prices measure not only any pure inflation but also include changes in the characteristics of units and/or lots. The Federal Home Loan Bank Board (FHLBB) and the Census collect information on the sales price of conventionally financed new single family homes. Both series tell a similar in terms of rates of increase although some details differ. (The levels of the two series differ for a technical reason: the Census figure is a median, the FHLBB series is a mean which is higher because of the inclusion of some very expensive homes.)

The Census figure is probably the more appropriate figure to use as a measure of the cost of an average house. Being the median price means that one half of all houses sold had a sales price less than or equal to the median price while the other half had sales prices greater than or equal to it. Over the period 1965-1970, both series show an increase in the sales price of new homes in excess of the pure inflation as measured by the house price deflators, suggesting that people were buying bigger and/better houses. The period 1965-1970 was also a period of strong gains in real income and a period when the inflation in construction costs was similar to general inflation.

Over the period 1970-1974 increases in sales prices of new homes did not match the increase in construction costs, suggesting that people were buying smaller homes and/or homes of reduced quaity. In contrast to the earlier period, 1970-1974 was a period of smaller gains in real income and a period when the inflation in construction costs substantially exceeded the general rate of inflation.

The Census Bureau also collects data on sales prices of new units with FHA and VA financing. These data show a slightly different picture. Over the whole period 1965-1974, both series show larger increases than for conventional financed homes. Further the pattern of increases in the two subperiods also differs from the pattern for conventional financed units. The figures for the separate period are more varied than those for conventionally financed houses and reflect among other things the impact of the 235 program as well as the timing of changes in FHA and VA regulations as to maximum house prices and interest

rates.

EXISTING HOUSES

Both the FHLBB and the National Association of Real Estate Boards collect data on prices of existing homes. Tables 7 and 8 present the FHLBB data on sales prices of existing homes. Over the periods 1965-1970 and 1970-1974 the FHLBB data for existing homes shows virtually the same increases as the FHLBB data for new homes. The year to year movements differ but the longer period increases are quite similar. It should be noted that the data collected by the National Association of Real Estate Boards shows a slightly higher rate of increase.

The similar response of prices of new and existing homes should not be too surprising. One would expect that when two goods are close substitutes their prices should show similar movements. If their relative prices move far from normal relations one type of housing represents an especially good buy when compared to the other. In such a situation an economist would expect that individuals would switch their buying plans and reestablish the traditional differentials. The increase in prices of existing houses points up another aspect of the recent inflation in house prices and that is the large capital gains that most current home owners have experienced. In addition

most homeowners are highly levered with mortgage financing and have thus experienced substantial rates of return on the equity investment in their homes.

MORTGAGE PAYMENTS

Monthly mortgage payments are determined by the interaction of mortgage terms-interest rate, maturity, loan-to-value ratioand house prices. If mortgage terms remained unchanged monthly mortgage payments would rise in step with house prices. Over the period 1965-1974 mortgage terms have not remained unchanged. Data from the FHLBB survey of conventional mortgage lending allows one to detail the change in mortgage terms. The average maturity of conventional mortgages for new homes has increased, which by itself would tend to reduce monthly mortgage payments. The average loanto-value ratio has also increased which by itself would tend to increase monthly mortgage payments. However, dwarfing both these figures has been the increase in interest rates that has resulted in a substantial increase in monthly mortgage payments. The combination of the increase in house prices and the change in mortgage terms has resulted in an increase in mortgage payments of 105 to 120 percent from 1965 to 1975. Tables 9 to 11 detail these changes.

Over the period 1965-1974 the increase in mortgage payments is substantially in excess of the increase in average incomes. Using Census data, the ratio of mortgage payments to income has risen over the period by almost 20 percent. But this ratio needs to be interpreted with care. Imagine a family in 1965 with the median family income of $6,957 buying a median priced new home with conventional financing at a price of $22,700. This family would have mortgage payments in 1965 of $1,265 equal to 18.2 percent of its before tax income. Imagine another family in 1974 with the 1974 median family income of $12,836, buying a 1974 median price new home with conventional financing for $38,000. This family would have mortgage payments in 1974 of $2,793, equal to 21.8 percent of its before tax income. The second family thus has initial mortgage payments that take up 3.6 percent more of its before tax income than was the case for the first family (3.6 is 20 percent of 18.2).

