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CONGRESSIONAL
RESEARCH
SERVICE
LIBRARY OF
CONGRESS
Issue Brief
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010-1 03860715
HOUSING AND THE ECONOMY
ISSUE BRIEF NUMBER IB78086
AUTHOR:
Barbara Miles
Economics Division
Bruce E. Foote
Economics DiViSiOI1
THE LIBRARY OF CONGRESS
CONGRESSIONAL RESEARCH SERVICE
MAJOR ISSUES SYSTEM
DATE ORIGINATED 09/O9/78
DATE UPDATED 08/19/82
FOR ADDITIONAL INFORMATION CALL 287-5700
0819
1
/
,
/5:.-.\\
~\businessmen located throughout the country
CRS- 1 IB78086 UPDATE-08/l9/82
/
ISSUE DEFINITION
are not
million
could
starts
the 15%
Housing markets are in their fourth year of deep recession and
expected to show any improvement in l982 over 1981 levels. The l.l
housing starts in 1981 were the fewest since 1946. A weak recovery
still begin in the late months of this year, but significant rises in
or sales are unlikely unless mortgage interest rates drop below
level. Even then, consumer resistance to adjustable mortgages, and shifts
away from mortgage lending by thrift institutions could dampen any
improvement. As has been true for the past three years, the current outlook
for housing production suggests serious doubts that an expanding and highly
mobile population can be housed without some reduction in traditional housing
standards, and raises issues ranging from the viability of homebuilding firms
and mortgage lending institutions as currently structured, to the
affordability without assistance of either homeownership or rentals for a
large part of the nation's households.
BACKGROUND AND POLICY ANALYSIS
HISTORICAL PERSPECTIVE
It also
small
home
is
are
Housing is one of the largest sectors of the U.S. economy.
highly atomistic most homebuilders and real estate dealers
and as the majority of
purchases are financed with long-term mortgages, housing is one of the most
sensitive of U.S. industries to changes in the cost and availability of
credit. Because" of the industry's size and sensitivity to financial
conditions, housing playsr a special role in macroeconomic stabilization
policy. During periods of rapid inflation, .housing has usually been
first major sector of the economy to respond to monetary policies designed to
slow the rate of price increases. In addition, housing has traditionally
been more severely affected by anti-inflationary monetary policies than
virtually any other sector of the economy.
and
high
If N
record
Thus, housing has earned its reputation as a
For example, starts of new houses fell from a
units in 1972 to 1.2 million units in 1975 a 50% decline.
basis the drop was even greater with the low of 976,000
representing a 60% drop from the previous quarterly peak rate.
1]. Furthermore, the housing industry has often led the way‘ into both
recessions and periods of sustained economic growth and has almost always
declined or risen more than proportionately to the rest of the economy. This
has led some policymakers to think of housing as a kind of economic "balance
wheel" that helps smooth out the business cycles for the economy as a whole
by bearing the brunt of economic contractions when interest rates rise, and
recovering most rapidly when interest rates fall.
"bust" industry.
of 2.4 million
On a quarterly
starts (SAAR)
[See Exhibit
The relation of residential construction to the economy as
shown by different rates of change in the Gross National Product (GNP) and in
investment in residential structures. Measured in real terms (inflation
Lcorrected), investment in housing generally comprises 4 or 5% of the total of
goods and services produced in the economy. In the seven business cycles
which have occurred since world war II, however, residential investment
accounted for a far greater proportion of the change in GNP. Exhibit 2 in
a WhOl€ iS
the‘
CRS- 2 IB78086 UPDATE-O8/19/82
the Appendix to this Issue ,Brief shows changes in GNP and changes in
investment in residential structures in the periods of economic recessionw i
subsequent growth from the lst quarter of 1971 through the first quarter of
1981. 9 A
FINANCIAL MARKETS
Often when discussing housing markets, reference is made to the "basic" or
"underlying" demand. This refers to demographics: in the current situation
and'at least until 1990, demand for housing should be very strong as persons
born during the 19505 baby boom come of age, form their own households, and
enter, most probably, the homeownership market. This demand for housing is
not entirely independent of economic factors --- households form more slowly
during recessions, for example --— but is often used in forming estimates of
housing "need." It is generally this notion of "needs? against which the
housing industry's performance in supplying new units is measured.
Regardless of the basic demographics, it is conditions in financial
mar=~.. » ~ i si—+ which have the greatest impact on fidusing
cycles. iIn the typical interest rate cycle, rising short-term interest rates
produce outflows of funds from savings and loan associations (S&Ls) —- the
nation's major mortgage lenders -- as depositors shift their money from
limited interest deposits into higher yielding, open market securities.
