likely that the problem of inade­
quate space is of less serious proportions now
than it was earlier. Inadequate housing space,




as indicated above, was an im portant source
of discontent throughout the fifties due pri­
marily to a rapid expansion in the size of the
pre-teen population. In recent years, this
expansion has slowed considerably, which
means that, in the aggregate, requirem ents for
housing space are being increased less rapid­
ly than before. C onsequently, the overall need
for additional space is less of a dem and fac­
to r than it was at the beginning of the iast
decade. A nother aspect of recent population
developm ents th at may have some bearing
on future housing dem and is the fact th a t the
larger families once again seem to be becom ­
ing the dom ain of the low er incom e families
(T able 6 ). If this continues and the trad i­
tional pattern is restored, population growth
can be expected to exert relatively less influ­
ence on housing dem and through its im pact
on the housing space dem ands of individual
families than was the case earlier in the post­
w ar period.
Finally there is the m atter of th at reservoir
of dem and consisting of families who are cur­
rently living in rental units but who would
prefer a home ow nership arrangem ent. As in­
dicated above, there were many of these fam ­
ilies in the early postw ar period whose sub­
sequent shift into home ow nership provided
a strong stimulus to new construction. W heth­
er o r not this shift will continue, therefore,
has some bearing on an evaluation of the
prospects for the future. Will the pendulum
swing beyond the present 60 percent home
ow nership ratio or has a peak been reached?
This is, of course, a difficult question be­
cause of the com plexity of the behavior u n ­
derlying the tenure preference of the A m eri­
can household. Nevertheless, there are cer­
tain indications which suggest that, for the
present at least, if the peak has not been
reached we may be fast approaching it. F or
one thing, the shift into hom e ow nership in
recent years has slowed perceptibly (C hart
2 ) . F o r another, the prop o rtio n of rental

November 1961

MONTHLY REVIEW

units being constructed has increased in re­
cent years. Beginning in 1956, rental units
have become an increasingly larger p ro p o r­
tion of new dwelling unit construction, reach­
ing 21 percent of the total in 1960 com pared
with 9 percent in 1953. If this trend continues,
it would strongly suggest that a peak in the
hom e ownership rate has been reached. If so
and the hom e ow nership rate stabilizes at its
current level, this would m ean the loss of an­
other source of new housing dem and that was
of considerable im portance throughout the
1950’s.
A smaller dem and potential, of course,
m eans that upgrading of the kind which oc­
curred in the fifties is likely to be less im por­
tant in the future. Since the dem and current­
ly being generated by dem ographic and re­
placem ent factors is not too different from
that in the fifties, it seems reasonable to con­
clude that the overall dem and situation is
w eaker than it was ten years ago. New devel­
opm ents, of course, can arise which would
alter this conclusion.1 If, however, there are
no “revolutionary” developm ents th a t alter
the general correctness of this conclusion, it
has one interesting im plication with respect
to movements in residential construction visa-vis those in the econom y as a whole.
T hroughout the entire postw ar period, resi­
dential construction has tended to lead the
cyclical movements in the overall economy.
This has been due mainly to the sensitivity
of housing dem and to changes in the avail­
ability of credit, and that availability, in turn,
has tended to move inversely to the general
business cycle. Thus, in periods preceding
the peak of econom ic expansion, the num ­
ber of families excluded from the new home
m arket by virtue of the reduced availabil­
ity of mortgage funds has m ore than offset
the effect on residential construction of fam i­
1 Even as recently as 1950, for example, many analysts might
have considered it sufficient to focus solely on demographic and
replacement factors in studying the underlying demand factors
in the housing market.




