Inflation Nightmare

Willie Roberts, a 38-year-old chef who owns a small house on Chicago's West Side, recently decided to buy a bigger home for his wife and four children. He applied to a savings and loan association for a new mortgage--but in the three weeks he waited for the deal to be closed, the down payment jumped from 10% to 25% and the closing costs from 4.5% to 11%. Roberts could not meet those terms, so his family is still living in cramped quarters.

For millions of Americans from Maine to California, the cherished dream of buying a home of their own has become an inflationary nightmare. In most states, mortgages now carry towering interest rates of between 9% and 9 1/2%--up from a national average of 7 3/4% in the first half of 1973. Down payments have at least doubled in the past few months; 40% is now common in some parts of the country. Worst of all, at some S and Ls and savings banks, the prime sources of residential mortgage money, new loans are unavailable on any terms whatever. Laments Boston Realtor Jack Conway: "This is the granddaddy of all mortgage droughts."

The cause of most of the shortage can be traced to the Federal Reserve Board's effort to combat inflation by severely tightening the money supply and letting interest rates soar. That policy was designed to discourage borrowing but has also dragged up mortgage fees.

More important, it has started an unintended flood of money out of S and Ls and savings banks; depositors are pulling cash out of passbook accounts that pay only 5 1/4% annual interest and buying Treasury bills, bank certificates of deposit (CDs) and other investments that sometimes yield more than 9%. Through early 1973, S and Ls were taking in savings at an average net rate of more than $1 billion a month, but they suffered a net outflow in July; in August a staggering $1.2 billion was withdrawn, the third largest monthly loss on record. Since then, the situation has improved little, if any.

By no coincidence, the outflow began when Washington granted financial institutions permission to sell so-called "wild card" CDs. The wild cards, sold to savers who will keep at least $1,000 on deposit for at least four years, yield interest at whatever rate the issuer chooses to pay; Manhattan's First National City Bank last week was offering CDs yielding 9.59% for this quarter. S and Ls can and do sell wild cards, but their ability to do so is severely limited by a rule specifying that the total amount of wild cards an institution offers cannot equal more than 5% of its reserves. Commercial banks, which have much larger reserves than S and Ls, are offering the rich-yielding CDs in far greater amounts. Mortgage lenders charge that the commercial banks are thus draining huge sums out of the housing market. In Washington, the mortgage lenders are lobbying hard to have the wild cards discontinued.

Closing the Window. Meanwhile, some S and Ls, strapped for funds, have stopped making new mortgage loans altogether. They include Sun Federal in Portland, Maine's largest, and First Federal in Chicago, the biggest in Illinois. Others are keeping their mortgage windows open a mere crack by granting loans only to long-time depositors, and in some cases actually demanding that a home buyer maintain a savings-account balance equal to the size of the mortgage loan he seeks. The market is tightest in states like New York and Illinois, where usury laws keep mortgage-interest rates below 9%, making loan officers reluctant to accommodate any but the best-heeled home buyers.

Builders and real estate brokers, scratching for business, are resorting to some far-out tactics to keep on selling houses. Realtors in the Jean Burgdorff firm in Summit, N.J., have taken out personal loans, pledging their own assets as collateral, and then relent the money on short terms to would-be house buyers who could not get mortgage financing elsewhere. Witkin Homes in Denver guarantees buyers who balk at today's high interest rates that they can refinance their mortgages once within the next three years if rates drop. Homewood Corp. of Columbus will give a buyer free paint for his new house, then deduct from the down payment the labor cost of spreading it on the walls.

Even so, builders and real estate men are taking a painful hammering. Atlanta Developer Lindsey Freeman reports his condominium sales down 50% in the past two months alone. Nationwide, the pace of housing starts dropped from a record 2.4 million in 1972 to an annual rate of 2,000,000 in August, and that by no means measures the full extent of the trouble; permits for new construction have dropped 29% during the same period. Some analysts expect next year's housing starts to plunge to a three-year low of 1.5 million or so.

Mortgage men hold out a bit more hope for 1974 if the Federal Reserve loosens up on the money supply and loan demand diminishes. Joseph T. Benedict, president of the Worcester, Mass., First Federal Savings and Loan Association, predicts that mortgage rates could come down as low as 8% by midyear. Even if he is right, though, many would-be house buyers have to write off the rest of 1973 and mutter "Wait until next year." Meanwhile, they have to live somewhere, and that necessity provides the only bright spot in an otherwise dreary housing picture. The once sluggish rate of apartment rentals, from Manhattan to Los Angeles, is picking up briskly.

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