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Statement on behalf of the Board of G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m , p r e s e n t e d by Wm. McC. Martin, J r , , C h a i r m a n , at a Roundtable D i s c u s s i o n before the Subcommittee on Housing, Senate Banking and C u r r e n c y C o m m i t t e e . November 2 3 - 2 9 , 1955. M O N E T A R Y POLICY AND THE REAL ESTATE MARKETS C o n g r e s s has placed on the F e d e r a l R e s e r v e S y s t e m r e s p o n sibility for formulating and c a r r y i n g out national c r e d i t and m o n e t a r y policies. The S y s t e m ' s objective is to contribute to sustainable economic growth and to m a i n t e n a n c e of a stable value for the d o l l a r . This r e s p o n s i b i l i t y for c r e d i t and m o n e t a r y conditions r e l a t e s to the o v e r - a l l c r e d i t situation, not to m a r k e t s for p a r t i c u l a r goods and s e r vices or to the activities of p a r t i c u l a r p r o d u c e r or c o n s u m e r g r o u p s . The S y s t e m ' s actions influence m o s t d i r e c t l y the lending and investing activities of c o m m e r c i a l b a n k s , which supply the c r e d i t used by individuals or b u s i n e s s e s . These o p e r a t i o n s of the c o m m e r c i a l b a n k s , in t u r n , influence other financial institutions and m a r k e t s . The g e n e r a l economic developments with which the System is p r i m a r i l y concerned a r e the r e s u l t of combined a c t i v i t i e s of the many m a r k e t s that make up the economy. The S y s t e m m u s t keep itself informed constantly about these p a r t i c u l a r m a r k e t s in o r d e r to make judgments and to d e t e r m i n e a p p r o p r i a t e c r e d i t and m o n e t a r y p o l i c i e s . * The S y s t e m ' s only d i r e c t influence on a p a r t i c u l a r m a r k e t is e x e r c i s e d through m a r g i n r e q u i r e m e n t s (Regulations T and U) in the m a r k e t for r e g i s t e r e d s t o c k s . -2Response to the S u b c o m m i t t e e ' s inquiry about the influence of c r e d i t and m o n e t a r y policy on m o r t g a g e and housing m a r k e t s m u s t be considered against this background. As these a r e specific m a r k e t s , the influence of c r e d i t and m o n e t a r y policies upon them is i n d i r e c t . Monetary Policy and Real E s t a t e M a r k e t s Over the P a s t Few Y e a r s The amount of housing that m a y be built, sold, and financed within any period depends upon a n u m b e r of c o n s i d e r a t i o n s . Demand for housing depends on growth and shifts in families and other o c c u p a n t s , upon p r i c e f a c t o r s , and upon ability of individual b u y e r s to finance t h e i r purchases. It a l s o depends upon the physical availability of r e s o u r c e s for c o n s t r u c t i o n of new h o m e s - - l a n d , building m a t e r i a l s , and l a b o r . This p l a c e s definite l i m i t s on the amount of housing that can be added to the supply within any short period of t i m e . The capacity of the economy to finance home p u r c h a s e s m u s t also be c o n s i d e r e d . The availability of funds for i n v e s t m e n t in m o r t g a g e s depends on the flow of s a v i n g s , on a l t e r n a t i v e opportunities for investing funds, and on c r e d i t and capital m a r k e t conditions g e n e r a l l y . Residential building and home p u r c h a s e s a r e strongly influenced by the availability and t e r m s of c r e d i t . The n a t u r e of this influence is not e a s y to t r a c e , for many other f a c t o r s a r e always a t work. It is c l e a r , h o w e v e r , that b e c a u s e of the complexity of these m a r k e t s , the i m p a c t of c r e d i t and m o n e t a r y policy on t h e i r different e cFRASER t o r s and on p a r t i c i p a n t s Digitized sfor therein varies considerably. -3Mortgage Markets and Lenders Because mortgage markets are local in important r e s p e c t s , variations usually develop among geographic a r e a s , reflecting