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For Use Upon Delivery at
9:00 a m. E .S .T .
January 9, 1976

Remarks of





to the


San Francisco, California

January 9, 1976

The Real Estate Outlook for 1976

While it has become a ritual to utilize the early part of a new calendar
year to make projections for the coming twelve months, most of you have
probably already made your own plans for 1976. Successful participants
in the real estate industry know of the need for advance planning to a greater
degree than in some other sectors of our economy.
Nonetheless, I'd like to share with you my own assessment of some of
the principal factors that will influence real estate in 1976.

I am, of course,

speaking only for myself not for my colleagues on the Federal Reserve Board.
It's important in any real estate outlook to realize there is no such thing
as a national real estate market. It only exists as the sum of a large number
of local markets. When you discuss real estate in general terms, it's also
important to remember there are always good local markets in bad times,
and bad local markets in generally good times. Therefore, your own real
estate forecast must be carefully cut to suit your own individual market

If you operate in one city, the forecast needs to be for that city.

If you operate in Northern California, then you need the total of a series of
local individual forecasts.
Given this assumption, you might logically ask why one who has
recently moved to Washington from Alabama, would dare to talk about the
outlook to a local group in Northern California.

My reason is only to give

some broad perspective of national events which will in turn be reflected in



your local markets during the coming year. As one who has been an
active practitioner in local real estate markets, I hope that my comments
from this new perspective will be a benefit to you in making your own
Let’s focus first on some things which have a high probability of
occurring in 1976.

While nothing is absolutely certain, I personally feel

that the probability of these things taking place is sufficiently strong that
you should be prepared to expect them.
The cost of new construction, whether it be a house, a store, or an
office building, will continue to go up

Why do I think so?

We have learned that the high proportion of the construction labor
forec that is unemployed has only slowed — it has not stopped — the rapid
rate of hourly wage increases in the construction industry. This fact, when
combined with the rebound in the price of building materials from its 1975
low, convinces me that the labor and materials factor in new construction
is going to increase again this year.
If — as I personally think likely — many of our cities will be unwilling
to borrow for extension of their utility systems in 1976, this may encourage
price stabilization of developed land.

liven so, raw land not suitable for

immediate development may recede from its speculative heights of recent

I am not sure in my own mind whether the financial condition of



many land developers will produce some fire sale liquidations which will
depress prices of developed lots during the year.

I personally hope not,

since forced liquidation of real property on depressed markets only tends
to depress prices further and hurts everyone in the long run.
These comments about raw land, of course, don't apply to agricultural
land which is suitable for modern economical and mechanical farming
techniques. This, I believe, is likely to continue to rise in value this

However, historical perspective would lead you to question whether

we may soon experience another decline in farm land value similar to
those experienced after previous periods of sharp rises in agricultural
prices, when land prices fell with farm product prices.
Everyone knows that unit sales of new single family houses have been
down in 1973 and 1974. Yet the median sales price of a new home sold in
1973 was $32,500, up 18 percent; in 1974 the median price was $35,900, up
10 percent; and in October 1975 the median sales price was $40,700, up
9 percent from a year earlier.

Put higher labor materials, land and expectations

together and the result is bound to produce higher total construction costs this
The second strong probability, I believe, is a slow rate of apartment

Here are some reasons apartment construction is likely to

continue in 1976 at about the present pace. Many communities still have


abnormally high vacancy rates.


For that reason, gross rental rales will

have trouble rising enough to keep pace with galloping increases in
operating costs for utilities, maintenance, taxes, and management.
So net rents will go up little, if at all.

These net rents, as all of you

know, are the basis of new construction decisions when they are compared
with the cost of construction, the cost of debt serv ice, and the need for a
reasonable return on equity.
The demand fo r apartments is influenced by the rate of household
formation, which in recent years was increased by a growing number of
single person households.

However, the number of new households formed

this year w ill, in my opinion, be depressed by a continued high rate of
unemployment among young adults. This means that the apartment
market will not grow for the singles only, ''sw ingers" groups.

F may

well be possible that the number of young people reaching the marrying
age will create growth in the market for units designed to appeal to young
fam ilies.
But there are other negatives.

One subtle but nonetheless important

impact on m ulti-family construction is the change in the legal and social
environment within which apartment investors now live.

Many of our

court jurisdictions have revised the fundamental legal rights of landlords
and tenants so that the rights of the tenant, to a certain extent, lake




precedence over those of the landlord.

Investors are becoming alarmed

about the increasing number of communities going the myopic route of
rent control, which they feel is another form of confiscation of private

A lso, many investors learned bitter lessons during 1974 and

1975 concerning the tax ramifications of loan default on accelerated
depreciation schedules. Therefore, the tax shelter aspects of multi­
family construction, while still important, are viewed with a great deal
more care than before.
My last reason fo r caution about apartment construction is a short­
term negative but long-term positive.

I believe that the leadership of

our Federal Housing programs now know that liberal credit or other
subsidy programs to stimulate m ulti-family construction, which are not
soundly based on market realities, create more problems than they solve.
Therefore, moves by our Government in this direction will likely be
gradual in implementation and modest in scope.
Now let's discuss some factors which, while less certain, are still
highly probable in 1976. The most important of these is the fact that
the tendency to inflation remains strong.

