KYLEFORD LIBRARIES It rate er cor alls. the 11957-59. Source: Council of Economic Advisers: Economic Indicators, and NAHB. THE MONEY MARKETS Commercial banks, in contrast to savings and loan associations and mutual savings banks, will experience another phenomenal gain in savings in 1965. By the end of 1965, time deposits were estimated at around $145 billion, more than twice the amount 5 years earlier. The growth in negotiable certificates of deposits has been even more spectacular, rising from almost zero in early 1961 to about $16 billion currently. The growth in time deposits at commercial banks during the 1960's has had a profound impact on banking and financial systems. During the past 5 years, growth in total bank assets has been astoundingly large. There has been a shift in the composition of total assets toward those with longer maturities. Banks have aggressively competed for deposits because a sustained strong demand for credit of the type that commercial banks can efficiently provide has encouraged and enabled them to do so, profitably. However, the interest rate on time and savings deposits has risen sharply and, recently, the ceiling on certificates of deposit and other "nonsavings" deposits was raised from 4.5 to 5.5 percent. Banks are now under added pressure to develop a liquidity position sufficient to meet unforeseen contingencies. This task may be somewhat more difficult now than in the past because of the recent shift in the composition of bank assets, the decline in importance of U.S. Government security holdings-the traditional form of secondary reserves-and the increasing importance of certificates of deposit which could prove quite volatile under certain conditions. The recent increase in the ceiling on certificates of deposit and on time deposits other than savings could hamper the ability of mutuals and savings and loans to attract funds to finance mortgages and other investments. The effort of the commercial banks to raise certificates of deposit money requires them to compete with Treasury bills, finance company paper, and the like. Time deposits other than certificates of deposit and savings accounts, however, are competitive with deposits at savings institutions. If the banks find it desirable to boost their current holdings of these deposits by bidding up the price of savings certificates, etc., savings institutions will have to follow the pattern and risk a further squeeze on earnings or stand pat and lose out in the competition for savings. In the savings race, the banks have a decided advantage. They can legally operate in a variety of credit markets. The investment return in some of these markets is greater than the yield on mortgages the major investment outlet for associations and mutuals. The Federal Reserve Board kept the rate payable on savings deposits at 4 percent in order to minimize competitive effects. Nevertheless, the recent Federal Reserve Board action raises the possibility of a further escalation in the competition for funds, with accompanying pressure to sacrifice investment quality for yield. It is too early to tell how associations and 60-878-66-pt. 1-35 mutuals will fare in the competition for savings. Perhaps all that can be said is that, if the differential in the savings rate between the banks and the other two institutions shifts very much in favor of the former, net savings flows may be different from those currently anticipated. THE IMMEDIATE OUTLOOK The housing outlook for 1966, prior to the Federal Reserve Board action, was for a very modest improvement. Now, the general tightening in mortgage markets is constricting that outlook. This means a squeeze on builders and their ability to produce sellable housing units. It will mean a further decline in federally assisted housing starts unless their interest rates are raised to a level with conventional rates. If not, the resulting payment of points on federally assisted mortgages will mean a hardship unless they are included as the "price" of money in appraisal of replacement cost. In either event, the Federal Reserve Board action has put builders on the spot. They can still provide houses for the upper middle and high income groups. It is a reasonable assumption that these groups will be able and willing to pay the price of the increased costs as incurred by the builder in the increase in shortterm as well as long-term credit. But builders will be less able to provide the housing most urgently needed-for medium and lower income groups-for these reasons: First, the fact that they have to pay more for interim financing will increase the price of homes. Second, working with the Government programs, they have no choice but to either absorb the cost of "points" or stop using these programs. Under current and foreseeable conditions, it would be next to impossible to take this out of profits. It would be tragic for the economy and families who depend on Government-assisted financing in housing should builders be forced further out of this market. EXHIBIT I-B: NOTES ON HOUSING AND ECONOMIC SCENE, MARCH 1966 For the first time since the Korean war, there is talk of price and wage controls. The decision, of course, rests with the President and if it should be done, it will not be to his liking. That this is a possibility is evident from comments of responsible people, mostly from outside of the administration. Within the administration, it was the Secretary of Labor who had the task of persuading labor to stay within the guidepost as set by the Council of Economic Advisers. Labor's answer to his plea was: "We went with you in the last elections but we did not marry you." Labor is, in essence, saying that profits are high and they should have a share in them. The administration, on the other hand, is saying that it is essential to stay within the 3.2-percent increase in wages as set forth by the Council and that to exceed this is inflationary. The talk about inflation and how to prevent it has been a major concern of most of the economists since the first of the year. But not until now, however, has a suggestion been made for price and wage control. Let us try to put the problem in a proper perspective. At this time, there are probably only three indications of a possible inflation: First, is the increase in the index of industrial materials prices which went up 10 points from January 1965 to January 1966; the second is the increase of 312 percent in wholesale prices. The third indication is the increase in some labor wages; namely, in the construction industry. However, one must remember that most of the indicators are a reflection of the past and help little in examining the immediate future. What is happening now will only be reflected in much new data later on. President Johnson was well aware of this when he said to the economic symposium celebrating the 20th anniversary of the Employment Act: "We will need to watch unfolding events closely, and to remain flexible in our tax and other policies so that we can change quickly, if the need should arise." The fact of the matter is that the price pressures in the past few months are real even though not always reflected in the economic data. This is a result of the economy working at record capacity, and unemployment being lowest in recent history. "What this really amounts to," said a high official in the Labor Department, "is that most of the people who are employable are now working." This, of course, puts a strain on the labor market. When companies compete for workers, the price goes up. And as this column has suggested last October, there has been a serious shortage of labor in the construction industry during most of 1965. $95 $96 $97 $98 AVERAGE PRICES FOR FHA INSURED NEW HOME MORTGAGES TTTT $95 $96 $97 $98 On the materials side, there are few indications of serious supply problems. The exception is copper, but much of this is an international problem rather than There is some talk about some types of textile and canned goods shipped to military which may create some shortages, but there is no actual evidence of this and it is quite unlikely that this should happen. a domestic one. Much of the recent economic comment has concerned itself with the threat of inflation and labor shortages. Inflation is relative and should be viewed VELEFORD LIBRARIES not in terms of news that prices are increasing, but rather in terms of the magnitude of the increases. Prices have been stable during the period from 1958 through 1964. In 1965 the first signs of increases became apparent during the last quarter. Preliminary data for both January and February point to a continuation of the trend but at a slightly faster rate. Chart 1 shows the yearto-year percentage changes in both consumer and wholesale prices for the period since 1948. Relative to the present, the period 1948 through 1952 saw sharp movements in the price index; a similar but not as sharp a movement occurred in the period from 1956-58. The consumer price index rose by 1.6 percent during the year 1965 as compared with an average increase of 1.2 percent over the preceding 4 years. Reduced supplies of meat and some other animal products contributed to the sharpest price advances, and rising demand pressures also brought about increases in prices of various other nondurable consumer goods. Prices of automobiles and some other consumer durable goods, however, were lower than a year earlier, principally because of the midyear cut in Federal excise taxes. Prices of services (excluding rent) increased by nearly 3 percent. In the closing months of 1965, retail prices of foods averaged about 3-percent higher than a year earlier. Meat prices advanced sharply in the spring and increased further in December. On the other hand, large harvests-particularly of citrus fruits and processed fruits and vegetables dropped to levels well below a year earlier. Consumer prices of apparel, particularly shoes, and of fuel oil, transportation, and medical services also rose more than in other recent years. The wholesale price which has been relatively stable since 1958 began to rise early in 1965 primarily as a result of farm products; 7 points from January to June. Beginning in May 1965 the industrial factor began to climb also, increasing by 1 percent between May and December. Virtually all of this increase was in the consumer non-durable-goods sector. No information is currently available on the role which the tax excise cut played in pricing. Sharpest price increases during 1965 affecting the home building industry were in metal products, up 2.3 percent primarily as a result of copper which showed an 11.8-percent rise for copper sheet. Lumber and wood products increased by 1.9 percent, most of the increase being in hardwood lumber which went up by 12.7 percent. Furniture and household durables were virtually unchanged. The industrial price index increased 0.3 percent in January to the 103.5 level. The index which was stable from 1959 through 1964 has increased at an annual rate of 21⁄2 percent since September 1965. A somewhat more erratic but truer indicator of what lies ahead (a leading economic indicator according to the National Bureau of Economic Research) is the index of industrial materials prices which has risen by 10 points since January 1965. The present level is 120.3 (1957-59 equals 100). Half of the increase has come since September 1965. A third industrial index is the Federal Reserve Board's index of sensitive industrial materials (sensitive to price changes) which has risen from 101.3 in January 1965 to 103.7 in January 1966. Even though the present increases have not as yet been as sharp, it must be remembered that the large sums of money committed by the Government and the anticipated budget deficit have not been reflected in the current indicators. Within the next few months, the effect of Government policies, both fiscal and monetary, will make itself felt. The "hyperinflation" of the immediate postwar period will not, however, again rear its head. The shortages which characterized the economy are no longer present. Short-term imbalance between supply and demand particularly in materials in heavy demand for use in Vietnam will exist. HOMEBUILDING The big news is still mortgage money, or money in general. After the change in the discount rate in early December last year, the availability and cost of money took a sharp turn for the worse. The 14-percent raise in the FHA rate was too little, too late. As one builder said before the raise, "We are very likely going to be stuck with the increase in the rate as well as the increase in points." He was right. The increase to 5% percent meant in many cases not only a 4-percent increase in the interest rate but also a further increase in points. "Before the FHA increase, I paid 11⁄2 points. Now I have to pay 3 points," commented a builder from North Carolina. Points have taken a sharp turn upward since late last year. In September the average price for $100 of an outstanding loan was $98.4, $98.2 in November, terms of th period fra parent dur ry point te ows the per for the per 52 saw shary ment occur 1965 as years f to the shap Out incre automoti than a re xes. Pr and $98.0 in December. In January 1966 it was $97.1 and $96.4 in February. (See table 3 and chart 2.) William C. Magelssen, vice president of the Security Trust & Savings Bank in Billings, Mont., has commented that, "increase of interest rates will force many one-, two-, or three-house part-time contractors out of the business. I look for rates to increase possibly another 2 points on FHA. It is ironic that the Federal Housing Administration did not move their rates to 54 percent. I feel that this is an economic blunder due to the increasing yields of prime corporate bonds." But it is not only the FHA money which is expensive. The interest on conventional loans has increased. In addition, money is harder to get. "With $6,800 down payment on a $26,800 house, the lending institution told me I can get only an $18,000 loan instead of $20,000. So I lost a good solid buyer," said another builder. "From where I sit it looks like the money situation is not going to improve soon," commented an east coast builder. Most of the indications bear him out. Money is going to be even more expensive in the future. There also seems to be a real danger of having less money this year than what the real estate market will need. The best estimate available at this time show a possible shortage of funds for home mortgage of $1 to $3 billion. The decline of $1 to $1.5 billion in availability of funds has been predicted by John E. Horne, Chairman of the Federal Home Loan Bank Board. The $3 billion shortage in funds was estimated by Dr. Robinson Newcomb in an analysis prepared for the National League of Insured Savings Association. An analysis by the economics department of NAHB shows, likewise, a possibility of shortage in funds between $1.5 to $2.5 billion in 1966. These estimates have been summarized in two tables. TABLE 1.-Mortgage requirements for 1- to 4-family housing [Dollars in billions] 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 TABLE 2.-Possible net increase in home mortgage holdings 1965 and 1966 [In billions of dollars] KROWD LIBRARIES Source: Estimated from Federal Home Loan Bank Board, home mortgage debt, 3d quarter 1965. First, illustrating the possible net increase in home mortgage holdings in 1965 and 1966, and second, shows the mortgage requirements for one- to four-family housing, 1957 to 1966. These figures show that homebuilding will very likely need between $16 to $17 billion available in 1966. This, then, will mean a possible shortage of between $1.5 to $2.5 billion for mortgages. |