lies who came into the new hom e m arket in
response to the rising incomes and im proved
income prospects associated with that period.
The converse has been true in the periods
preceding the trough of dow nward m ove­
ments in the econom y.
The apparent sensitivity of housing de­
m and to changes in the availability of m ort­
gage credit was no doubt due to the large
num ber of “ m arginal buyers” in the m arket.
Such families entered the m arket to buy a new
home prim arily when mortgage term s became
exceptionally liberal and stayed out of the
m arket when these term s stiffened. F o r the
m ost part, these were families who were a
p art of the dem and discussed above. They
were the families who had been m arried rela­
tively short periods of time, many of whom
were living in rental dwellings and had a
problem of inadequate space, but who, be­
cause of their income and equity positions,
could do very little about their housing situ­
ation unless they could obtain mortgage credit
on very liberal term s. The sm aller num ber of
such families now suggests that this type of
“m arginal buyer” is currently a less im portant
m arket factor, and the response of dem and to
the liberalization of term s th at has already
occurred offers some support to this view.
Therefore, housing dem and in the future may
be less sensitive to any changes in the avail­
ability of mortgage credit that occur. The vol­
ume of residential construction may, there­
fore, tend to move with rath er than lead the
cyclical movements in the econom y because
the num ber of families responding to changes
in income and income prospects m ay well
outweigh the num ber of families who are af­
fected by changes in the availability of credit.
In other words, in the more im m ediate future
“incom e” effects may tend to becom e m ore
im portant than “ credit” effects.
Looking beyond the im m ediate future, it
is anticipated th at the num ber of m arriages
and household form ations will increase sharp­

239

F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O

ly beginning in the m id-1960’s when there
will be a substantial increase in the num ber
of persons between the ages of 18 to 25.
Since the m ajority of persons within this age
group who form a separate household will
probably want to rent rather than own, the
initial im pact of this population pressure is
likely to be on the dem and for rental units.
Subsequently, however, many of them , espe­
cially those who are m arried and whose fam ­
ily size is increasing, can be expected to p u r­
chase a house. T heir decision as to when to
buy is likely to be strongly influenced by con­
ditions prevailing in residential mortgage
m arkets. C redit availability, therefore, may
again rise in relative im portance as a factor in
determ ining housing dem and at that time and
perhaps may come to play a role com parable
to that in the 1950’s.

CONCLUSIONS
The m arket for housing attracts attention
because it represents one of our largest and
m ost w idespread industries and because there
have been fairly strong fluctuations in home
building in the postw ar period. Until recently
the em phasis am ong analysts has been on
these fluctuations, which were generally
tim ed so th at residential construction began
to turn down before the peak in overall busi­
ness activity and began to turn up sooner
than did business generally, thereby sm ooth­
ing the business cycle somewhat. The explan­
ation advanced for this behavior stressed the
cost and availability of mortgage credit. In
the recent cycle, however, this sequence has
failed to m aterialize for a num ber of reasons.

240




The m ost im portant of these, discussed at
length in this article, is that the level of de­
m and for new houses is not as high as it was
earlier in the postw ar period, th a t is, there is
not readily available a large m argin of unsat­
isfied housing needs which can be translated
into effective dem and by a small decline in
interest rates or a softening of other term s of
paym ent. The decline in dem and, broadly
speaking, is a result of the reduction in “u p ­
grading” of housing. Im m ediately after the
end of W orld W ar II there was a large in­
crease in the num ber of m arriages and in the
birth rate. A large volum e of new housing
was built as existing housing did not fit the
standards of the newly m arried. Existing
housing, and some of the new er housing as
well, in turn became less satisfactory as fam i­
lies increased in size. W ith a backlog of dis­
satisfaction to work against, changes in m ort­
gage term s and availability of funds coupled
with provision of m ore satisfactory housing
brought prom pt responses. M arriage rates
have actually been declining since the early
p art of the 1950’s, and the birth rate has tend­
ed to level off. D em and being generated by
population and replacem ent factors at pres­
ent differs little from that of the fifties; but,
because the backlog for “upgrading” housing
has been sharply reduced, overall dem and is
w eaker than it was ten years ago. U ntil either
these basic factors change in the mid-sixties
or consum ers are otherwise m ade unhappy
with their existing housing, residential con­
struction may be expected to respond m ore
closely to changes in income than to changes
in interest rates.