It's not news to say that the

pace of inflation, while down from 1974, has continued at a relatively
high level despite unemployment and plant utilization figures which had
led us to expect low er p rices.

I am increasingly im pressed that the causes



of this situation appear to be coming from structural, endemic conditions
in our economy which are not likely to be resolved very quickly.
While it's my belief and hope that inflation will moderate further in
1976, investors are still unlikely to commit long-term loans at cheap
interest rates without m ore assurance that inflation is being contained.
I think it is highly probable that 1976 will see only a modest demand
for m ore stores, shopping centers, and office buildings. Retail sales
while up in dollar amounts are not rising rapidly when measured in
term s of the quantity of items sold.

This fact coupled with the slow er

changes in transportation and living patterns will also slow the need for
new shopping facilities unless someone is soon able to invent a new
merchandising concept to replace the discount store, the super market,
and the shopping center.
While general business conditions are improving, our corporations
have learned in 1975 to operate on lower overhead and with better efficiency.
T herefore, the overhang in the supply of office space which some areas
are experiencing will be gradually filled from older non-econom ic buildings
and from only modest overall market growth. This is a condition tending
to keep office rents depressed and the demand for new office building
construction sluggish.



F or some people, perhaps the most discouraging probability during
this year is the prospect fo r resort and recreational properties.

I think

that the speculative fires of 1973 and 1974 burned enough fingers that it
will take some more years to rebuild public confidence in this type of

I also think that a large part of this market is usually motivated

by a feeling of financial well-being on the part of our families who are
relatively well off.

In that context, while corporate profits have rebounded

sharply from the 1975 lows, thus far the stock market shows no inclination
to rise to a point that shareholders might be encouraged to spend some
paper profits on a secondary home.
Thus far, unfortunately, "calling it like I see it" has produced a very
discouraging outlook. You may properly ask, "is there anything good
about real estate for 1976?" In my view, yes, there is.
for 1975 will continue to shine in 1976.

The bright star

Namely, the single family home


As I have already noted, the fundamental demographics are still

The number of our young people reaching the age where they

are expected to m arry and buy houses is growing. While there has been
much conversation about changed living patterns and even changed marital
patterns in recent years, the figures would lead us to believe that these
people will buy their share of houses when they get to the house-buying age,
just like your and my generation did.

Furthermore, it looks like our consumer




incomcs arc continuing to increase in real, as well as in nominal
term s.
The fundamental conditions arc also positive for an ample supply
of the mortgage money which usually sustains single family home purchases.
The growth of savings in 1975 has produced a highly liquid thrift industry.
About 10 percent of its assets are now in liquid form , while the level of
forward commitments is modest in proportion to internally-generated
cash flow.

These facts should help insulate thrift institutions against

a sudden change in ihe inflow of new deposits, should that occu r in the
months ahead.
Most econom ic projections do not call for a rapid growth in econom ic
activity in 1976.

This suggests that credit demands w ill not likely push

interest rates up sharply.
Two factors, though, deserve a further note of caution. The first
is that urban single family mortgage credit is now almost totally dependent
on the thrift institutions and the Federal Government for funds. While
com m ercial banks still make about 11 percent of these loans, not a single
other source of savings capital has significant interest in home loans today.
For this reason, any change in the prospects for thrift institutions would
be likely to produce sharp changes in the mortgage market.




The second factor worth watching is the continuing level of Federal
deficits needing to be financed.

If gross credit demands should expand

in 1976, it could w ell be possible that Treasury borrowing could put
upward pressure on short-term interest rates.
The best news fo r 1976, in my opinion, is a fundamental change in
market psychology fo r single family homes. We learned in 1975 that
the general public would buy existing houses in record numbers at today's
p rice s.

We also learned that the public will pay 9 percent interest fo r

mortgage money without the mental blocks that drove many from the
market ea rlier.

I feel that this change has taken place because the

American public has increasingly learned that a home is a good buy at
today's prices and interest rates.

They have learned about the prospects

in most areas for increasing market values.

They have also learned

that the amenity benefits which they are receiving through home ownership
are needed by their fam ilies now, rather than later after the children
are grown and gone.
This renewed emphasis on single family homes is good news in
several non-real estate ways. It's good news econom ically because it
encourages a m ultiplier effect on spending and production.

It's good

news socially because it strengthens our family ties and produces a
more stable society.

It makes m ore fam ilies have a stake in the future

of our cities, and, therefore, in our nation.



Perhaps the most certain thing to happen in 1976 is that it will
produce surprises.

The biggest of these is likely to be the opportunities

which have existed, but you and I have perceived too late to utilize.
I've been impressed for years by a trite phrase.

"Opportunity is

where you find i t ." Notice very carefully what this phrase says but
doesn't say.

It does not say "where opportunity finds y o u ." But rather

"where you find i t ."
So 1976, like 1975, and like 1977, will end up being the kind of year
you and I determine to make it at the beginning..