different market structures as well as differences in regional economic development. To a considerable extent the development of Federally under* written mortgages has served to reduce regional differences in the supply of savings relative to local investment demands. The relative attractiveness cf Federally underwritten mortgages and conventional mortgages may change from time to time, partly because interest rates on the latter are free to vary more widely than are rates on the former. The effects of changes in credit and monetary policy normally take some time to permeate a market as complex and variable as the mortgage market. They may be particularly slow to influence con- struction, for instance, if the amount of financing commitments by lending institutions is large. The precise timing of events cannot be foreseen in view of the many variables involved and the changing c i r c u m stances of each period. For example, from mid-1952 to mid-1953 large over-all demands for credit p r e s s e d upon limited, though growing, credit availability and resulted in some strains on financial markets. Expansion of real estate mortgage debt was restrained at the start of this period by the selective regulation of real estate construction credit. Regulation X, governing the extension of conventional credit on new -4houses and other new s t r u c t u r e s , was suspended in S e p t e m b e r 1952, but some r e s t r i c t i v e conditions on F e d e r a l l y u n d e r w r i t t e n m o r t g a g e s continued until April 1953. F e d e r a l l y u n d e r w r i t t e n m o r t g a g e s having r e l a t i v e l y low m a x i m u m i n t e r e s t r a t e s b e c a m e l e s s a t t r a c t i v e to i n v e s t o r s in a m a r k e t of generally r i s i n g y i e l d s , and w e r e salable only at discounts from p a r . G I loans on new h o u s e s , in p a r t i c u l a r , declined m a r k e d l y during the y e a r ending June 1953 and w e r e a much s m a l l e r p r o p o r t i o n of total m o r t g a g e lending than in c o m p a r a b l e e a r l i e r p e r i o d s . Conventional mortgage lending meanwhile i n c r e a s e d s u b s t a n t i a l l y , although such loans were g e n e r a l l y available to b o r r o w e r s only at higher i n t e r e s t r a t e s and on m o r e r e s t r i c t i v e t e r m s than had been the c a s e p r i o r to selective c r e d i t regulation and g e n e r a l c r e d i t r e s t r a i n t . I n t e r e s t r a t e s on F e d e r a l l y u n d e r w r i t t e n m o r t g a g e s w e r e r a i s e d in May 1953. Shortly a f t e r w a r d s , the slackening of other c r e d i t d e m a n d s , the easing in c r e d i t and m o n e t a r y policy, and the r e s u l t i n g decline in yields on nonmortgage i n v e s t m e n t s i m p r o v e d the competitive position of m o r t g a g e s g e n e r a l l y in financial m a r k e t s . M o r e o v e r , the flow of savings to financial institutions was i n c r e a s i n g r a p i d l y while i s s u e s of c o r p o r a t e s e c u r i t i e s available to i n v e s t o r s w e r e r e d u c e d . The changed demand and supply situation in financial m a r k e t s began to be reflected significantly in m o r t g a g e m a r k e t s late in 1953. By that t i m e , with slackening in other demands for c r e d i t and a -5continuing decline in yields on competitive i n v e s t m e n t s , funds for m o r t gages with F e d e r a l u n d e r w r i t i n g b e c a m e much m o r e r e a d i l y a v a i l a b l e , with both FHA and VA loans selling in s e c o n d a r y m a r k e t s at p r i c e s close to p a r , and i n t e r e s t r a t e s on conventional loans reduced by 1/4 to 1/2 p e r cent. I n v e s t o r s began actively to seek m o r t g a g e s on t e r m s which they would not have granted six months e a r l i e r , C o m m i t m e n t s by l e n d e r s to take m o r t g a g e s , e s p e c i a l l y those guaranteed by VA, w e r e m a d e in i n c r e a s i n g volume toward the end of 1953 and r o s e s h a r p l y in 1954, and many l e n d e r s who e a r