Full text of Economic Review (Federal Reserve Bank of San Francisco) : September 1960

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IDAHO

ALASKA

S s fd & m b s A , 1 9 6 0
WASHINGTON

CALIFORNIA

6 A ue

Review of Business Conditions

UTAH

The Current Housing Situation
in Perspective.................

AR IZO N A

NEVADA

Review of Business Conditions
economy has continued during the
sum m er of 1960 at what appears to be
a high-elevation plateau of activity, as meas
ured by rates of spending for m ajor economic
sectors. F o r more than two years, the econ
omy has been generally expanding, but the
rate of expansion has slowed perceptibly in
recent months. The absence of significant
upw ard pressures in June, July, and early
August— after allowances are m ade for the
usual sum m er “doldrum s”— invites the ques
tion w hether the signs of a flattening out in
econom ic activity this summer portend an
econom ic dow nturn in the near future,
w hether the present high level of activity
can continue for some time, or whether this
is a pause th at refreshes.
The views of some observers that a down
turn is approaching appear to be based on a
variety of factors. There has been a lack of or
slowing in expansion of industrial production,
homebuilding, employment, personal income,
and consum er spending in recent months, and
this follows a relatively small rate of growth
in gross national product in the second quarter
of the year. M any industries possess ample
excess capacity, and a larger proportion of the
labor force is unemployed than in earlier
prosperous periods. R aw materials also ap
pear to be relatively abundant as indicated
by the weakening in their wholesale prices
this year and increasing reports of sales at
below list or posted prices. There is some
evident feeling that the unsatisfied demand
for large outlay items, such as cars, houses,
and other durable goods, is much smaller than
in prior years, and that future expansion, at
least for the next few years, m ust be geared
to a lower rate of family form ation and popu
lation growth. M id-year surveys of consumer
sentim ent reveal less optimism concerning
prospects for income and spending in the
latter part of this year. R eported profits have
h e

138

declined, and com m on stock prices, while
above the low of m id-M arch, are under a year
ago.
O ther observers find evidence in favor of
continued high-level business activity. A lower
rate of inventory investment, following an
unusually high rate in the first quarter, was a
dom inant factor in the slowed rate of growth
during the second quarter. If inventory in
vestm ent has already been adjusted to a m ore
balanced rate of spending, there now is little
danger of an inventory liquidation th at could
precipitate a decline in total spending. A ddi
tionally, some rise in Federal outlays is widely
expected in the second half of the year, after a
decline during the first half. This expectation
is based upon a m oderate acceleration of de
fense expenditures and the Federal pay in
creases which became effective in July. State
and local expenditures have continued to rise
this year, and assistance payments from the
Highway T rust F und at an increased rate
during the current fiscal year should provide
an added stimulant. In further support of the
high level of domestic business activity is our
present position as a net exporter of m erchan
dise, and this favorable balance of trade is
expected to continue during the latter p a rt of
the year.
By late August, no clear trend in business
activity had emerged from this m ixture of
favorable and unfavorable factors. It has been
evident for some time, however, that much of
the uncertainty about future prospects is
linked to developments in steel and steelusing industries, as a more detailed descrip
tion of recent developm ents in the m ajor in
dicators reveals.

Industrial production remains
stationary
Industrial production did not rise during
the first half of 1960, aside from the immedi-

September 1960

M O N T H L Y R E V IE W

ate post-steel strike period at the beginning
of the year, and output was unchanged dur
ing July from the June rate of 109 percent
of the 1957 average, after elimination of
seasonal factors. There was a sharp cutback
in July automobile production due to the
model changeover period. This is partly attri
butable to a strike at one m ajor firm but
probably was also influenced by the w eaken
ing in sales during the m onth plus a high
level of dealer inventories. In addition, pro
duction of other consum er goods declined
slightly in July, with the exception of such
staples as food and fuel, which rose. T his
m arks the second m onth of slight easing in
consum er goods production and reflects an
adjustm ent by producers of consum er dur
ables — home goods as well as autos — to
recent undesirably heavy inventory positions.
Production of items further removed from
final dem and showed signs of stability, how
ever, after declining for several months. P ro
duction of business equipm ent and materials
rose slightly in July. Iron and steel production
declined less in July than at any time since the
start of the dow nturn in steel output in M arch.
A ctual rates of steel production were slow to
turn up in August because there was a strike
in one m ajor producing area, and orders from
steel-users, especially auto producers, did not
rise in accordance with earlier expectations.
The gain in operating rates from 53.9 percent
of capacity in the first week of August to an
expected 54.5 percent for the fourth week was
a smaller than seasonal rise. W estern operat
ing rates showed a slightly larger gain. P ro
duction for the fourth week in August was
scheduled at 53 percent, up from a low of 47
percent in the second week of the month.

Manufacturers inventories and sales
showed mixed trends through June
A lthough inventory data are not as cur
rent as inform ation about production, the
sources of the slackened rate of inventory

spending, which explains m uch of the slow
growth rate of the economy in recent months,
are evident. Through June, no m ajor m anu
facturing group had significantly reduced in
ventories, on a seasonally adjusted basis. In
deed, except for fabricated metals and non
automotive transportation industries, inven
tories continued to increase. This was partly
a reflection of so-called involuntary accumu
lation, particularly in m ajor household ap
pliances and automobiles, but it is not at all
clear that factory stocks at mid-year were
considered so far out of line as to spur liquida
tion. It is possible for selected industries to
continue liquidation and for reduced rates of
accumulation to take place generally in the
latter part of the year. The rate of inventory
accum ulation was $11.4 billion in the first
quarter and dropped to $5.3 billion in the
second quarter. F u rth er such drastic declines
could only be w arranted by general declines
in m anufacturers’ sales and new orders, but
m ost of the weakness in these indicators
through June was focused in prim ary metals.
Alm ost all of the $900 million decline in fac
tory sales from F ebruary through June was
accounted for by this industry group. Ship
ments by most durables m anufacturers held
fairly close to earlier highs, while sales of
nondurables producers gained fairly steadily
during this period.

Employment rises slightly
Civilian em ployment rose to a record 68.7
million workers during July, while unemploy
m ent declined to 4.0 million, a seasonally
adjusted 5.4 percent of the labor force. N on
farm employment rose by a m odest 80,000
workers during July to a new high of 61.8
million. Despite the rise in overall employ
ment, some weaknesses were evident during
the m onth. Em ploym ent in the steel industry
fell for the fifth m onth; automobile m anu
facturers cut employment for an early model
changeover, while parts shortages resulting