Since mid-1978, however, a series of regulatory and legislative changes have
been made that are intended to increase the flexibility of the thrift
institutions in responding to cyclical swings in interest rates and, it is
hoped, smooth out mortgage lending and housing cycles. These developme” 5
include the introduction of high-yielding, variable-rate deposit certificates
(e.g. six-month "mmcs" and 30-month "small saver" certificates), "Now"
accounts, passage Of a Federal override Of State mortgage USUFY ceilings,‘
authorization for adjustable type mortgage loans, and the beginning of a
planned phase-out of deposit rate ceilings under supervision of the
Depository Institutions Deregulation Committee (DIDC). Further, the thrifts
have been authorized to invest up to 20% of assets in consumer loans,
commercial paper, and corporate debt securities, and powers of their service
cooperations have also been expanded.
These changes can be seen as adaptions to the realities of financial
markets in an inflationary environment. For mortgage lenders operations
continued well past the time that previously would have seen sharp lending
curtailments. Depositors in the institutions have been able t0 obtain_
interest earnings more in line with market rates. Mortgage borrowers, on the
other hand, have been forced to pay mortgage rates more closely attuned to
capital market rates. The upshot of all this appears to be that it is no
longer an outright unavailability of funds that periodically curtails housing
activity, but rather mortgage interest rates reaching very high cyclical
peaks which disqualify many would-be home purchasers.
The major factors now affecting housing are high interest rates and shifts
in financial capabilities of mortgage lenders and investors.
FOP financial institutions, high interest rates signify the need t0 adj"st
asset portfolios to lessen future interest .rate risk and proi ;t
profitability. The basic problem faced by the depository lenders has been
the very rapidly rising cost of deposit funds while the yield on assets has
risen only slowly. Liability costs have risen not only because of the higher
rates available to savers since mid-1978, but also because savers have
CRS- 3 IB78086 UPDATE-O8/19/82
shifted out of lower yielding accounts and into the more costly certificates.
At the end of 1978, for example, only about 17% of deposits were held as
mmcs, jumbo ($100,000) or 2 1/2 year certificates; by Dec., 1981 that
proportion was just under 65% and regular passbook accounts were about 19%.
On the asset side, low yields reflect a preponderance of pre-1979 mortgages
earning yields of 9 1/2% and less. New mortgages, at 15% and up are simply
not sufficient to overcome the "drag" of the older assets. Further,
assumability requirements and due—on-sale-clause avoidance by some sellers
and purchasers are having the effect of prolonging the life of mortgages
which normally could have been expected to be prepaid well short of their
25-and 30-year maturities (most mortgages turn over within 10 years). Thus,
system—wide, the spread between asset and liability yields for insured S&Ls
at mid-year 1981 was -0.59, compared to more normal spreads of about 1.5%.
In the long run, adjustable mortgage loans (AMLS), which were authorized in
April, 1981 may enable S&Ls to keep the spread in some desired range. With
ALMS, S&Ls may adjust the rate on the loans as market rates change. AMLS may
have little impact in the short run because (1) it takes time to implment the
new loans and (2) it may be years before ALMS represent a significant portion
of loans outstanding.
At the end of 1981, the situation for the thrifts was one of
deterioration: the net return on assets was negative, indicating that the
industry as a whole was losing money. Indeed, at least 3/4's of the industry
was losing money. Twenty arranged mergers (to avoid, liquidation) had
occurred including four giant interstate merger, and there was one outright
failure, the first in a decade. By comparison, voluntary mergers between
healthy institutions has more than doubled. The general increase in mergers
signals an attempt to gain the economies of scale necessary to take full
advangage of new asset powers granted under the deregulation proceedings.
The problems affecting the primary lenders are also being felt by the:
major secondary market investors. Secondary market investors provide funds
by making commitments to purchase mortgages and by purchasing existing.
mortgages from mortgage bankers and thrifts, thereby replenishing the primary.
lenders‘ funds for futher mortgages. The Federal National Mortgage
Association (FNMA), a quasi-public tax-paying institution, and the largest
secondary market investor, sustained losses throughout 1981, posting an
overall $190.4 million loss. Currently, FNMA's held mortgages are yielding
an average of about 9 l/2%, while the cost of financing the portfolio through
debentures is averaging 15%. In October, 1980, FNMA announced that it would
no longer purchase assumable conventional mortgages unless they carried
variable interest rates; in those States where assumability is legally
required, FNMA will require a 7-year "call" provision so that it can force
refinancing and protect its earnings against long-term interest—rate risk.