l i e r did not engage in such activity began to do so, The r i s e in m o r t g a g e c r e d i t on newly completed and existing p r o p e r t i e s did not occur until the second half of 1954. In that period total m o r t g a g e lending was one-fourth l a r g e r than in the p r e c e d i n g six m o n t h s , reflecting gains in m o s t types of loans for p u r c h a s e of both new and existing h o u s e s . G I loans were i n c r e a s i n g l y available to b o r r o w e r s with no down payment and m a t u r i t i e s of 30 y e a r s , and other types of m o r t g a g e loans w e r e a l s o r e a d i l y available on favorable t e r m s . Mortgage lending on r e s i d e n t i a l p r o p e r t i e s expanded s h a r p l y in the f i r s t half of 1955 to an a l l - t i m e high of a l m o s t 14 billion d o l l a r s . The volume of G I loans made on new h o u s e s r o s e m a r k e d l y to over 2 billion d o l l a r s , the l a r g e s t total by far for any half y e a r . In the s a m e period t h e r e was a s h a r p r i s e in F H A - i n s u r e d loans on existing h o u s e s to over 900 million d o l l a r s , reflecting chiefly a l i b e r a l i z a t i o n of t e r m s made possible by the Housing Act of 1954. • 6For the full y e a r ending June 30, 1955, new r e c o r d s for n e a r l y all types of m o r t g a g e lending w e r e e s t a b l i s h e d . The r e a d y acceptance by i n v e s t o r s of VA-guaranteed loans on t e r m s favorable to b o r r o w e r s and the accumulation of a l a r g e backlog of c o m m i t m e n t s by lending i n s t i t u t i o n s , to take m o r t g a g e s in the future, stand out a s major influences on the m o r t g a g e m a r k e t during this p e r i o d . Increase in the volume of VA loans amounted to over t w o - t h i r d s of the i n c r e a s e in lending on new h o u s e s and over two-fifths of the i n c r e a s e in lending on existing h o u s e s . Meanwhile, F H A - i n s u r e d loans made on new h o u s e s during these 12 months showed little change from the two p r e c e d i n g 12-month p e r i o d s . Housing M a r k e t s The influence of c r e d i t conditions on home building and p u r chase is even m o r e difficult to t r a c e than that on m o r t g a g e m a r k e t s , p a r t i c u l a r l y as far as the timing of changes is c o n c e r n e d . For e x a m p l e , t h e r e was little decline in r e s i d e n t i a l c o n s t r u c t i o n activity as a r e s u l t of the c r e d i t s t r i n g e n c y in the spring of 1953. Subsequently , t h e r e was c o n s i d e r a b l e lag in the adjustment of r e s i d e n t i a l m a r k e t activity to the change toward e a s i e r c r e d i t availability which began around m i d - 1 9 5 3 . The n u m b e r of housing units s t a r t e d through the first half of 1954 was little different from c o m p a r a b l e p e r i o d s in p r e ceding y e a r s . Statistical m e a s u r e s of p r e - b u i l d i n g activity did not begin to move upward until e a r l y 1954, but t h e r e a f t e r r o s e r a p i d l y . -7- By August, r e q u e s t s by b u i l d e r s to the V e t e r a n s A d m i n i s t r a t i o n for a p p r a i s a l of proposed h o u s e s were m o r e than double the l a r g e s t monthly total in the t h r e e p r e c e d i n g y e a r s . Applications to FHA for m o r t g a g e i n s u r a n c e on new h o u s e s a l s o r e a c h e d c o n s i d e r a b l y higher l e v e l s in the s u m m e r and autumn of 1954 than in p r e v i o u s c o m p a r a b l e p e r i o d s . Reflecting the u p s u r g e in p r e - b u i l d i n g activity, new p r i v a t e housing s t a r t s beginning in June 1954 i n c r e a s e d c o n t r a - s e a s o n a l l y through the end of the y e a r , with monthly totals in the l a s t q u a r t e r the l a r g e s t for any c o m p a r a b l e month on r e c o r d . The substantially l a r g e r volume of units s t a r t e d in the second half of 1954 c o m p a r e d with the like period of 1953 reflected chiefly a m o r e than doubling in units s t a r t e d