139

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

140

from a labor dispute reduced assembly line
The rate of District unem ploym ent re
activity for m ost of the m onth at some plants.
mained at about 6 percent of the labor force,
M oreover, much of the July drop in unem
on a seasonally adjusted basis, as employment
ploym ent was associated with the absorption
increases in California offset the declines in
of some 600,000 of the June teen-age entrants
W ashington and Oregon as well as the addi
to the tem porary labor force. F o r adults, lay
tions to the labor force.
offs in durable goods m anufacturing were
Construction outlook mixed
not offset by openings in other fields. U nem
Construction outlays were not an expansive
ploym ent rates higher than a year ago are
now com m on in many categories of the ex
force in the first half of the year, largely
because of a weakening in dem and for resi
perienced labor force.
In the Twelfth District, employment has
dential building. N o sign of an upturn in hous
also been affected by cutbacks in aircraft,
ing dem and was evident in July. Prelim inary
steel, auto, and lum ber production this year,
estimates indicate the value of new construc
and these reductions have had some effect
tion put-in-place in July am ounted to $5.2
on other industries. T he gain in D istrict nonbillion. This was 3 percent above the June
agricultural employment for the first seven
1960 level, which is approxim ately the nor
months of the year was about 1 percent, com
mal increase between June and July. Private
pared with a rise of 2.4 percent in the same
outlays recorded a m inor rise as both resi
period last year. In July, nonfarm employ
dential and nonresidential building increased
m ent rose by about 0.3 percent, seasonally
slightly. The latter was largely the result of
adjusted, following an almost negligible in
increased spending on industrial and farm
crease in June, and despite slight declines in
buildings. O n the other hand, public construc
the Pacific N orthw est. M ost of the additional
tion declined slightly, reflecting prim arily
20,000
workers were added to California pay
lower spending on highways and m ilitary
facilities.
However, it is anticipated that high
rolls. The industries accounting for most of
way construction will increase since contracts
the net gain in D istrict employment were con
for it are running above last year’s level.
tract construction, services, and government.
Despite increased outlays on residential
Em ploym ent declined in trade, and mining
construction during July, the signs in the
employment was reduced by rather exten
housing
m arket are mixed. Housing starts
sive vacation shutdowns. Although small in
dropped to a seasonally adjusted rate of
creases occurred in most nondurables m anu
1,173,000 in July, nearly 10 percent below
facturing industries, total m anufacturing em
the June rate and 26 percent below July of
ploym ent fell slightly further, partly because
last year. Furtherm ore, Census officials were
of labor disputes. Steel and nonelectrical
pessimistic about the possibility of an im
m achinery payrolls were also down m oder
proved rate for August since building perm its,
ately, and California aircraft firms made
the basis of estimating m ost housing starts,
additional cutbacks involving almost 3,000
have been declining for several m onths.
workers. A ircraft and ordnance employment
In the mortgage m arket, the Federal H ous
fell by about 1,200 workers in Arizona. In
ing A dm inistration indicated that, on a n a
W ashington, on the other hand, aircraft em
tional basis, secondary m arket prices on
ploym ent increased by a small am ount after
FH A -insured 5 3A percent mortgages aver
a year and a half of reductions. There was
aged $96.80 per $100 of face value on August
also a resurgence of hiring at electrical ma1, up 10 cents from the previous m onth. This
chinery firms in California.

September 1960

MONTHLY REVIEW

was the smallest discount reported so far this
year. The Federal N ational Mortgage A s
sociation, for the second time in two months,
announced an increase in the price it will pay
for federally-insured mortgages in its second
ary m arket operations. The new price schedule
adds Vi point to the face value of most of the
F H A and V A mortgages purchased.
Total construction in the Twelfth District,
as measured by contracts, fell 1 2 percent du r
ing July and was 4 percent below the corre
sponding m onth of last year. M ost of this
decline centered in homebuilding and nonresidential construction. Residential contracts
fell 19 percent from June and were 27 percent
below July of last year. Private nonresidential

C onstruction contract a w a r d s in
Western States1
m i l l i o n s of d o l l a r s

1Includes Wyoming, New Mexico, and Colorado in addition to
Tw elfth D istrict States.
Source: F. W. Dodge Corporation, Construction Contracts
Region V III.

construction contracts were 2 1 percent below
the June level and 22 percent under July
1959. W ith the exception of industrial build
ings, this decline was reflected in all com
ponents of this type of construction. O n the
other hand, contracts for public works and
utilities construction rose 7 percent during
July and were twice as large as in the
corresponding m onth of 1959. M uch of this
rise is attributable to increased contracts for
highway construction.

Lumber and plywood industries face
adjustment to homebuilding decline
The lum ber industry has had difficulties
this year because of reduced sales in its m ajor
m arket, residential building. The repercus
sions have been quite sharp in the Twelfth
District, where m uch of the nation’s lumber
output is concentrated. D istrict lum ber p ro
duction in July declined slightly further to the
lowest level in more than two years, on a sea
sonally adjusted basis. There was almost no
progress in reducing the high level of inven
tories, as mill shipments in July were approxi
mately equal to production. Lum ber prices
continued to ease lower in July and early
August, although p art of the decline was
seasonal.
The softwood plywood industry experi
enced a cycle of price-output cutting in late
July and the first part of August. Production
in the first half of 1960 was up 6 percent from
a year ago, but shipments rose only 4 percent,
and new orders gained only 1.5 percent.
O verproduction of plywood is usually re
flected in price cuts until some “rock-bottom ”
price is reached since the industry tries to
operate close to capacity levels while carry
ing relatively small inventories. This year the
“rock-bottom ” level was about $64 per
thousand square feet in terms of the key
Va inch sanded grade, but quotations from
some companies fell as low as $60 in late
July as inventories rose. Industry production

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

for the first half of August was scheduled for
a cut approxim ating 2 0 percent of capacity,
w hereupon some m ajor firms restored prices
to the $64 level, and, in early September, at
least two firms raised the price to $ 6 8 .

Another peak harvest in 1960
This year’s harvest in the nation will be
the m ost bountiful ever if official August fore
casts are realized. Crop production is esti
m ated at 119 percent of the 1947-49 aver
age, up slightly from the 118 percent peak
of the preceding two years. The m ajor factor
in this year’s gain is an expected 2 0 percent
boost in w heat production. The cotton crop
is expected to be slightly sm aller than last
year. C otton acreage is up 3 percent, but
growing conditions have been unfavorable in
parts of the South.
Different conditions prevail in the Twelfth
D istrict for these two crops. Pacific N orth
west w heat output is estim ated to be 14 p er
cent below a year ago, owing to hot, dry
w eather in July. However, the cotton harvest
may be nearly 3 million bales, the largest such
crop ever produced in the W est (see c h art).
C otton production also rose sharply last year

Cofffon p rod uction moves West
th o u sa n d ! of bales

3000-

M rccnl

D is t r ie t o s percent of
U nited S t o l e s

2000

- 2C

1000

when the G overnm ent introduced its “Plan
R ”, whereby plantings can be increased if
relatively low price supports are accepted.
W estern cotton growers have an incentive to
raise output when possible since the crop is
typically of high quality and can be sold above
price support levels. D istrict overall crop p ro
duction usually rises from year to year, but
A ugust forecasts indicate a slightly sm aller
harvest in 1960 because of declines in wheat,
some feed grains, and deciduous fruit.

Retail trade declines
Consum er dem and has shown signs of
weakening since mid-year. Total retail sales
in the nation in July were down 1 percent
from June, after seasonal adjustm ent. N on
durable goods stores showed a slight drop in
sales, although the greater p art of the decline
occurred in durable goods. This reflected
prim arily a decline in auto sales, which were
1.5 percent below year-ago levels. There was
some pickup in auto sales in the first p art of
August to a point 0.5 percent above the same
year-ago period.
Retail sales in the Tw elfth D istrict have
also declined since the end of the second quar
ter. D epartm ent store sales for July were off
5 percent from a year ago and continued to
rem ain relatively low during the first two
weeks of August. California auto registra
tions in July dropped below m onth-ago and
year-ago levels for the second consecutive
m onth. Registrations totaled 49,861, down
7.4 percent from a year ago. In the first week
of August, registrations were 24 percent
below those in the corresponding period of
July.

Personal income gained at a reduced
rate in July
•Excludes American Egyptian cotton.
•Acreage allotm ents required in 1950 and 1954-60. For 1959
and 1960 allotm ents were liberalized. Producers were perm itted
to increase acreage by a maximum of 40 percent if they accepted
the lower of two price support levels.
Source: United States D epartm ent of Agriculture, Agricultural
M arketing Service, Crop R eports; Board of Governors of the
Federal Reserve System.

