America’s housing industry now in a major crisis
Five times since the end of World War II, America’s housing industry has skidded into a slump.
In the past seven years alone, a slump has occurred three times. One of those slumps continues today and promises to be the worst.
Why can’t someone come up with something that will prevent a re- occurrence of the housing industry downturn?
In the first place, the situation does not lend itself to simple solutions since the causes are not simple, and secondly, there are solutions available which industry leaders believe will work if tried, according to John C. Milliner Jr., Executive Vice President Southeastern Lumber Manufacturers Association, an association of 230 lumber manufacturers located in seven Southeastern states.
Part of the solution is also part of the problem; namely the U. S. Congress. The Congress is seen by many as one of the big villains in the whole economic mess faced by the country today. Before solutions can be tried, Congress must act on proposals placed before it.
The housing industry’s money problems occur on two fronts. The builder needs money to erect structures and the consumer needs money to buy the highest interest rates in our history.
Maintaining an adequate commercial flow of money into the housing market is directly related to the ability of thrift institutions to channel funds into mortgage commitments. High interest rates have accelerated “disintermediation,” a process which basically reflects a net outflow of deposits from savings banks as depositors obtain high returns on their funds elsewhere.
This first took place in mid- 1973, and mortgage money tightened appreciably last summer with the result that housing starts by late 1973 fell to an annual rate of about 1.5 million units. Net withdrawals from savings banks are again restricting the availability of mortgage money.
Net withdrawals from savings and loan associations alone during April were estimated at $ 335 million, while more than $ 600 million moved out of savings banks.
New withdrawals from these institutions seem likely as long as key interest rates remain high. If this does occur, home building this year will probably drop to 1.6 million units or lower.
A number of proposals have been suggested to reform the financial structure of the economy, so that housing would not be the first to feel the pinch every time interest rates rise.
One of the most frequently suggested poli- cies is to provide an incentive for people to put their money in savings and loan associations or other thrift institutions by way of a tax credit.
For example, if the first $ 750 in interest earned on mortgage related investments were tax- exempt, SLMA believes that people would take advantage of this inducement and this pump more money into the mortgage lending institutions.
It is generally agreed that Congressional and White House actions to curb inflation would also generate for the housing industry.
The Federal Reserve Board has been attempting this alone thus far by attempting this alone thus far by slowing down the rate at which more is injected into the economy.
Most economist believe that this is not enough, and that sharp cutback in federal spending, as already suggested by President Ford, are essential. Industry economists have recommended special legislation in Congress which would implement selective control of credit, such as, to cut back on consumer credit while continuing to provide mortgage credit.
Another suggestion is a change in the way payments are made — variable interest rates or flexible payment schedules, for example.
Basically, a variable rate mortgage permits an increase or decrease in the interest rate, generally in response to changes in some specified economic indicator.
With a flexible payment schedule, the monthly payments in the early years could be less than under a standard mortgage, but would rise after a period of time in tandem with the buyer’s ability to pay. This would make it easier for young people to purchase homes.
In additions, a substantial increase in funds could be made available to the Federal Home Loan Bank Board in order for it to pump additional money into mortgage markets, including the purchase of funds on the open market and the re- lending of those funds to the S& L’s at rates a half percent below the rate paid by the home loan bank.
The Federal Home Loans Bank system absorbs the differences between the money cost at the two rates, but it gets additional funds to the prospective home buyer.
These are by no means the only proposed remedies to the money problems of the housing industry, although they are important. However, these remedies are useless unless they are acted upon on the federal level.