In the Spring 1981, FNMA announced a refinancing program for its mortgages in
which it offered attractive terms to encourage home owners to refinance, or
to enable them to sell to new borrowers who could obtain better than market
financing from FNMA. More recently both FNMA and FHLMC have been willing to
take "buy-down" mortgages -- those on which sellers of houses (especially
builders) make part of the monthly payments for a few years to reduce the
effective rate to the home buyer. These mortgages generally carry full
market yields and raise earnings for mortgage holders.
The importance of the federally sponsored secondary market institutions
(such as FNMA, or the Federal Home Loan Mortgage Corporation (FHLMC) in
maintaining the weak mortage resale market has been crucial. In 1981 the
total of secondary market purchases of home mortgages was $55.8 billion or
57% of all primary market originations. Private investors (pension funds,
CRS- 4 IB78086 UPDATE-O8/19/82
insurance companies, other savings institutions, etc.) accounted for only
about $17.6 billion of that amount. Another $20.3 billion came from mortg
pools, most of which are guaranteed by HUD's Government National Mortgage
Association (GNMA). The rest of the investment came from State and local
investment agencies, and the Federal credit agencies which alone took $12.4
billion or 22% of the purchases.
3
4
As mortgage interest rates change, or are expected to change, so do the
yields obtainable by investors. Yields have been mixed at recent auctions of
FNMA and FHLMC (see the listings below of Selected Interest Rates.) The FNMA
auctions are for commitments of funds for four months. These auctions thus
reflect expectations for the next four months. The FHLMC auction yields are
considered a good indicator of current market conditions, because delivery of
mortgages is mandatory while FNMA bidders may elect to hold or sell elsewhere
if they can get a better price.
The actions of FNMA and FHLMC and the GNMA become particularly important
when mortgage lending is curtailed. Both FHLMC and FNMA are currently buying
old, low-yielding mortgages from thrift institutions andr issuing their
guaranteed securities against them. This aids the thrifts by) allowing .them
to use the securities for collateral to gain liquidity, but still yields a
small profit to FNMA and FHLMC. The "swaps" of securities have dominated
mortgage backed securities markets since late-l98l. In early 1982, secondary
maket purchases, for the first time, were greater than mortgage originations.
For the Government-run GNMA, it is possible, if funds are available,
GNMA to open its "Tandem" window to buy up mortgages (FHA/VA
conventional) to get funds back into lender's hands. In 1974 and 1975,
attempt to bolster housing markets, GNMA bought up mortgages with
low interest rates, and then resold them to FHLMC and FNMA at a discount to
reflect the below market.rate. The budget cost to the government was the
difference between what GNMA paid for the mortgages and the discounted
at which it sold them. The countercyclical or emergency tandem program
expires this year. The importance of the secondary market is not only in the
level of funding that it provides, but also in the regional impactx on flows
of funds. Areas with active housing markets, but relatively low savings
flows, have been able to continue lending by selling mortgates to investors
from areas with relatively more capital and lower activity. Thus, interest
rates on mortgages have tended to exhibit smaller regional differences in
recent years, and there has been less of a tendency for one region of the
country to be more affected by interest rate cycles than other areas.
for
and
in 1
relatively
Selected interest rates (in percents)
Current period PI'€ViOL1S period
Commitment rates on
75%, 25-year
Conventional home
mortgages FHLBB
(July) 17.22 l7.l6
FHA/VA standard
mortgages (August) 15.0 15.5
graduated_payment
mortgages (August) 15.0 15.5
price
CRS- 5 IB78086 UPDATE-08/19/82
FNMA auction rates
(August 16)
conventional 4-month 15.687 ' 16.209
commitments
FHA/VA commitments 15.780 17.216
(August 16)
FHLMC auction
(August 13)
conventional, standard
immediate purchase 16.063 16.131
Adjustable mortgages 17.02 16.750
(June)
Bank prime rate
(August) 14.000 14.500
181-day U.S.
Treasury bills 26 wk.
(August 16) 9.821
6-month market
certificates 10.952 11.614
(August 16)
All Savers Certificates
(August) 8.96 9.86
SINGLE FAMILY HOUSING MARKETS
In general, single-family houses can be thought of as forming the
homeownership market: data from the 1978 Annual Housing Survey show that 87%
of single-family houses built after 1970 were owner4occupied after sale. By
contrast, only 23% of units in new structures containing 2 to 4 units and
only 9% of units in new buildings with 5 or more units were owner-occupied.