Personal income in the nation continued to
rise in July, on a seasonally adjusted annual
basis, but the $ 1 billion increase was a con
tinuation of a slowing down in m onth-to-

September 1960

MONTHLY REVIEW

m onth gains since April. The m ost im portant
sources of the July increase were higher gov
ernm ent payrolls, as Federal civilian pay in
creases became effective, and larger payrolls
for construction. T ransfer payments also rose
because of increased unem ploym ent insur
ance benefit payments. M anufacturing wage
and salary disbursements declined, as they
have in m ost months this year. The $0.7 bil
lion decline in July in such payments was the
largest to occur since last O ctober. F arm in
come also fell off slightly in July.

Credit market easier
The money and credit m arkets have been
generally easier since mid-year. The net free
reserve position of m em ber banks (the differ
ence between their excess and borrow ed re
serves) rose during July and A ugust, with
the Federal Reserve System contributing to
the increase through open m arket purchases
of G overnm ent securities. In addition, by
early September, all of the Federal Reserve
Banks had reduced their discount rates by Vz
of 1 percent. O n August 8 , the B oard of G ov
ernors announced changes in reserve require
ments estim ated to add $600 million to mem
ber bank reserve balances by September 1.
As of August 25, country banks were per
m itted to consider as reserves any vault cash
held in excess of 2 Vi percent of their net de
m and deposits in contrast with the previously
effective 4 percent rule. A similar change,
effective Septem ber 1, perm itted reserve city
and central reserve city m em ber banks to count
as reserves all vault cash in excess of 1 per
cent of net dem and deposits, com pared with
the prior 2 percent. It was originally estimated
that these changes would provide about $480
million in additional reserves, of which some
what m ore than half was at country banks and
almost all of the rem ainder at reserve city
banks. Also on Septem ber 1, the reserve re
quirements of central reserve city banks were
reduced Vi of 1 percent to 17 Vi percent, thus
freeing an estim ated $125 million in reserves.

Short-term yields mixed as bill yields
increase; interest rates generally lower
A fter declines to 1960 lows at the begin
ning of August, yields on new Treasury issues
of 3-to 6 -month bills moved sharply upwards
by 40 basis points during the following four
weeks. This reflected the lack of investment
dem and for G overnm ent securities that had
been anticipated to arise from those investors
who received $1.5 billion in cash in connec
tion with the T reasury refunding in the first
half of August. A s a consequence, dealers
had heavy inventories of Governments. M ar
ket yields on Treasury bills continued to fluc
tuate mildly about the late June and July
levels.
M oney m arket rates on prime commercial
instrum ents edged lower during July and
August. R ates on prim e commercial paper
showed the sharpest decline, falling from
3.61 percent at the beginning of July to 3.38
percent by mid-August. Prim e bankers
acceptances (90-day m aturities) and directly
placed finance com pany paper (3-to 6 -month
m aturities) fell slightly further during the
first three weeks of A ugust after finning in
July. B oth rates are down almost a full per
cent below their late A pril highs.
In the fourth week of August, the prime
rate charged by comm ercial banks was re
duced to 4Vi percent. The rate had been 5
percent since Septem ber 1, 1959. Stock prices
moved up sharply in the days immediately
thereafter, reacting m ore sharply to the reduc
tion in the prime rate than to the lowering of
margin requirem ents in late July.
In the longer m aturities, virtually all yields
moved downward steadily during July and
August. By mid-August, yields on 3-to 5-year
U nited States G overnm ent securities were
more than 1 percent below the mid-May
high, while long-term bond yields fell to their
lowest level in over a year. State and local
government yields fell sharply in August to
the lowest level since the sum m er of 1958.

143

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

B oth A aa and B aa grades of corporate bond
yields fell steadily during both July and early
August.

index fell 24 basis points, from 3.51 on July
21 to 3.27 on August 25.
Twelfth D istrict governmental units issued
a seasonally sm aller volume of new securities
in A ugust than in July. D istrict agencies
m arketed new issues in August at significantly
lower interest rates than prevailed in July.
The State of California sold $15 million in
H arbor Bonds on August 17 at a net interest
cost of 3.309 percent, having rejected a June
28 bid for the same bonds at 4.01 percent.
P art of the reduced rate, however, was attri
butable to the fact that the second time the
bonds were offered the m aturity was reduced
by 1 0 years.

Municipal bond market strong;
yields drop rapidly
The tone of the municipal bond m arket
strengthened in late July through late August.
M unicipal bond yields had been relatively
sticky in July while long-term U nited States
G overnm ent security yields were falling, but
they began to join in the decline by the last
week of the m onth and dropped sharply dur
ing August. The B ond Buyer’s 20 bond yield

CH A N G ES IN S E L E C TE D BA LA N C E S H E E T ITE M S OF
W E E K L Y R EP O R TIN G M EM B ER B AN K S IN LEAD IN G C IT IE S
(dollar amounts In millions)
Twelfth )istrict
From July 27,1960
From August 26, 1959
to August 24,1960
to August 24, 1960
Dollars
Percent
Dollars
Percent

144

ASSETS:
Total loans and investments
Loans and investments adjusted1
Loans adjusted1
Commercial and industrial loans2
Real estate loans2
Agricultural loans
Loans for purchasing and
carrying securities
Loans to nonbank 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

+ 418
+281
+ 58
+ 13
— 12
+ 16

1.90
1.29
+
0.39
+
0.25
+
— . 0.23
2.48
+

+
+
+
+
—
+

158
141
947
541
46
66

29.22

—

1.09

+ 213

+ 137
— 14
+ 19
+ 225
—
2

+ 110.48
—
6.76
0.65
+
4.45
+
0.10
—

— 63
+ 170
+ 34

0.58
1.57
0.37

Unite States
From July 27, 1960
From August 26,1959
to August 24,1960
to August 24, 1960
Dollars
Percent
Dollars
Percent

+ 0.71
+ 0.64
+ 6.76
+ 11.57
— 0.88
+ 11.09

3 49
295
— 58
—
84
40
+
20
+

—

6.57

—

—
—
—
—
+
+

0.33
0.28
0.0 9
0.27
0.32
2.02

+ 488
+ 540
+ 3,162
+ 1,919
+ 207
+
84

+
+
+
+
+
+

0.46
0.52
4.89
6.62
1.68
9.06

208

+ 7.12

—

398

— 11.28

+ 35.15

296

— 4.85

236

4.24

+ 17
+ 22
+ 197
— 648
— 158

+ 6.97
+ 12.87
+ 7.15
— 10.93
— 7.67

54
26
80
174
63

— 3.93
— 3,72
4* 0.53
.—- 0 . 6 4
— 0.66

—
52
+
59
+ 1,145
— 2,120
— 502

—
+
+
—
—

3.79
9.62
8.17
7.24
5.02

— 262
+
4
— 13

—
+
—

— 1,363
+ 568

— 2.27
+ 1.74

— 2,183
+ 843

—
+

n .a .

3.59
2,60
n.a.

2.36
0.04
0.14

+
—
—

n .a .

n.a. N o t available.
1 Exclusive of loans to domestic commercial banks and a fter deduction of valuation reserves; individual loan items are shown gross.
2 D ollar and percent change figures for the Tw elfth D istrict do not reflect a reclassification of $40 million in loans from commercial and
industrial to real estate as shown on this B ank’s published FR 416x report of August 24, 1960.
Source: Board of Governors of the Federal Reserve System and Federal Reserve Bank of San Francisco.

