Craig Swan

English

Research Papers in Economics

CRAIG  SWAN 
University  of Minnesota 
Recovery  for 
Homeb  uilding? 
HOUSING  STARTS SEEMED POISED for substantial gains during the second 
half of 1970 following a depressed level of activity during the first half of 
the year. From January to  June total private housing starts were at an 
average annual rate of  1,266,000 units, compared with rates of  1,467,000 
units for the year 1969 and 1,357,000 units for the fourth quarter of 1969. 
Month-to-month movements in housing starts have a large erratic element 
and should be interpreted  with care. While starts for July through Septem- 
ber have shown wide variation, they have all been above the monthly rates 
for January  to June and have averaged 1,506,000 units (annual rate). If one 
looks at factors influencing  housing activity, virtually  every indicator points 
toward continuation  of  recovery during the  rest of  the  year from  the 
apparent trough in housing starts in the first quarter of 1970. 
The Availability  of Mortgage Credit 
At the same time that demand is sustained at a high level by low vacancy 
rates and current population trends, prospects for the availability of mort- 
gage credit are encouraging. 
Following large outflows in January, savings flows into financial inter- 
mediaries rose dramatically in the second quarter (see Table 1). Because 
of their preliminary  nature, the quarterly figures should be used with cau- 
tion. Nevertheless, two-quarter averages reflect very large increases. The 
net increase in savings at mutual savings banks and savings and loan asso- 
313 314  Craig Swan 
Table 1.  Acquisitions  of Financial Assets by Households, First Quarter 
1969 through  Second Quarter 1970a 
Seasonally  adjusted annual rates in billions  of dollars 
1969  1970 
Type  of asset acquired  1  2  3  4  1  2b 
Savings  deposits  at financial  intermediaries 18.1  13.3  3.8  4.6  10.5  19.3 
Commercial  banks  6.6  5.4  -0.8  2.0  7.9  5.7 
Mutual savings banks  3.8  2.7  1.5  2.4  1.6  4.2 
Savings and loan associations  7.7  5.2  3.1  0.2  1.0  9.4 
Selected credit market instruments  25.9  9.1  32.1  19.8  22.3  24.7 
U.S.  government  securities  16.1  2.1  24.1  10.1  9.1  7.6 
Corporate and foreign bonds  4.8  5.3  4.7  4.7  9.2  14.7 
State and local  obligations  5.0  1.7  3.3  5.0  4.0  2.4 
Source: Board of Governors of the Federal Reserve System, "Flow of Funds, Seasonally Adjusted: 2nd 
Quarter, 1970, Preliminary"  (Aug. 13, 1970; processed), pp. 4 and 8. 
a.  Data include acquisitions by personal trusts and nonprofit organizations. 
b. Preliminary. 
ciations during the first half of 1970 was at an annual rate of $8.75 billion, 
compared with an annual rate of $3.7 billion during the last half of 1969. 
The increase was most dramatic at savings and loan associations, as savings 
flow more than tripled from an annual rate of $1.75 billion to $5.85 billion. 
That  savings deposits increased in  1970 after dwindling for  a year is 
due to several factors. Higher minimum denominations on Treasury bills 
and special agency issues have made it impractical for many individuals to 
purchase these  securities directly. Declining  market yields have  at  the 
same time made them less attractive, while increases in regulatory ceilings 
on deposit yields have enhanced the appeal of savings deposits. Another 
major contributing factor to large savings inflows has been the high rate 
of personal saving in the spring of 1970. On seasonally adjusted data, the 
rate was 7.5 percent in the second quarter of 1970 as against 6.0 percent 
for the year 1969. This high rate of savings has enabled households not 
only to step up their acquisition of savings deposits, but also to maintain 
their acquisitions of direct credit market instruments at the unprecedented 
rates of 1969. Households have even accelerated their acquisition of those 
instruments, such as corporate bonds, whose yields have remained high. 
Savings inflows to financial intermediaries would gain substantially more 
should long-term security yields again decline. 
Improved savings flows during the first half of  1970 will restlt  in  an 
expansion of mortgage lending in the second half of the year. At the end Recovery  for Homebuilding?  315 
of  June mortgage loan  commitments  outstanding at  savings  and loan 
associations were up 48 percent from their low at the end of January. As 
Table 2 demonstrates, experience in the spring of 1970 is in distinct con- 
trast to that of late  1966 and  1967, when savings and loan  associations 
applied a large part of increased savings flows to the reduction of their 
outstanding borrowings from the Federal Home  Loan Banks. This dif- 
ference is the result of actions by the Federal Home Loan Bank Board to 
limit repayments on advances and to encourage savings and loan associa- 
tions to  use new funds to  expand mortgage lending.  Specific measures 
taken along these lines  are the conversion of  short-term advances into 
long-term advances and steps to reduce the interest rate on advances out- 
standing. At the beginning of 1970 short-term advances accounted for 89 
Table 2.  Savings Capital, Mortgage Commitments,  and Federal Home Loan 
Bank Advances  at Savings and Loan Associations, Selected Months 1966-67 
and 1970 
Millions of dollars 
Net change 
from previous  month 
-  ~~~~~Outstanding 
Year  and  Savings  Mortgage  FHLBB 
month  capital  commitments  advancesa 
1966-67 
October  -56  -151  7,249 
November  614  -92  7,084 
December  1,732  -114  6,935 
January  184  149  6,340 
February  763  264  5,800 
March  1,457  344  5,175 
Total  4,694  400  ... 
1970 
January  -1,417  -74  9,852 
February  205  77  9,937 
March  1,595  226  9,745 
April  207  446  9,860 
May  753  469  10,008 
Juneb  1,812  96  10,236 
Total  3,155  1,240 
Sources: Federal  Reserve  Bulletin, Vol. 53 (October 1967), pp. 1782 and 1795, and Vol. 56 (August 1970), 
pp. A38 and A51. 
