Future housing demands and sources of mortgage money

Federal Home Loan Bank Board Journal, April, 1984 by Alan R. Winger

Suppose, on the other hand, the economy came out of the current recovery performing substantially better than most now expect, generating the incomes and financing costs that make it feasible for many more individuals to move out on their own. If this happens, earlier prophecies of housing demand in the Eighties could be fulfilled. Housing starts could rise to 2.0 million-plus.

The author's view is that many of our economic problems will remain as we come out of the recovery period. The result will be economic conditions that restrain individuals from establishing a separate residence. The upward trend in headship rates will not resum; hence, household formations will be closer to K the B or C. However, they will not be as low as those projected in K. Housing starts will probably average about 1.7 million per year over the remaining years of the Eighties and will do so for two reasons. One is, while the economy may not perform well, that performance is likely to be better than it was in the latter part of the Seventies and early part of the Eighties. Recent actions taken to deal with our economic problems should bear some fruit, which should mean some improvement in income and financing conditions. But it will not be enough to lead to significantly higher levels of household formations. Secondly, the very low levels of housing starts during the first three years of the Eighties undoubtedly generated some "pent up" demand that will come into fruition as the recovery continues and we move into the next phase of the cycle.

Those, the author believes, who expect that housing starts will average 2.0 million-plus during the remainder of the Eighties will be disappointed. Demands are more likely to sustain a starts level of about 1.7 million units per year. While below the glowing expectations of many as we started the decade of the Eighties, housing construction at this level would still represent an activity level that generates a healthy demand for mortgage money. HOUSING FINANCE PROBLEMS IN THE EIGHTIES Sources of Funds: Background

Housing finance problems in the 1980s, as we looked at them in the 1970s, appeared to stem from the expected heavy mortgage demand in the face of strong capital demands from competing sectors and an archaic mortgage finance instrument. There was much discussion of the need to broaden the base of mortgage money through the development of new financing instruments, e.g., mortgage-baced securities and the enlargement of the secondary market for mortgage loans.

Until the 1970s, most housing finance was provided by four major financial intermediaries--savings and loans, commercial banks, life insurance companies, and mutual savings banks. These institutions accounted for in excess of 80 percent of the net acquisition of long-term residential mortgage loans made each year up through 1970. (See Table 6.) The mortgage funds flowing through these institutions since then have diminished. In 1975, net acquisitions totaled about 75 percent. In 1980, this figure was 66 percent. (See Table 6.)