September 1960

MONTHLY REVI EW

District bank loans and deposits
increased in August
A fter a decline of $230 million in July,
loans 1 at District weekly reporting member
banks rose $58 million in the first four weeks
of August. All loan categories, except real
estate loans, loans to nonbank financial insti
tutions, and loans to foreign banks, shared in
the expansion. Business loans increased $13
million, and consum er loans rose $19 mil
lion, a reversal of the dow nw ard trend which
prevailed for these two loan categories
throughout July. Loans to brokers and dealers
for purchasing and carrying G overnment
securities increased $47 million during this
period. A gricultural loans rose $16 million
as District farm ers continued to increase
their bank debt. A fter a small rise in July,
real estate loans again moved downward in
August.
Since mid-year there does not yet appear
to be any conclusive evidence of a m arked
decline in dem and for bank credit in the
District. The exceptions to this generalization
may be some slight slackening in dem and for
credit to finance consum er expenditures and
a decline in dem and for financing of specula
tive business projects. O ver the past year and
lT o ta l loans less lo an s to dom estic com m ercial banks.

a half, banks in the District have expanded
their loan portfolios by record amounts. As a
result, the ratio of loans to deposits at report
ing banks has increased from 53 percent in
January 1959 to 64 percent in July 1960.
Banks have, therefore, become increasingly
selective in their loan policies, and the mo
mentum built up by bank management to be
selective may persist after considerable easing
in their reserve positions.
Although dem and deposits adjusted at D is
trict reporting mem ber banks declined $63
million in the first 4 weeks of August, time
deposits rose $170 million, with savings de
posits increasing $34 million. Thus, since
April, District reporting banks have been re
covering some of the time deposits lost dur
ing the heavy drains which occurred during
the first months of the year; total time deposits
are now only slightly below the year-end level.
In the first four weeks of August, D istrict
weekly reporting banks continued to increase
their portfolios of G overnm ent securities as
they had in July. T otal holdings rose $225
million; Treasury bills were up $81 million
and certificates of indebtedness $96 million.
The increase in bank holdings of G overn
ments also extended to notes and bonds, both
interm ediate- and long-term.

145

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

The Current Housing Situation
in Perspective

ing cycle is th at housing is subject to the
construction, after declining
influence of a wide range of factors that shift
throughout the last half of 1959 and the
early p art of this year, leveled off and has in im portance over time. A s a result, it is
possible to make the mistake of basing judg
been moving without a clear cut trend for the
ments on developments th at are of less
last several m onths. Housing starts reached
significance currently than they were in earlier
a low point in M arch but rose in A pril to a
periods. A look at the three m ost recent hous
seasonally adjusted annual rate of 1.3 million
ing booms may provide some perspective for
and continued at about this pace through
June. In July, however, starts declined to a
assessing current happenings in the housing
rate of 1.17 million. The seasonally adjusted
m arket as they bear on the outlook fo r hom e
annual rate of residential outlays has been
building.
about $ 2 2 billion since the first of this year,
Housing booms, 1949-59
dropping slightly during the January-A pril
period, but with m inor increases in M ay and
Although there have been five periods from
June and a decline in July and August. Is
the beginning of 1949 through 1959 in which
this relative stability a prelude to a further
the level of homebuilding has risen consist
decline, o r are we on the threshold of a ris
ently for at least six months, no t all of these
ing volume of residential building? There
can be considered as booms. Booms, w hether
have been some signs, especially in the m ort
within the entire economy o r in particular
m arkets, are generally considered to be
gage m arket, that point tow ard improvement
periods in which there is not only a sustained
in the latter p art of this year. One difficulty
bu t a substantial increase in the level of
encountered in determining w hether we are
activity. Table 1 indicates th a t only the inentering into the upswing stage of the hous
e s id e n tia l

146

MONTHLY REVI EW

September 1960

T able 1

BOOM S IN R E S ID E N TIA L
C O N S TR U C TIO N
Duration
in Months

Percentage
Increase

N E W P R IV A T E P E R M A N E N T D W E L L I N G U N I T ST AR TED
I Feb.

1949 - Aug. 1950

II J u ly

1951 - A p r il 1 9 5 3

23.5

1953 -D e c .

43.3

III A u g .
IV M a r .
V

Feb.

1954

90.8

1957 - Aug. 1957

13.2

1 9 5 8 - A p r il 1 9 5 9

56.7

P R IV A T E R ES ID E NTIAL C O N S T R U C T I O N EXPENDITURES
I A p r il 1 9 4 9 - S e p t . 1 9 5 0

79.0

II A u g . 1951 - Ju ne 1 9 5 3

20.4

III Sept. 1 9 5 3 - Ju ne 1 9 5 5

39.7

I V Ju ne 1 9 5 7 - Oct. 1 9 5 7

V A p r il 1 9 5 8 - M a y 1 9 5 9

4.9
41.8

Source: Housing and Home Finance Agency.

creased activity in the years of 1949-50,
1953-55, and 1958-59 had the dimensions of
a housing boom.

The 1949-50 boom
In the early p art of 1949, both housing
starts and residential construction expendi
tures began to rise and continued to increase

through the latter part of 1950. D uring this
period, the level of new home construction
almost doubled. T otal mortgage debt also
increased substantially; and its rise of over
$14 billion during those two years accounted
for approximately 28 percent of the net in
crease in total private debt.
This increased pace of activity resulted
from a com bination of factors. A strong de
m and for new housing existed at the time.
H o u se h o ld s w ere b ein g fo rm e d at re c o rd
rates. The presence of a large num ber of cou
ples still doubled up in dwelling units also
added strength to dem and. Furtherm ore,
much of the pent-up dem and for better hous
ing carried over from W orld W ar II had not
been fully satisfied. Congress paved the way
for the realization of this dem and by liberaliz
ing credit terms on both FH A -insured and
V A -guaranteed mortgages in its 1948 housing
legislation.
Equally im portant was the increased avail
ability of funds for mortgages which began
to appear in the early part of 1949. The busi
ness recession which developed in the latter

S p re a d b e tw e e n y ie ld s on b o n d s a n d interest on m o r t g a g e s
increases during recession
percent

*From January 1948 to April 1952, this series includes bonds due or callable after IS years. From April 1952 to January 1957, the series
is based on fully taxable 2 1/, percent bonds first callable after 12 years. From January 1957 on, the series is based on bonds m aturing
or callable in 10 years or more.
Source: Federal Reserve Bulletin.

147

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

p art of 1948 brought with it a decline in the
overall dem and for borrow ed funds. In
com bination with measures taken at the time
by the m onetary authorities to ease credit
conditions, this slowing of business activity
caused a gradual decline in the level of in
terest rates. T he yields on corporate bonds,
approxim ately 2.80 in July of 1948, declined
to about 2.60 by m id-1949 and rem ained
there until m id-1950. Correspondingly, long
term G overnm ent security yields fell from

the use of F H A and V A mortgages. D uring
most of this period, although the rate on V A
mortgages was V2 percent below that on F H A
mortgages, funds were still being m ade avail
able to veterans through V A -guaranteed
mortgages. This availability was partly related
to the respective credit terms on F H A and
V A mortgages. Loans w ithout downpaym ent
were permissible under the V A program
whereas m ost F H A loans required at least
a 10 percent downpayment. There were many

T able 2

N E T CHANG E IN M O R TG A G E D E B T O U TS TA N D IN G B Y T Y P E O F FIN A N C E FOR
S E L E C TE D IN V E STO R S
(Billions of dollars)
Savings and Loan
Associations
FHA
VA
Conv.
1947

1.0

1948

1949

1950

1951

—

1952
1953

Insurance
Companies
Conv.
FHA
VA

Commercial
Banks
VA
Conv.
FHA

Mutual Savings
Banks
FHA
VA
Conv.

