Verle Johnston

English

Research Papers in Economics

Housing: On the Way Down?
After six years of sustained albeit uneven expansion, the
Western housing industry appears due for a decline this year.
Where the Money Came From
Major Western banks expanded their sources of funds strongly
during 1972, and allocated those funds almost entirely to loans.
Pollution Control: Two Industries
The copper and forest-products industries face heavy costs
in cleaning up the air and water pollution they cause.
Business Review is edited by William Burke, with the assistance of
Karen Rusk (editorial) and Janis Wilson (graphics).
Copies of this and other Federal Reserve publications are available from
the Administrative Services Department, Federal Reserve Bank of San
Francisco, p.o. Box 7702, San Francisco, California 94120.lHl(Q)M~nrrn~~
(Q)ITil frm(e; W@'ff [))©~ITil?
The Western housing boom
continued during 1972, as
550,000 new units-about
455,000 housing starts and about
95,000 new mobile homes-
added up to a respectable 12-
percent gain in activity for the
year. However, after six years
of sustained albeit uneven ex-
pansion, demand appears to be
fairly well satisfied in most areas,
and this consideration has led
most industry observers to fore-
cast a downturn in homebuilding
in 1973.
Last year's 12-percent gain was
considerably below the 40-
percent increase recorded in
1971. This slowdown reflected
the relatively stable or even
lower levels of homebuilding
in such crucial markets as Los
Angeles, San Jose, San Diego and
Seattle. Los Angeles, in fact,
accounted for less than half as
many housing starts as it did in
1963, which until recently had
ranked as the banner year for
Western homebuilding.
Even so, Los Angeles continued
to rank among the top home-
building areas in the nation, as
did also the San Francisco Bay
Area, Orange County, Phoenix
and San Diego. In the latter two
areas, and in Portland and Salt
Lake City as well, housing activ-
ity was well over twice as high
as it was a decade ago.
Multiple units accounted for
roughly half of last year's housing
starts in the West as a whole,
and for a somewhat larger pro-
portion in California, Oregon,
Alaska and Hawaii. In some
local markets-most notably
Los Angeles-multiples ac-
counted for over three-fourths
of all new units. This situation
reflected an upsurge in buying
of condominiums, largely by
ex-renters; industry sources be-
lieve that more than two out of
three condominium buyers were
formerly renters.
Funds for the boom
The ample availability of both
construction financing and per-
manent mortgage financing pro-
vided a basic support for the
market, both nationally and
regionally. Last year witnessed
a record flow of funds to the
financing of residential mortgages
-about $47 billion nationally,
or $20 billion above the previous
year's level. This represented
almost one-third of all funds
raised in the nation's credit
markets last year.
3 i
I,_211-_......__"-_..&..__"""'-_....Io__"""'-_.....A__ ...II
Billions of Dollars
NET SAVINGS INflOWS
Funds for the Western mortgage
markets were provided by the
heavy savings inflows which
almost inundated the mortgage
institutions for the second
straight year. Savings deposits
increased by a record $7.5 billion
at the S&L's, and consumer-type
time and savings deposits
grew by $3.0 billion at the com-
mercial banks. In both cases,
over 80 percent ofthe new
inflows occurred in higher-yield
certificate accounts, thereby
raising the average cost offunds
and also the potential floor
under mortgage rates.
The major mortgage lenders in
the West, savings-and-Ioan asso-
ciations and commercial banks,
vastly expanded their lending.
The S&L's increased their out-
standing real-estate loans by $6.8
billion, 36 percent more than in
1971; the banks expanded their
mortgage portfolios by $2.8
billion, this gain being half again
as large as in the previous year.
With funds so readily available,
liberalized lending terms pre-
vailed; for instance, many S&L's
utilized their new-found authori-
zation to make conventional
loans with only a 5-percent
down-payment requirement.
1972 1970 1968 1966
CHANGES IN
OUTSTANDING LOANS
4
2
4
6
8
8
6
o
o
1964
10
Funds for Western mortgage markets provided by the heavysavings
inflows which almost inundated mortgage-lending institutions
4Thousands
Housing inventory rises sharply during last several years,
despite declining trend in Western population growth
The cause of the expected decline
can be traced to the industry's
success in producing homes for
the private market during the
pasttwo years. (Some reduction
in subsidized housing starts also
is expected, in line with the
Administration's recently an-
nounced freeze, on top of a
fairly significant decline recorded
in 1972.) Indeed, the short-fall
in housing stemming from the
1971 1969 1967
The net supply of housing,
including the large number of
units currently under construc-
tion, may have outpaced basic
demand in the Twelfth District
states by about 80,000 units dur-
ing the last year or so. This
reduced levels of home-building
during the 1965-70 period now
appears to have been largely
overcome.
1965 1963
o
1961
200
600
400
800
Consumers nationwide reduced
their volume (and rate) of savings
in 1972, especially during the
~ middle two quarters ofthe year.
But at the same time, thanks in
part to an increased willingness
to finance current expenditures
by borrowing, they acquired
financial assets at a record rate.
Overtwo-thirds of the total
went into savings deposits in
response to favorable yield
spreads, although this spread
narrowed somewhat in the latter
part of the year.
How much of a drop?
The Western housing boom
probably reached its peak last
Ii year, and a decline which might
extend into 1974 now seems
reasonable to expect. Total new
housing units-housing starts
plus mobile-home sales-could
fall by about 18 percent to
455,000 units, on the basis of
a sharp reduction in housing
starts and no more than stability
in mobile-home sales. But even
with this decline, total produc-
tion will be the third highest
on record, still exceeding the
number of units built in the 1963
boom year. Most of the weak-
ness in homebuilding is expected