Starts of single-family houses in the current quarter continue to be at
very low levels (see Table 1), and Sales of both new and existing
single-family houses have continued to slide in response to high interest
rates
CRS- 6 IB78086 UPDATE-08/19/82
TABLE 1
PRIVATELY OWNED HOUSING UNITS STARTED
(Thousands of units, seasonally adjusted annual rates)
MANUFACTURERS‘
SINGLE MULTI SHIPMENTS OF
TOTAL FAMILY FAMILY MOBILE HOMES
1965 01473 964 509 217
1966 1165 779 386 217
1967 1292 844 448 240
1968 1508 899 608 318
1969 1467 811 656 413
1970 1434 813 621 401
1971 2052 1151 901 497
1972 2357 1309 1048 576
1973 2045 1132 913 567
1974 1338 888 450 329
1975 1160 892 268 213
1976 1538 1162 275 246
1977 1987 1451 536 277
1978 2020 1433 587 276
1979 1745 1194 551 277
1980 1292 852 440 222
1981 1084 705 379 241
1981 I" 1399 891 508 248
II 1173 783 390 255
III 962 644 318 244
IV 871 540 331 207
1982 I 920 594 327 238
II 954 604 350 246
July 1,211 614 597 NA
Note: Quarterly data represent averages of months in the quarter
(P): Preliminary
by census.
(R): Revised
Sources: Bureau of the Census; Manufactured Housing Institute.
CRS- 7 IB78086 UPDATE-O8/19/82
The inventory of newly constructed unsold homes has been high relative to
sales once again. In the most recent period the inventory represented about
10 months of sales at existing sales rates. The absolute number of houses,
however, has remained fairly low so that even a modest increase in sales
could shorten the inventory to a more managable a 6 month rate.
The high costs due to expensive construction period loans, of carrying
completed houses for which there is no buyer, constitute the major reason for
builder bankruptcies in housing recessions. In an attempt to alleviate this
problem, HUD has twice made FHA long-term mortgage financing available to all
FHA operative builders, and builders operating under the Home Owners Warranty
program of the NAHB. Thus, builders in 1980 and early 1981 were able to
replace short-term construction loans with 30-year FHA standard mortgages
without finding a buyer for the houses. At this point, eligible activity
under the program has ceased; it nonetheless is a potentially important
countercyclical precedent.
CRS- 8 IB78086 UPDATE-O8/l9/82
TABLE 2 SINGLE FAMILY HOUSING MARKET INDICATORS‘
NEw HOMES EXISTING HOMES
. MEDIAN MEDIAN
SALES(r) PRICE SALES(r) PRICE
(000) MONTHS OF SUPPLY(l) ($) (000) ($)
1955 575 5.1 20,000 EA NA
1955 451 5.8 21,400 KA NA
1957 487 4.8 22,700 NA NA
1958 490 5.1 24,700 1,559 20,100
1959 448 5.1 25,500 1,594 21,800
1970 485 5.5 23,400 1,512 23,000
1971 555 4.5 25,200 2,018 24,800
1972 718 5,0 27,500 2,252 25,700
1973 534 8.3 32,500 2,334 28,900
51974 I 519 9.3 35,900 2,2725 32,000
1975 549 7.5 39,300 2,452 35,300
1975 545 5.3 44,200 3,002 38,100
1977 819 5.5 48,800 3,547 42,900
1978 817 5.1 55,700 3,853 48,700
1979 709 7.8 52,900 3,701 55,700
1980 545 8.3 54,500 2,881 52,200
1981 435 8.9 58,900 2,351 55,400
1981 - I 523 7.8 55,800 2,500 54,300
(r) II 455 8.7 59,400 2,530 55,400
III 359 10.4 59,200 2,250 57,500
IV ‘ 401 8.7 70,400 1,920 55,200
1982 I 387 8.5 55,700 3 1,930 55,800
II(P) 358 8.7 70,200 1,920 58,100
(1) Months of supply at current sales rates; averages of monthly
ratios within each period.
r: revised p: preliminary e: estimated
Note: Quarterly data represent averages of months in the quarter,
sales data are annual rates seasonally adjusted.