Federal National
Mortgage Association
FHA
VA
Conv.

1.0

—

1.2

—

---

1.5

1.1

-.2

1 .7

1.1

—

2.4

2.8

-.1

—
--

1954

3.3

1.0

1.2

-.2

1955

1.2

3 .7

1.5

1.0

1.5

1956

3 .4

1.2

1.3

1957

3.9

1.1

-.3

1958

4.5

—

-.3

1959

6 .0

-.6

l.l

-.2

1.2

—

1.1

-.3
.6

-—

Source: Housing and Home Finance Agency, Housing Statistics, M arch, 1960.

2.45 to around 2.20. Since the rates on F H A
and V A mortgages were fixed at 4 Vi and 4
percent, respectively, these mortgages became
increasingly attractive relative to other types
of long-term obligations, particularly to in
vestors such as commercial banks, insurance
com panies, and m utual savings banks. A n
indication of investor response is reflected in
the d ata in Table 2 which shows the increases
in net holdings of federally-insured mortgages
during these two years.
The im portance of these additional funds
stems from the fact that over 70 percent of
the increased construction was financed by

veterans in the m arket for homes at the time
who found the no-dow npaym ent loan most
attractive, and the large dem and fo r such
mortgages was accompanied by a willingness
on the p art of lenders to invest a substantial
volume of funds in them. In addition, some
investors preferred V A -guaranteed mortgages
because of the procedure by which the V eter
ans A dm inistration settled default claims.
The V A m ade cash payments as com pared
with the Federal H ousing A dm inistration
procedure of issuing debentures equal in
value to the am ount of the claim, and at th at

September 1960

MONTHLY REVIEW

time those debentures were selling for sub
stantially less than par.
A n additional factor was the expansion of
V A mortgage purchases by the Federal
National M ortgage Association. Congress,
openly concerned with the shortage of VA
mortgage funds that appeared to be develop
ing in 1948, gave FN M A in July of that
year both the authority and the appropriation
with which to purchase a substantial quantity
of V A mortgages at par. The Association
was also authorized to issue advance commit
ments to builders to purchase these m ort
gages. A rapid expansion of purchases by
FN M A ensued and increased its V A m ort
gage holdings from $ 1 1 million at the end
of 1948 to $1,177 million by the end of 1950.
This growth in FN M A holdings represented
approxim ately 35 percent of the total increase
in V A -guaranteed mortgage debt during those
two years.
The accompanying chart shows th at most
of the increase in construction consisted of
single family dwelling units. This growth re-

1 9 4 9 -5 0 h o u sin g b o o m fin an ced
chiefly b y federally-insured mortgages*

♦The increase in housing starts is measured as the difference
between total housing starts during the years 1948 and 1950.
**Includes two or more fam ily dwelling units.
Source: Housing and Horae Finance Agency.

fleeted the increasingly liberal terms on feder
ally-insured mortgages which made home
ownership possible for many families who
had been previously excluded from this m ar

ket as well as a growing preference for home
ownership. R ental unit construction also in
creased somewhat, prim arily as a result of the
strong dem and for rental housing. N et house
hold formations were at peak levels, reflecting
in part the high m arriage rates which prevailed
at the time. Since young m arried couples,
then, as now, were inclined tow ard renting
rather than buying, this put considerable
pressure on the existing stock of rental units.
The Federal H ousing A dm inistration, acting
under the provision of section 608 of Title
V I of the N ational H ousing A ct, provided
assistance through a program of insuring
mortgages for rental housing projects in
amounts up to $5 million and up to 90 percent
of F H A ’s estim ate of the cost.

The 1953-55 boom
The housing boom th at developed during
the years 1953 through 1955 was similar to
the earlier one in th at the increasing levels
of activity were associated with trends in
business activity and in the overall credit
market. The decline in business activity
which started in the late summer of 1953
brought about a reduction in the overall de
mands for credit. This falling dem and coupled
with the effects of a Federal Reserve policy
of credit ease led to a decline in interest rates.
The yields on A aa corporate bonds, close to
3.35 in June of 1953, declined to 2.90 by
M arch 1954 and rem ained approximately at
this level through the rem ainder of the year.
Long-term G overnm ent security yields, about
3.00 in m id-1953, fell to a level of 2.50 by
M arch the following year. A s the rates on
both F H A and VA mortgages were fixed at
4V2 percent throughout this period, the
spread between the yields on these m ort
gages and competitive investments increased,
thereby m aking mortgages increasingly at
tractive to investors. T he extraordinary re
sponse of investors to the financial system is
once again apparent in the increase in the

149

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

federally-insured mortgage holdings of the
m ajor investors in this m arket during the
years 1954 and 1955, shown in Table 2.
The im pact of these financial developments
on the level of homebuilding began to become
apparent in the latter part of 1953. Both hous
ing starts and residential construction expen
ditures increased and continued to rise for
approxim ately a year and one-half. During
this period both expenditures and housing
starts increased by close to 40 percent, less
than the rise in the 1949-50 period. Total
mortgage debt rose by over $23 billion dur
ing 1954 and 1955, accounting for m ore
than 32 percent of the net increase in total
private debt.
In spite of those elements of similarity,
that boom differed considerably from the
earlier one. W hereas the 1949-50 boom
reflected increased construction of both single
and multiple dwelling units financed by all

V A h o u sin g b o o m in 1954 and 1955*
p e rce n t

had lost much of the urgency they possessed
during the earlier period. The net addition
to the nonfarm household population was
running below one million p er year, and the
num ber of families doubled up had de
clined considerably. There were, however,
m any families, especially among renters, who
w anted better housing bu t who had been ex
cluded from the m arket because they had
neither the money to make a downpaym ent
nor the income to keep up the monthly m ort
gage payments under existing mortgage
financing terms. In effect, these families were
given access to the housing m arket by a series
of administrative and Congressional actions
taken during this period which not only
removed the restrictions imposed during the
early stages of the K orean conflict but further
liberalized the credit terms on F H A and V A
mortgages. However, these families could
only become a p art of effective dem and when
funds were m ade available at these liberal
terms, and in this sense financial factors were
more im portant during this period. Investors
made funds available in the form of F H A
and, more particularly, V A mortgage loans
because these loans represented the best in
vestm ent opportunities at the time.
T able 3

M A T U R IT Y AND D O W N P A YM E N T
PR O VISIO N S O F VA P R IM A R Y NEW AND
PROPOSED HOM E LOANS
Percent of Loans With

•T h e increase in housing starts is measured as the difference
between total housing starts during the years 1953 and 1955.
• 'In c lu d e s two or more family dwelling units.
Source: Housing and Home Finance Agency.

150

three types of mortgages, FH A , VA, and con
ventional, the 1953-55 increase was almost
exclusively the result of an expansion in the
construction of single family dwelling units
financed with V A -guaranteed mortgages. The
reasons for these differences are largely re
lated to housing demand. By 1954 the underlying determ inants of new housing dem and

Year

Maturity
Less than
25
25 years
years

Down Payment
26-30
years

Yes

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

Source: Housing and Hom e Finance Agency.