to OCcur in California and Ari-
zona, although decreases are also
anticipated'in every other state
except possibly Washington.UNDER CONSTRUCTION
assumes a basic annual demand
consisting of about 120,000 re-
movals from the housing in-
ventory plus an estimated
310,000 household formations.
That household-formation figure
may be rather conservative, in
view of a recent sharp increase
in Census Bureau estimates for
the nation. But despite the ten-
tativeness of regional household
estimates, a shift in the supply-
demand relationship is indicated
by the 1972 downtrend in West-
ern housing starts, with a 21-
percent decline between the first
and fourth quarters of the year.
Warning signals
Evidence of a growing excess
supply is proVided by the rise
in vacancy rates on rental units
-as high as 8 to 10 percent in
some areas-although rates
regionwide still lag considerably
below the levels of the mid-
1960's. In addition, the number
of houses available for sale has
risen faster than sales; the in-
ventory of unsold new single-
family homes alone approached
100,000 units at year-end, or
almost double the level oftwo
years ago. The situation could
worsen further as the very large
numbers of single and multiple
units underconstruction-
325,000, or 28 percent higher
than a year ago-are brought
1972 1970
COMPLETIONS
o
o
1968
Thousands
100
100
Housing completions reach peak in '72, and will probably remain
high in '73 because of large numberof homes under constructionNew homes harmonize with rustic surroundings.
to completion and placed on
the market.
The impact of rising vacancy rates
on new construction may be
delayed, however, because of the
relatively high level of unused
building permits and loan com-
mitments, and perhaps because
of some tendency for vacancies
to show up first in older rather
than newer units. The initial
impact may be to stabilize rents;
indeed, over the past year, rents
have risen more slowly in major
Western metropolitan areas than
they have nationally. A second
effect may be to delay the down-
turn but also to increase the
magnitude of the correction
!$1 when it takes place.
Despite the projected reduction
in homebuilding, most analysts
expect housing costs to continue
their inexorable rise in 1973.
The median price of new
single-family homes has risen
50 percent in less than a decade,
and was up 11 percent last year
alone. (However, the average
home size has also increased.)
Lumber and other materials costs
may descend from the strato-
sphere in response to any decline
in demand, butthe costs of land
and labor seem destined to con-
tinue upward, albeit perhaps at
a reduced rate. Consequently,
unless builders are willing or
able to trim profit margins,
the increased costs will translate
themselves into higher home
prices.
How much financing?
The intense competition for
funds likely to develop under the
expansionary economic condi-
tions of 1973 may also be a
limiting factor on homebuilding
activity in any case. The Federal
sector will place very large
demands on credit markets,
because of the continuation of
substantial Federal deficits. The
corporate sector, despite its
strong cash-flow position, un-
doubtedly will be a major source
of credit demand because of its
very strong anticipated level of
demand for plant, equipment and
inventories. Nonetheless, there
should be ample funds left over
for a reduced level of mortgage
borrowing, although not neces-
sarily at the current level of
interest rates.
Much will depend upon the
amounts of savings channeled
by households into depository
institutions. Since yield differ-
entials have been narrowing
recently, new funds are not
likely to flow into the banks
and the S&L's at the spectacular
levels of the past two years.
Even so, these institutions are
likely to garner a substantial share
of such flows-and they may
keep a strong grip on the funds
they obtained last year, which
are concentrated in higher-yield-
ing certificates. Moreover, with
the funds available from amor-
tized mortgage loans-well over
7$5 billion annually at District
S&L's-and with the funds po-
tentially available from various
Federal housing agencies, a
severe credit shortage of the
'1969-70 variety seems unlikely.
Housing vs. ecology
One final influence on the
housing outlook should be noted
-the environmental movement
For a period last fall, all con-
struction work in California
appeared stymied by the State
Supreme Court's ruling calling
for "environmental impact"
reports on all construction proj-
ects whose impact was likely
to be "significant." In December
the legislature invoked a 120-
day moratorium on the filing of
such reports, and the Court
itself, in a supplementary opinion,
stated that the original ruling
was not meant to apply to
minor projects such as single-
family homes. Nonetheless, the
appropriate public agencies now
have the task of laying down
specific guidelines for the im-
plementation of environmental
impact reports.
Clearly, concern is increasing
over the environmental impact
of construction, and by no
means is the concern limited to
California. One national build-
ing-trade journal recently said,
"There has been enough bad
building-and enough bad land
use-to give local conservationist
movements avery sound basis
for their resistance to bad proj-
ects." From this and other
sources have come a rising tide
of warnings about the many
interrelated aspects of growth,
resources and the environment;
as an extreme example, one
building industry official recently
declared that fuel shortages vir-
tually could eliminate home-
building in little more than a
decade.
At this point it is impossible
to foretell just what kind of
consensus will eventually emerge
regarding the trade-off between
economic-,growth-that is, jobs-
and environmental balance.
Nowhere, however, are the issues
more likely to remain alive
than in the West-an area whose
magnificent natural endowments
have been a major inducement
to in-migration, and conse-
quently to a succession of
housing booms.
Verle Johnston
8

Housing: on the way down

http://www.frbsf.org/publications/economics/review/1973/econrev_73janfeb_3-8.pdf

Housing: on the way down

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics