were more directly affected than new, however, and the evidence that there was still a strong demand at somewhat lower prices seems to have stimulated builders and their financial backers to revise the character of their output.

THE BOOM OF 1949-50

Although the most pressing demands for living accommodations had been met, more remained to be satisfied. The ease that developed in markets in the latter part of 1948 was sufficient to improve supply conditions substantially, and the fact that economic activity apart from construction declined late in 1948 was a factor in this development. Nonconstruction demands for materials and labor were reduced, and prices of many building materials declined or stopped rising. Efficiency of operation improved, and builders were able to offer new houses that were attractive to buyers at prices competitive with the lower prices that had developed for old houses. They managed to do so in part by providing better designs, more equipment, and more attractive subdivisions. Relaxation of rent controls early in 1949 had relatively little effect on the market, suggesting that the market was in better balance and that consumers had a wider range of choice.

The recession had reduced business demands for funds. As a result, the yields available on investments other than mortgages had dropped sharply at the end of 1948. Financial saving continued large and the 4 percent interest rate available on mortgages guaranteed by the Veterans' Administration was attractive.

By mid-1949, lenders showed an increased willingness to make mortgages. Interest rates on conventional mortgages probably declined somewhat, but easier credit terms were more manifest in higher loan-to-value ratios and longer maturities. The "no downpayment" VA loan became very popular. Of consequence also was the readiness of the Federal National Mortgage Association to buy and hold FHAinsured and VA-guaranteed mortgages. In 1948, FNMA had been authorized to purchase first one-fourth, and later one-half of the dollar amount of FHA and VA home mortgages under $10,000 made by any lender after April 30, 1948. Under this provision the Association might hold mortgages in the amount of $1 billion until July 1949; this amount was then increased to $1.5 billion.

Consumers' incomes had fallen little in the recession and, although the distribution of liquid assets among consumers changed somewhat, total consumer holdings of liquid assets continued high. Buyers were attracted to the housing market and, as the year progressed, builders found little difficulty in selling their new, generally improved houses, especially on the easy financing terms they could make available. They reduced their starts in the winter of 1949-50 much less than usual, and increased their activities rapidly in the spring of 1950.

By the time of the Korean outbreak at the end of June, nearly 700,000 private units had been started in 1950, more than in the entire year 1946. In the year ending with the Korean outbreak, nearly 1,280,000 units had been started. The total for the highest 12 consecutive months-October 1949 to September 1950-was 1,353,000.

This very large increase taxed not only the capacity of builders to undertake more work, but also the ability of investors to absorb the mortgages offered. Starts turned down early, but in October seasonally adjusted starts were still higher than in any month before 1950. The number of units under construction continued to increase throughout 1950, as starts, though declining, continued to exceed completions. At the same time, the general recovery in economic activity that started in 1949 had, by mid-1950, stimulated business demands for funds. Investors found alternative yields rising just as their mortgage commitments began to restrict their capacity to take other assets. Loan terms tended to tighten during the spring and summer.

The Korean outbreak set off speculative responses. During July, consumer buying expanded greatly and businesses substantially increased their orders for materials and for capital equipment. Buying was financed by high and rising consumer and business incomes, substantial further expansion of credit, and the use of liquid assets. As a result of heavy buying, prices advanced sharply. By early August prices of basic commodities at wholesale had risen 16 percent in 5 weeks and all commodities at wholesale had risen by 5 percent.

In an effort to meet this situation, the President initiated a series of actions. In July he directed the Federal agencies concerned with real estate credit to restrict Federal programs affecting residential construction. He also requested Congress to authorize emergency powers to limit the use of essential materials; to regulate consumer, real estate, and commodity trading credit; and to assure adequate financing for defense production and plant. Later in the month, he requested additional appropriations for defense activities and recommended higher taxes to meet the additional expenditures.

As a result, terms on FHA and VA loans were tightened by limiting the level of value on which appraisals were to be made, increasing the minimum downpayment ratios, and reducing the maximum size of loan insurable by FHA. VA direct lending authorized only that spring-was to be done slowly. The Federal Home Loan Bank System restricted borrowing rights of members, limited appraisal values, and encouraged its members to restrict loans to 75 percent of such values, to limit construction lending, and to shorten mortgage maturities. The public housing construction program was cut back, and bank supervisory agencies urged the institutions under their jurisdiction to exercise special care in their lending and investment policies so as to minimize inflationary pressures.

In September 1950, the Defense Production Act was passed, authorizing, among other things, direct selective control of real estate construction credit. Because such control was unprecedented, regulations under the act were not ready until October. In the meantime, many investors interpreted the mobilization measures to forecast a dearth of earning assets such as had occurred during World War II. Between adoption of the act and issuance of the regulations, therefore, many entered into commitments to take mortgages on terms easier than the regulation eventually permitted. No reliable estimate can be made of the volume of such commitments, but it seems clear that building financed by them was being done throughout the life of the regulation.

