A Jolt for Housing

At Federal Reserve banks across the nation last week, thousands of people who normally keep their money in savings accounts stood in long lines to buy U.S. Treasury notes (minimum purchase: $5,000) yielding average interest of 8.1% that is exempt from state and local taxes. Such eagerness to buy is understandable: the notes offer both complete safety of principal and an interest return far above the 5 1/4% maximum currently paid on passbook savings at a bank or savings and loan. But, for involved reasons, the popular fascination with Treasury notes raises a real worry about the national economy. It means that the net inflow of money into savings and loan associations and mutual savings banks has dropped off sharply; these thrift institutions depend far less on corporate deposits and far more on individual savings than do commercial banks. That in turn threatens to throttle the just beginning recovery in the housing industry, which relies heavily on S and Ls and savings banks for mortgage money.

In August the net inflow of money into S and Ls dropped more than 50% below July, to $1.3 billion. Savings banks suffered an even worse decline, from $264 million in July to an estimated $10 million last month. Nearly all these thrift institutions blame the decline on competition from Government bills and notes. Says President Harvey Kuhnley of Minneapolis' Twin City Federal Savings: "Treasury bills account for at least three-fourths of it." He and other savings executives worry that when the September figures are added up, they will show a net loss in deposits.

Heavy borrowing by the Treasury is one reason why Government securities are luring money out of savings accounts. Largely because federal spending has risen faster than expected, the Treasury will have to tap the money market for $44 billion to $47 billion in the last half of this year, or about $3 billion to $6 billion more than was anticipated only a month ago.

Another reason for the attractive Treasury yields: despite last month's decline in the rate of increase of the consumer price index, many lenders remain convinced that worse inflation lies ahead. That expectation pulls up the general level of interest rates, forcing the Treasury to increase the yield on its securities in order to make them attractive to investors.

To minimize the flow of savings-account money into Government securities--a process that economists call by the jawbreaking name of disintermediation--the Treasury plans to offer fewer three-to-six-month bills and more medium-term notes. Its reasoning: the notes, which usually mature in about two years, compete less with highly liquid passbook accounts than with time deposits, which typically pay 6.5% over two years or 7.5% over four years. However, that strategy may not work if, as some experts suspect, the public has simply been storing up idle funds in passbook accounts and waiting for Treasury rates to go up. Money will almost certainly keep flowing into notes as well as bills if interest rates continue creeping upward, and most monetary analysts expect that they will.

Plenty to Lend. For housing, the shift of savings-account money into Treasury issues could hardly have come at a worse time. The industry has barely begun to recover from what for it has been more like a depression than a recession. New-home starts bounced up 14% in July but flattened out in August at an annual rate of 1.3 million, v. a peak of 2.4 million in 1972. Largely because of high home prices, the $2,000 income tax credit to buyers stimulated sales very little. Continued disintermediation, says U.S. Savings and Loan League Economist Ken Thygerson, "will abort the housing recovery."

Such forecasts may sound Cassandra-like. The thrift institutions took in money at a record clip early this year and still have plenty to lend: they hold more than $405 billion in assets. Treasury borrowing in the fourth quarter is supposed to decline from the current quarter, though that is not certain. Nonetheless, the threat of continued disintermediation is pushing savings institutions into taking protective action. Already many are cutting back on mortgage commitments for the rest of this year; in the past few weeks several have raised mortgage Interest rates by about a quarter of a percent, to as much as 9 1/2%. For the overall economy, the implications are disturbing. Forecasters did not expect the housing industry to lead the nation out of recession as it has in the past, but their predictions of continuing recovery nonetheless assumed a modest and gradual housing upturn that now may not happen.

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