a.  Figures are for total advances outstanding, end of the month, and include small amounts of advances 
to members other than savings and loan associations. 
b. Preliminary. 316  Craig Swan 
percent of all advances. By the end of June they had fallen to 68 percent 
of the total. In March the Federal Home Loan Bank Board asked its dis- 
trict banks to limit the rate on advances to 7.75 percent. The Emergency 
Home Finance Act of  1970, passed in July, provides $250 million to the 
Federal Home  Loan  Banks to  subsidize interest rates on  advances to 
savings and loan associations. 
Another important source of strength for home mortgages has been a 
continued high rate  of  acquisitions by the  Federal National  Mortgage 
Association  (FNMA).  In the first half of  1970 FNMA  purchased home 
mortgages at an annual rate of $5.4 billion, accounting for 49 percent of 
the net increase in home mortgages. Federal budget estimates in January 
indicated that acquisitions would be maintained at about the same rate 
for the rest of the year. 
Table 3 shows how equations presented in the first issue of Brookings 
Papers on Economic Activity have tracked experience during the first two 
quarters  of 1970. Results for 1969 differ slightly from those presented in the 
earlier paper due to subsequent revisions in the data on housing starts and 
savings deposits. In line with earlier projections, equation estimates for 
1970 incorporate information about mortgage purchases by the Federal 
National Mortgage Association. While high for the first quarter and low 
for the second, the equation estimates are slightly below actual experience 
when averaged for the half year. 
Table 3.  Estimated and Actual Values for Private Nonfarm Housing Starts, 
First Quarter 1969 through  Second Quarter 1970 
Seasonally  adjusted annual rates in thousands  of units 
Year  and  Actual  Estimated 
quarter  starts"  starts 
1969  1  1,621  1,546 
2  1,497  1,547 
3  1,410  1,427 
4  1,328  1,222 
Year  1,464  1,435 
1970  1  1,229  1,283 
2  1,262  1,152 
Half-year  1, 246  1, 218 
Sources: Actual starts from U.S.  Bureau of the Census, Housing Starts,  C20-70-3 (March 1970), and 
Economic  Indicators  (August 1970). Figures for private nonfarm housing starts for 1970 are derived by sub- 
tracting the 1969 figures for farm units from the figures for total private starts. Estimated housing starts are 
based on equations presented in Craig Swan, "Homebuilding: A Review of Experience,"  Brookings  Papers 
on Economic  Activity (1:1970), pp. 53-54. 
a.  Starts for 1969 have been revised by the Census Bureau from those reported in ibid., Table 2. p. 54. Recovery for Homebuilding?  317 
Mobile Homes 
An unexpected weakness on the housing scene thus far in 1970 has been 
mobile home shipments, which are not included in the statistics on housing 
starts or residential  construction expenditures. Shipments had risen almost 
without interruption after 1966, and in 1969 were 30 percent ahead of 1968 
and 90 percent ahead of 1966. But in the first five months of 1970, they fell 
7 percent below the same period a year earlier. 
This drop in shipments occurred at a time when most  observers were 
expecting continuing  increases: Housing  starts were  at  low  levels  and 
mobile homes sell at about half the cost of comparable space in a conven- 
tionally built home. In fact the recent increases in sales of mobile homes 
attracted so many new  firms that there were reports of substantial price 
cutting this spring.' The President's 1970 report on housing goals projected 
a 24 percent increase in mobile home shipments this year.2 Explanations 
for  the  drop in  shipments include a possible shortage of  sites and the 
effects of the general economic slowdown and increase in unemployment. 
According to  a recent study by the Department of Housing and Urban 
Development, mobile home owners tend to be young, semiskilled or skilled 
workers.  Increases in  unemployment  may  have  discouraged potential 
buyers and potential lenders. 
Discussion 
SEVERAL  PARTICIPANTS  OFFERED reasons why mobile home sales have 
been disappointing in the first half of 1970. These included lack of sites, 
increased zoning regulations against them, reduction in the armed forces 
and in employment at defense bases, and increased availability of conven- 
tional housing. 
James Duesenberry and Thomas Juster mentioned some reasons why the 
outlook  for  homebuilding might not  be  so  buoyant  as  Swan  implied. 
Duesenberry contended that rationing of mortgage credit had probably 
1. "Mobile-Home  Shipments  Lag; Firms Blame Economy, Too Many Rivals, Too 
Few Parks," Wall  Street  Journal,  June 19, 1970. 
2. Second  Annual  Report  on National  Housing  Goals,  H. Doc. 292, 91 Cong. 2 sess. 
(1970), p. 23. 318  Craig Swan 
been less intense in 1969 and early 1970 than in previous periods of credit 
squeeze. Instead, higher interest rates were doing more of  the market- 
clearing than they did in former times. As a result, there may be smaller 
backlogs of potential homebuyers who were kept out of the market by 
rationing. Hence, increased inflows into thrift institutions cannot be auto- 
matically translated into  increased homebuilding activity. The  stimulus 
may depend on declines in mortgage interest rates, and there is at present 
no basis for confidence that these rates will fall sharply. If people's expecta- 
tions of rising costs for homes should evaporate, that would further hold 
down demand. 
Thomas Juster said that survey data on buying plans for single-family 
homes continue to  suggest no great exuberance of demand in that area. 
These  data  showed  a  marked decline in  the  demand for  single-family 
housing from 1967 through 1969; it has begun to turn up, but is still below 
1967 and 1968 levels. 

Recovery for Homebuilding?

http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/1970_2_bpea_papers/1970b_bpea_swan.pdf

Recovery for Homebuilding?

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics