Demonstration Cities, Housing and Urban Development, and Urban Mass Transit

One sure indication of the tight money situation is the Fannie Mae operation in buying or selling Government-backed mortgages on the secondary market. The last quarter, ending in December, was the fifth quarter in a row in which purchases of these mortgages by the Federal National Mortgage Association rose. And this rise has been the highest for any quarter since this operation began in 1954.

Fannie Mae buys mortgages and provides the financial instructions with fresh cash to invest in other types of construction activity. This occurs where money is tight. When money is plentiful, the opposite happens-lenders buy existing mortgages from the Fannie Mae portfolio. Last quarter, purchases by Fannie Mae reached a record high of $405 million and sales declined to only $221,000. A year ago sales reached nearly $12 million and purchases nearly $73 million. Now the purchases by Fannie Mae increased more than fivefold and sales declined to practically nothing (chart 3).

[merged small][merged small][merged small][graphic][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][ocr errors][subsumed][ocr errors][subsumed][subsumed][merged small][subsumed]

The problem of money supply is aggravated by overall expenditures in just about all sectors in the economy. The Government is in the money market in order to finance the highest budget in history. Much of this goes to fight the war in Vietnam. Private individuals are in the market for money. Consumer installment credit last year reached nearly $75 billion, $25 billion higher than 5 years ago. Industry is competing for funds; expenditure for new plant and equipment have been projected for the second quarter of 1966 to be at the rate of nearly $59 billion, close to $9 billion higher than last year.

Federal Reserve Board member Sherman J. Maisel recently urged bankers to withhold loans for adding inventory or provide excess plant capacity in order to slow down the growth in demand. His comment is shared by many others who see a possible danger in the increase of plant capacity if a sudden cutback should force the industry to slow down production, thus hurting the overall economy. This fear stems from new, revised figures of the stockbuilding inven tory rate which showed a rapid increase in the last quarter of 1965, in sharp contrast to an initial estimate that it has declined.

Homebuilding is considered in the light of all of the other requirements of the economy by policymakers, and they frankly feel that other items may be more important. On this point, Horne stated that in some "metropolitan areas a surplus of housing still remains," and that the "lenders can be more selective and avoid some unfortunate practices." This would indicate that the adminis tration is not overly worried about the possibility of sluggish housing this year or may even feel that the further decline may be to the advantage of the overall economy. They are not very likely to funnel more money into the housing mar ket by changing any of the existing savings and loan regulations and allowing them to compete in the financial markets. If this restraint is not removed,

ENT

Tae operatin

market. T

which pe ciation r Tation be s with fres where m

Our existing by Fa ly 2010 $13 milli and sales

namely, that the savings and loan can put only a certain portion of their assets into mortgages and that they cannot increase their borrowing from the Board, then the net inflow into mortgages will likely drop to about $7 billion this year. What this would do to the home market is obvious. There will be a curtailment in the homebuilding activity, both in housing starts and sales of used homes. To put it another way, unable to sell or properly finance, a possible new home buyer may end up not selling his older home and as a result will not buy a

new one.

FHA has now published four consecutive vacancy studies done for them by
local post offices. The last two have been summarized in alphabetical order and
are shown in table 4. As is clearly evident, vacancy data varies considerably
from city to city. In general, the apartment vacancy rate is about twice that
of the single family house. There are only two cities with over 10 percent of
vacant units among singles while there are 35 cities having a 10-percent rate or
over, and 6 with over 20 percent.

TABLE 3.-Average prices for FHA-insured new-home mortgages (sec. 203) im-
mediate delivery transactions-25-year maturity, 10-percent downpayment
54 PERCENT MAXIMUM INTEREST RATE EFFECTIVE MAY 29, 1961
[Per $100 of outstanding loan amount]