Sources: Bureau of the Census; National Association of Realtors
CRS- 9 IB78086 UPDATE-08/l9/82
PRICES and FINANCING COSTS
Price increases for houses have clearly slowed, as high interest rates
have resulted in monthly payments which disqualify many buyers. The median
sales price of new houses in l98l rose only about 7% above a year earlier.
For previously occupied houses the rise was the same. This represents a
significant deceleration from earlier increases. Changes in median prices of
houses sold occur not only because of price increases, but also because of
differences in quality, location, and other characteristics of the houses
which are actually sold. The index of new house prices attempts to correct
for such differences and thus provides an approximation of "pure" price
changes. The index has not changed in recent months. In fact, prices in a
"real" sense may have slowed more than these figures suggest. Perhaps 60% or
more of all current sales are thought to involve some form of "creative," or
below-market financing. Such cut-rate financing masks the true market price
of a house by allowing a higher price than the seller could get otherwise.
It has been estimated by the Realtors and others that true prices have
actually fallen in both l98l and l982. i 2
It is not unusual for prices to moderate when financing is difficult.
some owners remove their houses from the market rather than reduce their
asking prices. Others, who must sell quickly, lower the price to lower
monthly payments at high interest rates enough to qualify potential buyers.
If past experience holds, when interest rates ease, larger house price
increases will resume. The restructuring of the financial system and
development of adjustable mortgages which require borrowers to pay current
costs of funds may effectively limit future demand-induced price increases,
however. Using average commercial financing terms, the median priced new
house in 1981 required a downpayment of $17,300 (25%), and monthly payments
to principal and interest of $708 (l6.25%, 30 years). Comparable figures for
l980 were $l5.550 and $544 ($l3.75%).
The apparent decrease in housing affordability has long been considered a
major deterrent to homeownership, particularly for first time homebuyers who
do not have an existing equity to use as a downpayment. However, as noted
above the expectation of continued increases in house prices relative to
those for other goods and services combined with tax benefits for homeowners,
have produced a strong propensity toward housing as an investment on the part
of consumers seeking tax sheltered savings as well as a place to live. Tax
benefits include the combined effect on taxes paid of progressive tax rates
and mortgage interest (and property tax) deductability from income,
provisions that allow capital gains from the sale of residences to be rolled
over into sucessive home purchases, and escape from up to $125,000 of capital
gains not rolled over after age 55. The tax expenditure for the interest
costs alone for owner occupied homes is estimated to total $19.8 billion for
FY81 and is expected to top $25 billion by FY82. Thus, the notion of what is
"affordable" (and profitable) has changed. While the standard mortgage
practice dictates that monthly housing payments (including principal,
interest, taxes, and hazard insurance) should not exceed 25-28% of income,
mortgages requiring up to 35% are no longer uncommon. According to the U.S.
League of Savings Associations, about 45% of all homebuyers in 1979 committed
more than 25% of income to home payments, up from 40% in 1977.
MULTI UNIT HOUSING
CRS-l0 IB78086 UPDATE-08/19/82
Starts of units in multi unit structures (including condominiums) have
been rising slightly, but remain low Most of the new construction appears o
be in condominiums, cooperative, or subsidized rentals rather than more
traditional rentals. The basic reason for this is that, in general, rent
increases have been inadequate to assure developers of a reasonable return on
unsubsidized rental projects, in light of increases in construction and
maintainance costs. when interest rates are both high and volatile, the
potential financing costs of construction which will take l to 2 years to
complete, discourage all but luxury or subsidized rentals and condominiums.
The latter offer much higher returns than rental sales to developers so long
as mortgage money remains available for individual purchasers.
As a result of the moderate pace of construction, removals from the
inventory, and conversions to condominiums, rental markets have been very
tight, with the national vacancy rate averaging about 5%.
Another indicator of relative rental demand is the market absorption rate
for new apartments. Unlike vacancy rates, which measure vacancies for the
entire stock of rental units and are affected by demolitions and condominium
conversions as well as tenant moves, market absorption rates measure the ease
with which new units are rented. Of units completed in the 3rd quarter of
l98l, 79% were rented within 3 months (see table 3). Considering the small
number of units being completed, this implies some weakness in demand, (which
implies ability to pay), at least for the types of units newly offered.
Sales of condominium and cooperative units have been reasonable as this form
of ownership housing has become more accepted. 0f units completed in the 3rd
quarter of 1981, 60% were sold in 3 months indicating recent weakness in this
market also.
