It Will Cost More

The nation's most ramshackle major industry--housing--had hoped to rebuild this year, but it appears that the roof is still caving in. Reason: mortgage credit has grown scarcer and costlier since the Federal Reserve Board's recent increase in the discount rate. The board's overall purpose was to prevent inflation. But, the predictable side effect on housing of its move was to inflate prices and discourage buyers in a $25 billion-a-year business that has been slumping since late 1963, despite unprecedented prosperity throughout the rest of the economy. "The general tightening in mortgage markets," declares the National Association of Home Builders, "is further going to aggravate the housing situation."

What 1/2% Means. This pessimism may seem to conflict with the Commerce Department's report last week that housing starts jumped 14% from November to December, to an annual rate of 1,746,000. But almost all of those starts had been firmly planned for months before the Federal Reserve Board increased the price of money. In 1966, predicts Walter Heller, former chairman of the President's Council of Economic Advisers, the increase in interest rates will cut housing back to a point even below last year's disappointing 1,500,000 starts. Federal Reserve Board Governor Sherman Maisel, who strongly opposed the rate boost, figures that the board's action will cut housing sharply. Some Washington officials predict that the discount-rate increase will eliminate 100,000 to 150,000 starts for a year or two.

The discount-rate hike might seem small to laymen--it rose from 4% to 4 1/2--but the impact on housing is substantial. On a $20,000, 25-year mortgage, an increase of 1/2% raises costs by $6 a month, or $1,800 over the life of the loan. Conventional mortgage rates have already started to climb--to as much as 6 1/4% in San Francisco, Houston, Cincinnati and elsewhere--and are likely to rise a bit more. Hardest hit will be the Southeast, the Southwest and the Far West, which have to import much of their mortgage money from the cities of the capital-rich Northeast.

Competition for Money. Borrowers face hard times because the demand for credit of all kinds outstrips the supply, and money that traditionally funnels into mortgages is going to other sources instead.

To raise money for the Viet Nam war and domestic expenses, the Government was forced last week to lift its 91-day bill yield to an alltime high 4.673%. President Johnson also instructed Treasury Secretary Henry Fowler to boost the interest rates on U.S. Savings Bonds, probably from 3 3/4% to 4 1/4%. Meanwhile, some AAA corporate bonds now yield close to 5%, and banks have begun to pay up to 5 1/2% for time deposits.

In such a market, few lenders are rushing to put their money into Federal Housing Administration or Veterans Administration mortgages, which have an interest ceiling of 5 1/4% . Says Veterans Administration Chief William Driver: "If things continue this way, there will be very little money available for G.I. mortgages."

Obviously, things will not continue this way. The Administration is debating whether to increase the rate ceiling on FHA-insured mortgages and whether to ask Congress to raise the VA rate, may well come out for raises of 1/4% or 1/2%. Expecting that they soon will be able to get those steeper rates, many mortgage lenders have held back on new loans. Almost anyone who intends to buy a house in 1966 will thus have to pay more--or settle for less in the way of quality.

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