MO NTHLY REVIEW

September 1960

M ost of the funds went to home buyers
through V A -guaranteed rather than FH A insured mortgages even though the rates on
these two were both fixed at 4V2 percent
throughout the period. Again, this reflects in
part the investors’ preference for V A -guaran
teed mortgages which provide cash payments
for defaults. M ore im portant during this
period, however, is the fact that VA mortgage
loans were in greater dem and by home buyers
because of their liberal terms. Beginning in
A pril 1953, the no-downpaym ent, 30 year
T able 4

LO A N -V A LU E AND M A T U R IT Y
P R O VISIO N S OF FHA (S E C . 2 0 3 )
NEW HOM E LOANS
Year

Maturity
Loan-Value Ratios— Percent of Loans With
Average Length
75%
or less
75-90% 91-95%
96-97%
in Years

1949

22.8

10.8

78.5

1 0 .8

—

1950

24.1

7.2

76.8

16.0

—
—

1951

23.4

14.1

67.7

18.2

1952

21.7

13.2

71.6

10.2

—

1953

2 2 .2

11.1

66.2

2 2.7

—

1954

22.9

11.0

6 6.0

22.8

—

1 9 55

25.6

9 .3

57.4

33.3

—

1956

25.5

1 1 .0

70.9

18.1

—

1957

25.5

1 1 .9

7 5 .8

11.5

1958

27.3

5.5

40.3

39.7

14.5

Source: Housing and Home Finance Agency.

m aturity loan was permissible under the VA
loan insurance program . This was also the
period of the “no-no-dow npaym ent” loan, in
which the veteran was even relieved of clos
ing costs. In contrast, it was not until August
1954 that Congress raised the permissible
maturities on F H A mortgages to 30 years,
and there was a downpaym ent requirem ent
on all F H A mortgage loans of at least 5 per
cent.

The 1958-59 boom
As in the prior two booms, the expansion
during this period was associated with events
taking place in the economy and in the over
all credit m arket. Econom ic activity declined
in the second half of 1957, turning down

sharply late that year. Again, one consequence
of this was a decline in the overall demand
for credit which helped to push down the
level of interest rates. The yields on A aa
corporate bonds, hovering around 4.10 in
O ctober 1957, declined to 3.60 by June 1958.
The yields on long-term G overnm ent securi
ties also fell from 3.70 to around 3.15 during
this same period. A fter June, the yields on
both of these types of bonds began to rise
and continued increasing throughout the re
m ainder of 1958 and all of 1959. F H A and
V A mortgage rates were 514 and 4% p er
cent, respectively, for the first p art of this
period but in m id -1959 were both increased
by Vi percent. Thus, during the latter part
of 1957 and through the first half of 1958,
F H A and VA mortgage rates became increas
ingly attractive to investors. It was at this
time the housing boom began to develop.
B oth housing starts and residential construc
tion expenditures began to rise in the early
part of 1958 and increased for a period of
slightly over one year. Housing starts reached
a peak in A pril 1959, whereas expenditures
turned down after M ay. D uring this period
both expenditures and housing starts in
creased by approxim ately one-half, slightly
m ore than the 1953-55 rise but less than in
1949-50. T otal mortgage debt rose substan
tially, increasing $27 billion during 1958 and
1959 and accounting for over 34 percent of
the net increase in total private debt. In sharp
contrast with the previous period, approxi
mately 60 percent of the increase in housing
starts in the recent boom was in convention
ally-financed construction. To a large extent
this reflects the net inflow of funds into savings
and loan associations during 1958 and 1959,
almost one-third again as large as the total
during the years 1956 and 1957. M oreover,
these associations had additional access to
funds by virtue of their heavy borrowing from
the Federal H om e L oan Banking System
throughout 1959. This inflow of funds into

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

savings and loan associations had a significant
impact on the level of conventionally-financed
construction since these associations invest
most of their funds in conventional home
mortgages. Savings and loan associations
alone accounted for approxim ately 56 p er
cent of the net increase in conventionallyfinanced mortgage debt during this two-year
period.
O ther m ajor investors in the mortgage
m arket, particularly commercial banks, also
increased their investment in conventional
mortgages. Over 50 percent of the increase
in the total nonfarm mortgage holdings of
commercial banks, insurance companies, and
m utual savings banks during the 1958-59
period was accounted for by conventional
mortgages, a substantially larger proportion
than in the two earlier periods of boom. This
reflects w hat seems to be a growing prefer
ence for conventional mortgages by these in
vestors. This preference is partly related to
T a b le 5

S E L E C TE D FA C TO R S A F F E C TIN G T H E
D EM AND FOR H O USING

Year

Net
Household
Formations
(Thousands)

Married
Couples
Without Own
Households
(Thousands)

No. of
Marriages
(Thousands)

Marriage
Rates per
Thousand
Population

1948

1 ,4 4 3

2,464

1,811

12 .4

1949

1,571

2,1 6 8

1,585

10.6

1950

1,592

2,016

1,6 6 7

11.1

1951

1 ,3 0 8

1,758

1 ,5 9 5

10.4

1952

967

1 ,5 5 8

1 ,5 3 9

9.9

1953

949

1 ,5 4 6

9.8

1954

896

1,471

1,490

9.2

1955

844

1 ,3 0 4

1,531

9.3

1956

893

1,263

1 ,5 8 5

9 .5
8.9

1957

1,1 8 9

1 ,2 2 9

1 ,5 1 8

1958

899

1 ,2 1 5

1,451

8.4

1959

685

1 ,1 0 9

1 ,4 9 4

8.5

Source: Housing and Home Finance Agency.

152

the fact th at they have m ore control over the
terms of conventional mortgages and since
the paym ent period is usually shorter for
these mortgages, funds are tied up for shorter
periods. In addition, there is less “red tape”
associated with conventional mortgages.

The underlying determ inants of dem and
were much the same as in the 1953-55
period, i.e., they were not so strong n or as
pressing as in the imm ediate postw ar period.
As indicated above, the expansion in 195455 resulted prim arily from the shift into
homeownership encouraged by the liberal
term s on V A -guaranteed mortgages. Since the
conventional m ortgage generally provides
less of a basis for entry of the “m arginal” buy
e r and since the underlying determ inants of
dem and do not appear to have been suffi
ciently strong enough to have brought about
the levels of construction attained during the
peak of the boom, it is reasonable to ask
w hat was the basis of demand.
A lthough the factual inform ation needed to
answer this question is not fully available,
there are several observations that can be
made. It is likely that some of the dem and
resulted from home purchases by families
who entered the m arket for the purpose of
“upgrading” their housing standards. Some
of these undoubtedly were “upper” income
families who had little worry over dow npay
m ent provisions or m onthly mortgage pay
ments. O n the other hand, m any of these
families probably did not have the m oney for
a large dow npaym ent bu t made a purchase
by resort to a junior mortgage o r other form
of supplem ental lending. D ata on the total
volume of this kind of lending during this
period are scant. However, it is significant to
note a substantial increase in the conventional
mortgage holdings of “ in d iv id u a ls and
others.” The net increase in their holdings
of these mortgages during the 1958-59 period
was half again as large as th at during 1957
and 1958 and over twice as large as that
during the two previous boom periods. This
suggests an increased volume of supplem ental
lending as m ost of these mortgage loans are
held by persons and institutions in this classi
fication.