under VA g u a r a n t e e . Units s t a r t e d under FHA financing a r r a n g e m e n t s also i n c r e a s e d slightly, while conventionally financed s t a r t s declined. Sales of old a s well as new h o u s e s a c c e l e r a t e d in the second half of 1954 and continued strong through the middle of 1955. In the 12 months ending June 1955, substantially m o r e h o u s e s w e r e sold than during p r e c e d i n g c o m p a r a b l e p e r i o d s . Reflecting the i m p a c t of easing t e r m s in the G I loan m a r k e t during 1954, the i n c r e a s e in units sold with VA-guaranteed m o r t g a g e s in the y e a r ending June 1955 amounted to a l m o s t t w o - t h i r d s of the i n c r e a s e in new house s a l e s and n e a r l y two-fifths of the i n c r e a s e in existing house s a l e s . -8The C u r r e n t Situation This s u m m e r and autumn economic activity in m o s t l i n e s has been at new high l e v e l s . The g r o s s national product in the third q u a r t e r was a r e c o r d 392 billion d o l l a r s (seasonally adjusted annual rate) and a further l a r g e i n c r e a s e is indicated for the c u r r e n t q u a r t e r . In October, i n d u s t r i a l production continued at the new high e s t a b l i s h e d in September and n o n a g r i c u i t u r a l employment was a r e c o r d for any October. The m o s t striking economic developments over the p a s t y e a r have been the m a r k e d expansion in c o n s u m e r buying, e s p e c i a l l y of durable goods, renewed r i s e in b u s i n e s s outlays for fixed c a p i t a l , and the r e l a t i v e l y m o d e r a t e n a t u r e of inventory a c c u m u l a t i o n . Since output in many a r e a s is now close to c a p a c i t y , further i n c r e a s e s in production will n e c e s s a r i l y be at a slower pace and growth in consumption and investment demands will need to be c o r r e s p o n d i n g l y m o d e r a t e d . Reflecting the p r e s s u r e s of expanding d e m a n d s upon limited supplies, wholesale p r i c e s of i n d u s t r i a l c o m m o d i t i e s have been r i s i n g considerably since m i d - y e a r , with the i n c r e a s e s m o r e r e c e n t l y extending to i n t e r m e d i a t e p r o d u c t s and finished goods. C o n s u m e r p r i c e s , which have been r e l a t i v e l y stable for two y e a r s , have r e c e n t l y shown signs of edging up. The situation is not g r e a t l y different in c o n s t r u c t i o n and r e a l estate m a r k e t s , except that these m a r k e t s have been e x t r a o r d i n a r i l y strong for a longer p e r i o d . m o r e than Digitized began for FRASER Since the r e c o v e r y in the g e n e r a l economy a y e a r ago, a c t i v i t i e s revolving about c o n s t r u c t i o n -9- and r e a l e s t a t e , which continued high throughout the 1953-54 r e c e s s i o n , have expanded s h a r p l y further and a r e now at r e c o r d l e v e l s . The evidence in r e c e n t months s u g g e s t s i n c r e a s i n g l y that c o n s t r u c t i o n and r e a l e s t a t e a c t i v i t i e s - - e v e n m o r e m a r k e d l y than m o s t manufacturing a c t i v i t i e s - - a r e close to capacity. In these a r e a s , a s in the economy as a whole, a m a j o r c u r r e n t p r o b l e m is to p r e v e n t development of inflationary f o r c e s , which could lead to s e r i o u s m a l a d j u s t m e n t s and declines from the gratifying l e v e l s of activity e x p e r i e n c e d in r e c e n t years. The r e c e n t volume of c o n s t r u c t i o n and high l e v e l s of economic activity g e n e r a l l y have r e s u l t e d in l a r g e and w i d e s p r e a d p r i c e i n c r e a s e s for building m a t e r i a l s . After about two y e a r s of c o m p a r a t i v e l y e a s y m a t e r i a l supplies and efficient o p e r a t i o n s , m a t e r i a l s s h o r t a g e s and delays in the p r o g r e s s of work have r e a p p e a r e d . L i k e w i s e , financing — in competition with many other expanded d e m a n d s in a capital m a