Things did not develop, however, as many expected. The Korean conflict was limited, hence economic mobilization was limited. Non

defense demands rose, and to meet private loan demands in addition to honoring mortgage commitments, investors resumed large-scale selling of Government securities. It was in this way that they had financed some of the expansion of mortgage portfolios after 1947. In the earlier period, however, there had been net retirement of Federal debt as tax receipts exceeded expenditures. Now with Federal expenditures greatly increased, there would be no net retirement of debt to enable investors as a whole to switch out of Government securities and into mortgages and other loans. If the Federal Reserve continued ready to purchase Government securities at relatively fixed prices, the result would be large increases in bank reserves at a time when credit restraint was called for.

In March 1951, therefore, the Treasury and Federal Reserve authorities reached an "accord" on the role Federal Reserve would play in the Government securities market. Generally, the accord meant that, unless disorderly market conditions arose, Federal Reserve would deal in Government securities only to implement monetary policy, and not to establish any particular pattern of rates or prices for Government securities. As a result, investors could not depend on obtaining par prices for bonds, but if they wanted to sell, they had to accept prices set by market forces.

Many financial institutions did sell Government securities to obtain funds. The need to sell at a loss, however, tended to reduce the incentive to move from Governments to other investments.

By the summer of 1951, mortgage credit terms had tightened appreciably, although the volume of loans closed continued at a near-record level, reflecting in part lending under earlier commitments. Builders were encountering some reluctance of lenders to make further loans or commitments. Starts leveled off, and completions began to come into balance with starts.

The pressures on capacity that had clearly developed in 1950 moderated substantially in 1951. Delays in obtaining materials lessened and prices of some materials weakened. Employment continued at a record level and wage rates continued to rise, but since efficiency improved, costs did not rise appreciably.

Relative stability characterized residential real estate and construction markets from mid-1951 through 1953. Prices and costs changed little and mortgage terms continued tight and subject to regulation until the spring of 1953. During much of this period, FNMA was purchasing VA mortgages as well as FHA mortgages on defense, military, and disaster housing. In mid-1953 Federal rent control was removed in all but defense areas.

With the removal of real estate credit controls, terms on federally underwritten mortgages became more liberal. Maximum maturities moved from 20 to 25 or 30 years, and minimum downpayment ratios were reduced. In addition, maximum interest rates were raised in May to 41⁄2 percent from 4 and 4% percent, respectively, on VA and most FHA loans.

As general economic activity slowed in the latter part of 1953, pressure on capital markets eased. As a result, mortgages again looked attractive to lenders, who both relaxed their terms and increased their commitments, particularly for FHA and VA mortgages. An easier monetary policy, adopted to counteract the recession, contributed to the attractiveness of mortgages.

THE BOOM OF 1954-55

The limited character of the Korean conflict had not required drastic curtailment of construction activities. For the most part, the emergency regulations limited the use of particularly scarce materials and discouraged building of certain postponable types of structures. They also encouraged greater use of owner's equity in financing new construction and the transfer of existing real estate.

These tighter financing terms may have induced some families to postpone purchase, but there is no clear evidence that the regulation permanently destroyed any appreciable amount of demand for houses. Prices of both new and used housing remained relatively firm throughout the period. Under the influence of the regulation, and the general economic downturn, there was some decline in starts in the latter part of 1953; by the early months of 1954, however, residential real estate markets were again quite strong.

The slack that developed in the economy in the downturn of 1953-54, as in 1948-49, increased the availability of materials and labor and resulted in easing of price pressures. Again, incomes were well maintained, and underlying desires for better housing accommodations were widespread. Ease in capital markets made mortgages more attractive to lenders and investors and encouraged them to increase their commitments to take mortgages. Builders, able to offer attractive financing as well as attractive houses, found ready

customers.

By mid-1954, starts were at a rate second only to that of 1950. The winter decline was relatively small, the peak rate, seasonally adjusted, was reached in December 1954, and the spring pickup was rapid. Indeed, in the 12 months ended June 1955, the number of starts was 6 percent larger than in the 12 months ended June 1950. Thereafter, however, starts dropped off faster than in 1950. The highest consecutive 12 months, October 1954 to September 1955, showed about the same total as the similar period in 1949-50. The houses built in this period were somewhat larger and more fully equipped and finished than those built in 1949-50. In this respect the output represented a larger contribution to the housing stock.

As in the earlier period, the number of units under construction continued to rise after starts declined. Revival of activity in other lines added to demands for resources, construction delays reappeared, and costs rose.

Fairly early in 1955, mortgage credit terms began to tighten as business loan demands increased, and institutional investors were called on to take up mortgage commitments earlier and in larger volume than they had expected. In this situation various arrangements for temporary financing "mortgage warehousing"-were brought into use. These arrangements involved obtaining funds from commercial banks either through loans or through sale of mortgages accompanied by agreements to repurchase. Savings and loan associations borrowed record amounts from the Federal home loan banks. After mid-1954, mortgage repayments rose substantially-reflecting the payoff of mortgages upon the sale of existing houses-and so supplemented the funds available to a greater degree than earlier.