September 1960

M O NTHLY REVI EW

M u ltip le a n d c o n v e n tio n a lly fin a n ce d h o u sin g sta rts rose
in 1 9 5 8 -1 9 5 9 *
p e rce n t

FHA
Si n g l e F a m i ly

1
I

C o n v e n t io n a l
M u l t i p l e F a m i ly * *

Type o f Finance

Ty p e o f

D w e l l i n g Uni t

*The increase in housing starts is measured as the difference
between total housing starts during the years 1957 and 195P.
••Includes two or more family dwelling units.
Source: Housing and Home Finance Agency,

It also appears that some of the increased
construction was speculative in nature and
resulted in a certain am ount of overbuilding.
As shown in the accompanying chart, more
than 30 percent of the increase in construc
tion was in multiple or rental dwelling units.
Corresponding to the 1954-55 period, rental
housing dem and was not so strong as it was in
the late forties. B oth net household form a
tions and the num ber of marriages were still
well below the early postw ar levels. O f course,
there were developments taking place which
probably added some strength to the demand
for rental units, e.g., a growing num ber of
single persons setting up private housekeep
ing units, increased movement back to the
city and into apartm ent units, especially by
m ature couples, etc. P art of the apartm ent
house boom during the 1958-59 period may
have been the result of the actions of some
builders who reportedly began to build rental
units as a means of utilizing the production
capacity for single family homes built up dur
ing the early stages of the boom. In any event,
it has become apparent in recent months that
some over-building did occur, as rental va
cancy rates have risen during the first two

quarters of 1960 in spite of the declining
levels of construction over the past year.
In contrast to its im portance in the earlier
booms, construction financed with V A m ort
gages contributed little to the expansion dur
ing this period. As indicated above, the earlier
im portance of the V A program resulted
largely from the exceptionally liberal credit
term s of the V A -guaranteed mortgage. Lib
eral terms still prevailed during the 1958-59
period, as shown in Table 3, yet the V A p ro
gram was of much less consequence. This was
chiefly the result of an interest rate fixed well
below what was deemed competitive. By
O ctober 1957, the spread between the AVi
percent rate on the V A mortgage and the
yield on A aa corporate bonds had been re
duced to 40 basis points, well below w hat it
had been in earlier periods when these m ort
gages had trouble competing for funds. The
declining yields on these bonds raised the
spread to 1.15 percentage points by June of
1958, bu t this still com pared unfavorably
with earlier periods, e.g., 1.40 in 1950 and
1.60 in 1954, and with the current spread of
1.65 between F H A mortgages and these
bonds. Theoretically, this low rate on V A
mortgages was offset by the larger discounts
which were applied to these mortgages.
However, a num ber of financial institutions
were reluctant to acquire them at large dis
counts. M any felt that acceptance of such
discounts might expose them to public dis
approval because of the “unethical” stigma
they felt was attached to this practice. This
attitude was reinforced by recurrent adverse
Congressional reaction to mortgage discounts.
M oreover, builders were not very receptive to
large discounts on V A mortgages. A lthough
both F H A and V A appraisals did not
recognize discounts on mortgages as cost
items, these discounts were easier to pass on
to the buyer who financed the purchase with
a F H A mortgage since the buyer was not
legally prohibited from paying more than the

153

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

F H A appraisal. O n the other hand, the
“reasonable” value placed on the home by
the V A controlled the maximum price the
veteran was perm itted to pay for the home,
thus, forcing the builder to absorb the dis
count out of his profits.
A final distinguishing feature of this period
is the im portant role of mortgage purchases
by the Federal N ational M ortgage Associa
tion in the expansion of new construction
financed by FH A -insured mortgages. In
A pril 1958, as an antirecession measure,
Congress appropriated $1 billion to FN M A
which the Association used under its special
assistance function to purchase F H A and V A
mortgages on low- and medium-income hous
ing. The A ssociation also expanded its sec
ondary m arket purchase in response to the
“tightness” which developed in the mortgage
m arket in m id-1959. As a result, its mortgage
holdings increased by close to $ 1 . 6 billion
during 1958 and 1959. However, in con
trast to its expanded operations during
the 1949-50 period, the m ajority of these
purchases were of F H A rather than V A
mortgages. F N M A ’s holdings of FH A -insured
mortgages increased by over $1.3 billion d ur
ing 1958 and 1959, accounting for approxi
mately 16 percent of the total net increase in
F H A debt during this period.

The current housing situation

154

Throughout the last half of 1959 and the
early p a rt of 1960, homebuilding was in the
downswing stage of the housing cycle. Both
housing starts and residential outlays fell con
tinuously during this period. Recently, this
dow nw ard movement has leveled off, and
there have been signs in the mortgage m arket
th at provide some basis for expecting im
provem ent in the latter p art of the year. A fter
being under heavy pressure last fall and
winter, residential mortgage markets have
eased slightly in recent months. However, it
does not automatically follow th at residential

construction is entering the early stages of
an upswing in the housing cycle. In the cu r
rent situation there is uncertainty arising out
of such unfavorable developments as a con
tinued rise in rental vacancy rates and the
failure of F H A applications and V A appraisal
requests to pick up as m uch as expected d ur
ing June and July.
It is clear from o ur discussion above that
what the future holds in store for housing is
related in large p art to w hat is currently
happening in the economy. Since all three
housing booms have been associated with
periods of econom ic decline, it is significant
to note that the economy has exhibited little
exuberance in recent months. T he gross n a
tional product increased only slightly during
the second quarter, rising from $501 billion
to $505 billion on a seasonally adjusted
annual basis. Industrial production has
leveled off in recent months. Interest rates
have also turned down sharply. In contrast,
the yields on F H A and V A mortgages have
rem ained relatively unchanged. Certainly our
past experience suggests this increasing
spread between the yields on F H A and V A
mortgages and competitive forms of invest
m ent should make these mortgages m ore at
tractive to investors, and, therefore, F H A and
V A m ortgage funds should become m ore
plentiful in the near future. Conceivably, the
im pact could be greater than it was earlier
since the interest rates on these mortgages
are higher now. A nother favorable financial
factor is the continued heavy flow of savings.
F o r example, the net increase in the savings
capital of savings and loan associations in the
first half of 1960 was 7 percent above the
record level of the corresponding period of
a year ago. This m eans substantial additions
to the supply of funds available for hom e
purchase, especially in the form of conven
tional mortgage loans.
These are favorable signs from the avail
ability side of mortgage funds. In themselves,

September 1960

M O NTHLY REVI EW

assuming that the current trends continue,
they portend rising levels of construction in
the near future. However, is it possible to
assume the presence of a dem and sufficient
to support a rising level of homebuilding?
Because of the anticipated increase in the
level of family form ations, the opportunities
for housing in the sixties are generally con
sidered to be favorable. However, the in
creasing num ber of family form ations is not
expected to materialize until after 1965. C ur
rently, this most im portant demographic fac
tor is about the same as it was throughout
the 1950’s. Thus, the underlying dem and
conditions are sim ilar to w hat they were
during the boom periods of 1953-55 and
1958-59. D uring the 1953-55 period, addi
tional buyers were attracted into the m arket
by the exceptionally liberal terms on VA
mortgages. D uring the 1958-59 period, the
boom was sustained in part by what appears
to be speculative apartm ent building con

struction. N either of these two appear to be
im portant factors in the current period. There
is some doubt as to how much more dem and
can be stimulated by further liberalizing m ort
gage credit terms, partly because there is not
much room left in which to liberalize. Rising
rental vacancy rates should exert some drag
on new apartm ent building. A nother unfavor
able factor is the relatively high interest cost
on mortgages which might discourage some
families from making a home purchase.
It is possible that the num ber of decisions
m ade to postpone home purchase during the
recent period of decline, i.e., the pent-up
dem and, will provide the basis for future
increasing levels of new construction. How
ever, the basic dem and situation, the higher
overall level of interest rates, and the
relatively high rental vacancy rates suggest
that there are more impediments in the way
of a strong upswing in housing construction
than in the earlier periods.