r k e t c h a r a c t e r i s e d by l a r g e , though l i m i t e d , s u p p l y - - h a s become m o r e difficult and m o r e expensive for many types of u n d e r t a k i n g s . Some o b s e r v e r s in r e c e n t weeks have a t t r i b u t e d these developm e n t s and the m o d e r a t e l y reduced level of s t a r t s solely to a m o r e r e s t r i c t i v e m o n e t a r y policy. tion. This is by no m e a n s an adequate e x p l a n a - F o r e x a m p l e , although housing s t a r t s for some months have been below the very high l e v e l s r e a c h e d l a s t s p r i n g , the n u m b e r of h o u s e s under c o n s t r u c t i o n this s u m m e r was probably l a r g e r than e v e r b e f o r e . If c o n s t r u c t i o n delays have been a s s e r i o u s as some t r a d e r e p o r t s -10suggest, this n u m b e r m a y still be r i s i n g . The n u m b e r of new h o u s e s completed and occupied in the f i r s t six months of 1955 was c o n s i d e r a b l y l a r g e r than in any other f i r s t half y e a r . Completions in the second half will undoubtedly r i s e further to exceed the a l l - t i m e r e c o r d second half of 1950. These completions have r e q u i r e d an exceptionally heavy volume of financing. In addition, s a l e s of an unprecedented n u m b e r of old houses have also been financed. Accordingly m o r t g a g e lending so far this y e a r is at r e c o r d l e v e l s , m o r e than one-fourth higher than in the c o m p a r a b l e period l a s t y e a r . rising. Demands for financing a r e still Whatever effects the p r e s e n t c r e d i t situation m a y be having on housing m a r k e t s , it has not p r e v e n t e d an e x t r a o r d i n a r i l y l a r g e volume of mortgage u n d e r w r i t i n g . It is the l a r g e demands, for c r e d i t t h r o u g h - out the economy, r a t h e r than a c u r t a i l m e n t of funds for i n v e s t m e n t in housing, that has caused a tightening in the money m a r k e t . Mortgage r e p a y m e n t s have a l s o been r i s i n g , but at a slower rate. As a r e s u l t , the amount of m o r t g a g e debt outstanding has been growing rapidly. Mortgage debt outstanding on s m a l l p r o p e r t i e s this year can be expected to i n c r e a s e by about 13 billion d o l l a r s , c o m p a r e d with 9.6 billion d o l l a r s in 1954. This y e a r ' s i n c r e a s e in all nonfarm m o r t g a g e debt will be close to 16 billion d o l l a r s , and of this over 11 billion will be a c q u i r e d by t h r e e major groups of l e n d e r s - - s a v i n g s and loan a s s o c i a t i o n s , mutual savings b a n k s , and life i n s u r a n c e c o m p a n i e s . proportion of the This is a v e r y l a r g e total i n c r e a s e this y e a r in the capital and l i a b i l i t i e s -11due from these institutions to the public. In other r e c e n t y e a r s the i n c r e a s e in their capital and l i a b i l i t i e s to the public exceeded the i n c r e a s e in their m o r t g a g e holdings by a wider m a r g i n . To obtain the funds needed to keep up the r e c e n t high and r i s i n g level of m o r t g a g e lending and to m e e t other financing d e m a n d s which have a l s o been l a r g e , these institutions have been b o r r o w i n g heavily this y e a r from c o m m e r c i a l b a n k s . Mortgage l e n d e r s have a l s o been obtaining forward c o m m i t m e n t s from the banking s y s t e m in o r d e r to be in a position to make good t h e i r own forward c o m m i t m e n t s to lend. A special s u r v e y of l a r g e city banks indicated that in the y e a r ended August 10 loans of such banks to m o r t g a g e l e n d e r s had r i s e n by over half a billion d o l l a r s and that additional c o m m i t m e n t s for billion d o l l a r s of loans to such l e n d e r s w e r e outstanding. 