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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Content last modified 6/05/2009. CONFIDENTIAL (FR) SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee October 15, 1971 By the Staff Board of Governors of the Federal Reserve System SUPPLEMENTAL NOTES The Domestic Economy New homes sold by speculative builders, although down from the peak reached in July, were at a very advanced rate in August, as much as three-tenths above a year earlier. While the number of homes being held by speculative builders for sale increased somewhat further in August, it remained quite low relative to sales. Continuing an apparent shift in the mix of sales toward smaller and less expensive units, the median price of new homes actually sold moved down further in August--to $24,900. This was more than $1,000 under the recent high in June and the lowest since March. AFTERNOON October 18.) (CONFIDENTIAL UNTIL MONDAY -2 - NEW SINGLE FAMILY HOMES SOLD AND FOR SALE Homes for Sale2/ Homes Sold 1/ (Thousands of units) Median price of: Homes for Sale Homes Sold (Thousands of dollars) 1969 448 228 25.6 27.0 1970 485 227 23.4 26.2 IIQ 457 518 571 219 215 227 24.4 23.0 22.6 27.0 27.1 26.2 661 626(r) 220 245 24.3 25.8 26.1 26.4 596(r) 621(r) 722(r) 672 233(r) 245 250 259 25.5 26.0(r) 25.3(r) 24.9 26.5 26.4 26.7 26.4 IIIQ IVQ 1971 IQ IIQ 1971 May June July Aug 3/ 1/ SAAR. 2/ 3/ SA, end of period. August figures and revisions are confidential until Monday afternoon. -3- The Domestic Financial Situation Mortgage market. Interest rates on conventional new- home mortgages remained at an average of 7.85 per cent during September, according to FHA data, reflecting mixed regional changes. Average yields in the more sensitive secondary market for Federally underwritten home mortgages continued downward for the second consecutive month, as discounts declined below 7 points. Gross yield spreads of home mortgages over new issues of high-grade corporate bonds improved to 40 basis points, the widest margin since early this year, but offering little, if any, net investment incentive to diversified lenders after allowance is made for the higher servicing costs on mortgages. -4 - AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES Primary market: Conventional loans Yield spread Level (basis points) (per cent) Secondary market: FHA-insured loans Yield spread Level (basis Discount (points) (per cent) points) 1970 Low High 8.30 (Dec) -56 (June) 8.60 (July, 50 (Dec) Aug) 8.40 1 (May) 9.29 99 (Feb) 3.1 (Nov) 6.0 (Feb) 1971 April May June 7.55 7.65 7.70 - 2 -36 -20 7.37 7.75 7.89 -20 -36 - 1 July Aug Sent 7.80 7.85 7.85 -16 20 41 7.97 7.92 7.84 1 27 40 NOTE: 3.1 6.1 7.2 7.8 7.4 6.8 FHA series; interest rates on conventional first mortgages (excluding additional fees and charges) are rounded to the nearest 5 basis points. On FHA loans carrying the 7 per cent ceiling rate in effect since mid-February 1971, a change of 1.0 points in discount is associated with a change of 12 to 14 basis points in yield. Gross yield spread is average mortgage return, before deducting servicing costs, minus average yield on new issues of high grade corporate bonds with 5-year call protection. September data confidential until released. -5 - INTEREST RATES Highs Lows Aug. 1971 13 Sept. 20 Oct. 14 Short-Term Rates Federal funds (wkly. avg.) 3-month Treasury bills (bid) Bankers' acceptances Euro-dollars Federal agencies Finance paper CD's (prime NYC) Most often quoted new Secondary market 5.59(9/15) 5.53(7/19) 5.62(8/23) 10.00(8/17) 5.70(7/30) 5.62(8/16) 5.75(8/11) 6.05(8/18) 6-month Treasury bills (bid) 5.84(7/24) Bankers' acceptances 5.75(8/23) Commercial paper (4-6 mo.)5.88(8/18) Federal agencies 6.02(7/30) CD's (prime NYC) Most often quoted new 6,00(8/11) Secondary market 6.40(8/18) 1-year Treasury bills (bid) CD's (prime NYC) Most often quoted new Prime municipals 3.29(3/10) 5.59(8/11) 5.59(9/15) 5.29(10/13 5.15 5.62 7.89 5.58 3.62(3/15) 5.50 3.22(3/11) 3.88(3/10) 4.94(3/17) 3.27(2/24) 4.43 4.72 5.00 5.50 6.69 8.21 5.23(9/ 17) 4.68 5.25 5.38 5.25 5.62 3.62(3/24) 5.75 3.80(3/17) 5.88(8/11) 5.68(9/15) 5.34 3.35(3/11) 5.51 4.00(3/10) 5.75(e) 4.00(3/29) 5.88 3.53(3/10) 5.83 5.00 5.62(e) 5.75 5.24(9/17) 4.55 5.12(e) 5.62 4.80 5.38 4.00(3/24) 6.00 5.75 6.25(8/11) 6.00(9/15) 5.50 3.70(3/3) 6.01(7/28) 3.45(3/11) 5.85 5.19 4.72 6.25 3.60(8/12) 2.15(3/24) 3.60 5.75 3.10 5.62 2.70 Treasury coupon issues 5-years 20-years 7.03(8/10) 4.74(3/22) 6.78 6.56(6/15) 5.69(3/23) 6.32 6.16 6.07 5.87 5.92 Corporate Seasoned Aaa Ba 7.71(8/13) 7.05(2/16) 7.71 8.93(1/5) 8.33(2/25) 8.87 7.42 8.66 7.39 8.48 8.23(5/20) 6.76(1/29) 7.97 7.56(9/17) 7.22 Municipal Bond Buyer Index Moody's Aaa 6.23(6/24) 5.00(3/18) 6.03 5.90(6/30) 4.75(2/11) 5.80 5.38(9/17) 4.99 5.10(9/15) 4.65 Mortgage--implicit yield in FNNA auction 1/ 8.07(7/26) 7.88(9/8) 6.25(8/11) 4.38(3/3) Intermediate and Long-Term New Issue Aaa 1/ 7.32(4/12) -- 7.85(10/4) Yield on 3-month forward commitment after allowance for commitment fee and required purchase and holding of FN.I stock. Assumes discount on 30-year loan amortized over 15 years. e--estimated. i -6 - International Developments On October 14 the Bank of Italy followed the lead of the Bundesbank (p. IV-16) and announced reductions, effective immediately, in its discount rate from 5 to 4-1/2 per cent and in its rate on advances from 5 to 4 per cent. In London many market participants had expected a Bank of England rate change on Thursday, but this did not occur. CORRECTIONS: Page 11-5, line 6. The industrial production index figure should have been 105.1 for August as shown on page I-T-1. (However, this is subject to revision when the September index is released, October 18.) Page II-4A. Gross National Product and Related Items - the high employment surplus or deficit should be $4.9 billion in QII 1972, not +$4.9 billion, as shown. Page III-8. July 26, Table footnote should include: "Beginning auctions are only for 3-month commitments." Last paragraph should begin: quarter,...". "During the third
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