N ote: The series, Bank Debits Index— 31 cities, which is published
in the Banking and Credit Statistics and Business Indexes table, has
been revised beginning with 1953 data. Figures previously published
were based on a six-day week, while the revised series is based on a fiveday week. The revised indexes reflect new seasonal factors.

155

FEDERAL

RESERVE

BANK

SAN

FRANCISCO

BANKING AND CREDIT STATISTICS AND BUSINESS INDEXES—TWELFTH DISTRICT'
(In d e x e s : 1947-1949 = 100. D o llar a m o u n ts in m illio n s o f d o lla rs)
Bank rates

Condition items of all member banks*
Vear
and
Month

Loans
and
discounts

U.S.
Gov’t
securities

Demand
deposits
adjusted*

Total
time
deposits

Bank debits
index
31 cities*. *

Total
nonagrlcultural
employ
ment

nn
on

short-term
business
loans*

1929
1033
1939
I960
1951
1952
1953
1954
1955
1956
1957
1958
1959

2,239
1,486
1,967

495
720
1,450

1,234
951
1,983

1,790
1,609
2,267

42
18
30

....

7,866
8,839
9,220
9,418
11,124
12,613
13,178
13,812
16,537

6,463
6,619
6,639
7,942
7,239
6,452
6,619
8,003
6,673

' 9,937
10,520
10,515
11,196
11,864
12,169
11,870
12,729
13.375

6,777
7,502
7,997
8,699
9,120
9,424
10,679
12,077
12,452

i32
140
150
153r
173r
190r
2 04r
209
237

3.66
3.95
4.14
4.09
4.10
4.50
4.97
4.88
5.36

1959
A ugust
S eptem ber
O ctober
N ovem ber
D ecem ber

19,924
15,978
16.010
16,252
16,537

6,932
6,717
6,702
6,651
6,673

12,797
12,850
12,963
13,133
13,375

12,378
12,365
12,316
12,138
12,452

242r
240r
243r
243r
240r

I960
Ja n u a ry
F e b ru a ry
M arch
A pril
M ay
Ju n e
Ju ly
A ugustp

16,354
16,388
16,660
16,933
17,104
17,131
16,895
17,145

6,304
5,976
5,707
5,999
5,813
5,738
5,967
6,301

12,971
12,493
12,553
12,810
12,290
12,298
12,608
12,584

12,111
12,017
11,986
12,042
12,142
12,277
12,253
12,455

2 48r
243r
2 42r
2 54r
255r
255r
260r

*. ••

5.54
5.71
• • ■•

5,72

....
5.73

Total
mf’g
employ
ment

Dep’t
store
sales
(value)*

Retail
food
prices
i. •

60
103
112
118
121
120
127
134
138
138
143

57
105
121
130
137
134
143
152
156
154
163

102
52
77
98
100
100
100
96
104
104
96
89
93

30
18
31
107
112
120
122
122
132
141
140
143
157

64
42
47
100
113
115
113
113
112
114
118
123
123

144
144
144
145
145

164
163
161
164
165

105
87
71
91
98

157
157
158
155
158

123
123
123
123
123

146
147
147
148
148
148
148

167
167
167
166
164
163
163

99
92
95
95
95
85
81

157
159
157
159
153
153
159

124
123
123
126
125
125
126

....

Industrial production (physical volume)*

III

Car
loadings
(number)*

Waterborne Foreign Trade Index* i*

Petroleum7

Exports

Imports

Steel1

Copper1

Electric
power

Total

Dry Cargo

Tanker

Total

Dry Cargo

1029
1933
1939
1950
1651
1952
1953
1954
1955
1956
1957
1958
1959

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

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

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

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

29
26
40
120
136
145
162
172
192
209
224
229
253

190
110
163
91
186
172
141
133
165
201
231
176
186

150

247

i0 7
80
194
200
138
141
178
261
308
212
221

243
108
175
129
146
123
149
117
123
123
135

124
72
95
142
163
206
314
268
313
459
582
552
682

128

24
125
146
139
158
128
154
163
172
142
138

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

97
145
140
142
163
166
187
219
216
218
283

57
103
733
1,836
4,239
2,912
3,614
7,180
10,109
9,096
11,083

1959
Ju ly
A ugust
Septem ber
O ctober
N ovem ber
D ecem ber

118
111
113
115
117
129

92
92
92
91
91
91

136
136
132
132
133
131

192
191
176
186
154
152

79
11
13
15
148
212

118
76
36
40
43
40

267
256
248
249
257
257

166
196
171
231
148
209

215
265
217
289
202
266

96
97
107
150
71
128

612
654
678
702
807
858

284
254
269
261
290
302

9,168
11,074
11,344
12,206
14,284
15,333

1960
Ja n u a ry
F eb ru ary
M arch
April
M ay
Ju n e
Ju ly

127
127
120
113
112
101

90
90
91
91
91
91

130
127
131
137
136
132

141
140
153
180
180
180
165

197
206
183
162
164
158
134 p

67
116
134
141
144
142

263
258
273
262
272

229
230
287
240
251

296
271
316
287
330

134
172
246
172
139

958
720
607
811

277
259
296
286

18,687
12,719
8,707
14,484

[ Lumber

Crude

Refined

Cement

...

•• •

...

Tanker

1 A djusted for seasonal v a ria tio n , except w here indicated. E x ce p t for d e p a rtm e n t store sta tistics, all indexes are based upon d a ta from outside sources,
as follows: lum ber, C alifornia R edw ood Association a n d U.S. B ureau of th e C ensus; petroleum , cem ent, and copper, U.S. B u reau of M ines; steel,
U .S. D e p artm en t of C om m erce and A m erican Iro n a n d Steel In s titu te ; electric pow er, F ed eral Pow er C om m ission; n o n a^ricu ltu ral and m an u factu rin g
em p lo y m en t, U.S. B u re au of L ab o r S ta tistics a n d cooperating sta te agencies; re ta il food prices, U.S. B u reau of L ab o r S ta tistics; carloadings, various
ra ilro ad s a n d ra ilro ad associations; a n d foreign trad e , U.S. B u reau of th e C ensus.
J A nnual figures are as of end of year, m on th ly figures as
of la s t W ednesday in m onth. *D em and deposits, excluding in te rb a n k and U.S. G overnm ent deposits, less cash item s in process of collection. M onth ly
d a ta p a rtly e stim ated .
* D e b its to to ta l deposits except in te rb a n k prior to 1942. D eb its to dem and deposits except U.S. G o v ern m en t a n d
in te rb a n k deposits from 1942.
* D aily average.
* A verage ra te s on loans m ade in five m ajo r cities, w eighted b y lo an size category.
1 N o t a d ju ste d for seasonal v a ria tio n ,
• Los Angeles, S an Francisco, and S e a ttle indexes com bined.
• C om m ercial cargo only, in
phy sical volum e, fo r th e Pacific C o ast custom s d istricts plus A laska a n d H aw aii; sta rtin g w ith Ju ly 1950, “ special categ o ry ” ex p o rts a re excluded
because of secu rity reasons.
10 A laska a n d H aw aii are included in indexes beginning in 1950.
p — P relim in ary .
r— R evised.

156

Full text of Economic Review (Federal Reserve Bank of San Francisco) : September 1960

FRASER