MONTHLY REVIEW

November 1961

B A N K IN G A N D C R ED IT ST A T IST IC S A N D B U S IN E S S IN D E X E S — T W E L F T H D IST R IC T 1
(In d e x e s: 1947-1949 = 100. D ollar am ou n ts in m illio n s o f d ollars)
Condition items of all member banks2' 1
Bank debits
index
31 cities1- 5

Demand
deposits
adjusted3

Total
time
deposits

495
720
1 ,4 5 0
6 ,4 6 3
6 ,6 1 9
6 ,6 3 9
7,9 4 2
7,2 3 9
6 ,4 5 2
6 .6 1 9
8 ,0 0 3
6 ,6 7 3
6 ,9 6 4

1,234
951
1,983
9 ,9 3 7
1 0,5 2 0
10,5 1 5
1 1,1 9 6
11,864
12,1 6 9
1 1,8 7 0
12,7 2 9
1 3,3 7 5
1 3,0 6 0

1,790
1,609
2 ,2 6 7
6 ,7 7 7
7 ,5 0 2
7 ,9 9 7
8 ,6 9 9
9 ,1 2 0
9 ,4 2 4
10,6 7 9
12,0 7 7
12,4 5 2
1 3,0 3 4

42
18
30
132
140
150
153
173
190
204
209
237
253

16 ,9 5 8
16,898
17,139

6 ,6 2 6
6 ,6 9 7
6 .9 6 4

12,848
12,9 0 7
13,0 6 0

1 2 ,6 2 8
12,616
1 3,0 3 4

263
248
25 8

16,751
1 7,5 2 5
17,517
17,637
17,632
17,578
17,504
1 7,779r
18,0 2 8
17,901

6,9 8 4
6,991
6 ,9 1 6
7,4 3 6
7,3 9 3
7,571
7,9 3 5
7,863r
7,9 5 5
8 ,1 9 0

13,0 1 0
1 2,7 5 0
1 2 ,8 6 0
13,222
12,8 6 5
12,9 3 5
1 3,2 0 6
13,212
13,317r
13,901

13,121
13,6 3 9
13,7 5 4
13,999
14,289
14,371
14,492
1 4 ,6 5 6
14,7 8 6
14,867

254r
2 73r
273r
266r
265r
268r
267 r
262r
277
291

Year
and
Month

Loans
and
discounts

1929
1933
1939
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960

2 ,2 3 9
1,486
1,967
7 ,8 6 6
8 ,8 3 9
9 ,2 2 0
9 ,4 1 8
11,124
12,6 1 3
13,1 7 8
13,812
1 6,5 3 7
1 7,1 3 9

U.S.
Gov’t
securities

Bank rates
on
short-term
business
loans6' 7

Total
nonagri­
cultural
employ­
ment

Total
mf'g
employ­
ment

Car­
loadings
(number)6

Dep't
store
sales
(value)5

Retail
food
prices
T. 8

3^66
3 .9 5
4 .1 4
4 .0 9
4 .1 0
4 .5 0
4 .9 7
4 .8 8
5.36
5 .6 2

60
112
118
121
121
127
134
139
138
146
150

'5 7
121
130
137
134
144
154
161
153
165
165

102
52
77
101
100
100
96
104
104
96
89
94
88

30
18
31
112
120
122
122
132
141
140
143
157
156

64
42
47
113
115
113
113
112
114
118
123
123
125

5 ,5 0

150
150
150

163
162
162

85
85
87

161r
153r
159

126
126
127

150
150
150
150
151
152
152
152
153
153p

161
161
161
160
162
163
162
164
165
165p

84
83
83
88
81
85
86
84
87
99

154
164
160
164
153
162
167
157
170
164

127
127
127
127
127
126
126
125
126

1960

October
Novem ber
December
1961

Jan u ary
February
M arcli
April
M ay
June
July
August
Septem ber
October

5 48

b.'so
5^45

Industrial production (physical volume)5
Year
and
month
1929
1933
1939
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960