However when one considers the case of the first family in 1974, nine years after it purchased its home, one gets a decidedly different picture. If the income of this family kept pace with median family income, the ratio of mortgage payments to before tax income would have dropped dramatically. In fact it would have dropped to 9.9 percent. This is because the traditional mortgage contract fixes payments in nominal terms over the life of the mortgage. The yearly mortgage payments remain at $1,265. On the other hand the family's nominal income would be expected to grow, reflecting both inflation and trend increases in productivity. As a result the ratio of mortgage payments to income would fall. The family that bought a home in 1965 is now using a smaller fraction of its income to meet mortgage payments. Further, the family that bought a home in 1974 can expect. a similar decline in the fraction of its income that must be used to meet mortgage payments.

COST OF HOMEOWNERSHIP

Mortgage payments are an important cash outlay for homeowners but they are not a complete measure of the costs of homeowning. In

particular one would want to account for additional expenditures for property taxes, insurance, and maintenance and repair. Detailed data from the CPI series on the cost of homeownership show that these three categories of expenses have all increased less than average income. As seen in Tables 12 and 13, over the period 1965-1974 the inflation in maintenance and repair expenditures was 88 percent, almost as much as the increase in average income, while taxes increased by 65 percent and insurance premiums by 38 percent.

An economist would want to make four further adjustments to arrive at what he would call the cost of housing. In particular he would want to eliminate the principal portion of the mortgage payment that is a form of saving. Secondly, he would want to allow for the opportunity cost of the homeowner's equity. If a family rented, it would invest its current equity and earn a return on that money. Thirdly, he would want to make some allowance for the capital gains on houses which works to reduce the cost of housing. Fourthly, he would want to take account of special income tax preferences for homeowners that also work to reduce the cost of housing.

Source: col. 1: "Current Population Reports, Consumer Income," Series P-60, numbers 49, 93, 98. col. 2: "Economic Report of the President, 1975," table C-18.

col. 3: "Business Statistics, 1973," p. 85; "Survey of Current Business," June 1975, p. S-16.

TABLE 2. PERCENTAGE CHANGE IN SELECTED MEASURES OF INCOME, 1960-1974

Source: col 1: "Economic Report of the President," 1975, Table C-3 (converted to 1967 base). col 2: "Economic Report of the President," 1975, Table C-44.

TABLE 4. PERCENTAGE CHANGE IN SELECTED MEASURES OF GENERAL PRICES, 1969-1974

Year

1960.

1961.

1962

1963.

1964.

1965..

1966.

1967.

1968.

1969

1970.

1971

1972.

1973.

1974

1957-1970.

1970-1974.

1965-1974.

Sources: see Table 3.

Year

1960.

1961.

1962.

1963.

1964.

1965

1965.

1967.

1968.

1969.

1970.

1971.

1972.

1973

1974.

TABLE 5.-SELECTED MEASURES OF HOUSE PRICE DEFLATORS, 1960-1974

Source: col. 1: "Economic Report of the President," 1975, Table C-3.

col. 2: "Construction Review," April 1975, Table E 4.

col. 3: Business Statistics, 1973, p. 55; "Survey of Current Business," June 1974, p. S-10.
col. 4: "HUD Yearbook," various years; FHA, data is for the first three quarters of each year.

Na: not available.

TABLE 6. PERCENTAGE CHANGE IN SELECTED MEASURES OF HOUSE PRICE DEFLATORS, 1960-1974

Source: cols 1 and 2: "Federal Home Loan Bank Board Journal," various issues; Federal Reserve Bulletin, February 1969.

cols 3, 4, and 5: "Construction Reports, New One-Family Homes Sold and For Sale," Series C25, various

issues.

TABLE 8. PERCENTAGE CHANGE IN SELECTED MEASURES OF HOUSE PRICES, 1964-1974