1-1/4 In addition, d i r e c t r e a l e s t a t e loans by c o m m e r c i a l banks a r e likely to r i s e this year by over 3 billion d o l l a r s . It should be borne in mind that expan- sion in c o m m e r c i a l banking o p e r a t i o n s c r e a t e s new supplies of money in c o n t r a s t to other financial institutions which lend existing funds. It is evident that c o n s u m e r s have been buying h o u s e s - - b o t h old and n e w - - a t a higher r a t e than e v e r b e f o r e . Builders' operations-- which m e a n s houses under c o n s t r u c t i o n , b u i l d e r s ' financial obligations, consumption of m a t e r i a l s and need for c r e d i t - - h a v e been higher than ever before. C o m m i t m e n t s of financial o r g a n i z a t i o n s to take m o r t g a g e loans have been v e r y close to if not the l a r g e s t on r e c o r d . Moreover, a l a r g e r p r o p o r t i o n of financial institutions a p p e a r s to be obligated on -12commitments. This m e a n s that individual institutions have not had the freedom to respond to the c u r r e n t demands that they might o t h e r w i s e have had. It no doubt accounts in p a r t for r e p o r t s that b u i l d e r s a r e unable to obtain additional forward c o m m i t m e n t s . With the housing i n d u s t r y operating close to c a p a c i t y and bidding actively against other i n d u s t r i e s for r e s o u r c e s , p r i c e s of construction m a t e r i a l s have i n c r e a s e d . P r o p e r t i e s under c o n s t r u c t i o n have been v e r y high and so also h a s been c o n s t r u c t i o n financing to c a r r y these i n v e n t o r i e s . The demand for funds has been beyond the supply of savings, and additional funds have been supplied from an unusually large expansion of bank c r e d i t . Except, p e r h a p s , for the extent to which c o m m i t m e n t s to finance future t r a n s a c t i o n s a r e outstanding, the situation in r e s i d e n t i a l construction and r e a l e s t a t e is v e r y much like the c r e d i t situation generally. Heavy d e m a n d s for c r e d i t have been in evidence a l m o s t e v e r y w h e r e - - t o finance the high level of c o n s u m e r buying of a u t o m o b i l e s and other durable goods; to finance b u s i n e s s expansion of fixed plant and equipment; to finance public i m p r o v e m e n t s by State and local governments. The F e d e r a l Government h a s a l s o been a s u b s t a n t i a l b o r r o w e r in r e c e n t m o n t h s , but m o s t , if not a l l , of this b o r r o w i n g will be offset by debt r e t i r e m e n t during the r e m a i n d e r of the fiscal year. The volume of investable funds becoming available from con- s u m e r and b u s i n e s s savings h a s not been adequate to take c a r e of all these d e m a n d s . Mortgages a r e competing with all these other u s e s http://fraser.stlouisfed.org/ for the l a r g e , but Federal Reserve Bank of St. Louis l i m i t e d , supply of funds. -13While some expansion of c o m m e r c i a l bank c r e d i t has been d e s i r a b l e in o r d e r to supply additional c a s h b a l a n c e s , c o n s i s t e n t with the growth needs of the economy, the c o m m e r c i a l banking s y s t e m could not have met all of t h e s e demands for c r e d i t not supplied from savings without running the r i s k of inflationary c o n s e q u e n c e s . In a p r o s p e r o u s , expanding economy, funds for financing home o w n e r s h i p , as well a s financing ownership of other l o n g - l a s t i n g capital goods, should come a s far a s p o s s i b l e from savings in the hands of the owners or made available on loan from institutional or other h o l d e r s of accumulated savings funds. F r e e competitive c r e d i t m a r k e t s a r e the m o s t effective m e a n s for allocating these funds to applicants. Under prevailing conditions, d e m a n d s for funds a r e running far ahead of the supply of s a v i n g s . To m e e t t h e s e d e m a n d s by c r e a t i n g new supplies of money through the c o m m e r c i a l banking s y s t e m with F e d e r a l R e s e r v e a s s i s t a n c e , would invite d a n g e r o u s inflationary r e p e r c u s s i o n s throughout the e n t i r e c o u n t r y .
@FedFRASER