Waterborne Foreign Trade Index1' *' «

Petroleum1

Exports

1mports

Steel1

Copper1

Electric
power

Total

Dry Cargo

Tanker

Total

Dry Cargo

95
40
71
114
113
115
116
115
122
120
106
107
116
110

87
52
67
98
106
107
109
106
106
105
101
94
92
91

78
50
63
103
112
116
122
119
124
129
132
124
130
134

55
27
56
112
128
124
131
133
145
156
149
158
174
161

29
26
40
120
136
145
162
172
192
20 9
224
229
25 2
271

190
110
163
92
186
171
141
133
166
201
231
176
188
241

150

247

7

107
80
194
201
138
141
178
261
308
212
2 23
30 5

243
108
175
130
145
123
149
117
123
123
138
149

124
72
95
144
162
204
3 14
2 68
3 14
459
5 82
564
6 86
8 08

128

24
125
146
139
158
128
154
163
172
142
138
154

103
17
80
115
116
115
113
103
120
131
130
116
99
129

'9 7
145
140
141
163
166
187
2 01
2 16
221
2 63
2 69

'5 7
103
733
1,836
4 ,2 3 9
2 ,9 1 2
3 ,6 1 4
7 ,1 8 0
1 0 ,109
9 ,5 0 4
11,699
14,209

103
100
99

91
91
91

131
135
137

159
155
151

127
129
133

144
141
137

275
276
274

244
2 20
271

34 7
30 6
338

97
97
175

779
8 26
1,046

238
254
2 45

9 ,2 4 0
15,744
2 1 ,9 1 9

101
101
103
1 14r
111 r
lllr
110

91
91
92
92
92
91

159
176
178
168
169
188
157
160
163

111
152
162
172
191
187
183
180
174
181

139
134
137
133
143
143r
129p

277
276
285
283

235
2 48
2 64
261
2 65
2 24
3 33

318
362
363
331
331
290
299

118
95
124
163
171
128
138

779
666
9 52
759
865
684
1,027

218
233
252
286
292
267
297

15,394
11,985
19,268
13,139
15,856
11,535
2 0 ,0 2 5

Lumber

Crude

Refined

Cement

Tanker

1960

October
Novem ber
Decem ber
1961

Ja n u a ry
F ebruary
M arch
April
M ay
June
July
A ugust
Septem ber
October

134
134
131
135
143
1 4 2 .5p

1 A djusted for seasonal variation, except where indicated. E xcept for banking and credit and d ep artm ent store statistics, all indexes are based upon
d a ta from outside sources, as follows: lum ber, N ational Lumber M anufacturers’ Association, W est C oast L um berm an’s Association, and W estern
Pine Association; petroleum , cement, and copper, U.S. B ureau of Mines; steel, U.S. D epartm ent of Commerce and Am erican Iron and Steel In stitu te ;
electric power, Federal Power Commission; nonagricultural and m anufacturing em ploym ent, U.S. B ureau of Labor S tatistics and cooperating state
agencies; retail food prices, U.S. Bureau of Labor S tatistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. D epartm ent
of Commerce.
2 Annual figures are as of end of year, m onthly figures as of last W ednesday in m onth.
3 Dem and deposits, excluding
interbank and U.S. G overnm ent deposits, less cash item s in process of collection. M onthly d a ta partly estim ated.
4 D ebits to total deposits
except interbank prior to 1942. D ebits to dem and deposits except U.S. G overnm ent and in terb an k deposits from 1942.
5 D aily average.
6 Average rates on loans made in five m ajor cities, weighted by loan size category.
_
7 N ot adjusted for seasonal variation.
8 Los Angeles,
San Francisco, and Seattle indexes combined.
9 Commercial cargo only, in physical volume, for the Pacific C oast custom s districts plus Alaska
and Hawaii; starting with July 1950, "special category” exports are excluded because of security reasons.
10 Alaska and Hawaii are included
in indexes beginning in 19o0.
p— Prelim inary.
r— Revised.




240A