In spite of the very recent easing, the rental market should still be
characterized as tight. This tightness, however, has not brought about a
more rapid rise in rents because the ability to translate physical shortages
Of rental units iI1tO price increases iS weak. In some areas this may be due‘
to rent controls. However, nationally, the fact that renters on average have
lower incomes than home owners limits possibility of higher rents. Also the
increase in single individuals entering the ownership market may mean that
further attempts to increase rents would simply accelerate the diversion from
apartments of this traditional renter group.
Federally subsidized housing provided support some to multiunit housing
during l98l. By the end of the year there were about 48,000 section 8 new
construction starts. Even fewer starts are expected in FY82 because of
financing difficulties and proposals to rescind authorizations. Under the
Section 8 program, HUD pays rent subsidies on behalf of lower-income tenants
to landlords. To encourage new construction, HUD makes commitments to
provide subsidies if developers will build for lower-income tenants. As
further incentive, some private Section 8 developers receive FHA-insured
permanent financing at interest rates of 7 l/2%. The low rate mortgages are
granted by private lenders who sell them to the Government National Mortgage
Association (GNMA) under a special "tandem" plan. GNMA either holds, the
mortgages or resells them to other investors, taking a loss on the sale, and
thus, providing an interest rate subsidy to the developer, a fee and
replenished funds to the mortgage lender, and competitive yields from the
discounted resale to secondary market investors.
CRS-ll A IB78086 UPDATE-O8/19/82
TABLE 3 MULTI-FAMILY HOUSING MARKET INDICATORS
Market Absorption Rates(1): Percent
of units rented (or sold) within 3
months, by period of completion
Rental p Rental Condominiums
Vacancy Rate Apartments and cooperatives
(NSA) (SA) (NSA)
1965 8.3
1966 7.6
1967 6.8
1968 5.9
1959 5.5 80(2)
1970 5.3 74
1971 5.4 69
1972 5.6 67
1973 5.8 69 I
1974 6.2 69 57
1975 6.0 71 44
1976 5.6 81 53
.1977 5.2 80 72
1978 5.0 82 77
1979 5.0 83 75
1980 5.4 75 72
1981 5.1 80 63
1981 - I 5.2 78 68
- II 5.0 81 67
III 5.0 78 60
IV 5.0 84 56
1982 - I 5.3 na na
(1) Privately financed, non-subsidized, unfurnished apartments,
and condominiums and cooperatives, in buildings with 5 or
more units.
(2) Last quarter completions only.
Source: Bureau Of the CEDSUS
CRS-12 IB78086 UPDATE-O8/19/82
CURRENT LEGISLATIVE DEVELOPMENTS
Current proposals to assist the homebuilding industry fall into either of
two basic catagories: those that seek to stimulate homebuilding and sales
through reduced rate mortgages or other purchase subsidies; and those that
seek to assist ailing financial institutions or otherwise encourage and
expand the private supply of funds available for mortgage lending.
Direct aid: The direct stimulation category includes low-interest rate
loans supplied through the Government National Mortgage Association (GNMA),
such as the "Brooke-Cranston" program which was used during the l973-75
housing cycle; interest payment supplements such as those in the Section
235(q) FHA program; various other interest rate buydowns, including "Lugar";
tax credits for purchase and tax benefits for savings for home purchase. The
essential features are as follows:
(1) Brooke—Cranston or tandem (Section 313 of the Housing Act. of 1974)
allows GNMA to make funds available to lenders for origination of home
mortgages at interest rates specified by HUD. Current law sets maximum
subsidy at three percentage points below the market rate as measured by FHLBB
closings statistics, mandates a house price limit based on area medians, and
where possible gives priority to moderate-income families. Legislation
loosening limits and allowing deeper subsidy has been proposed. Major
advantage: there is experience with the program which could be used quickly.
Major disadvantage: immediate budget impact from purchasing completed
mortgages is very high unless immediately resold to private investors at a
loss.
(2) Section 235(q) allows the FHA to make payments to a lender on behalf
of a qualified mortgagor to effectively lower the cost of the FHA-insured
loan. Current law has house price limits and income limits varying by’
region, maximum subsidy limits, and a recapture of subsidy upon resale.
Legislation proposes extension and amendment of the program which otherwise
expires Sept. 30, 1982 (S. 2327, H.R. 5731). Major advantage: potential
tight control over recipients of loans, minimizing equity problems. ‘ Major
disadvantage: may be too restrictive to stimulate much home building,
particularly in high cost areas.
(3) Buydowns. The prototype, since vetoed by the President was the
"Lugar" bill, which would have allowed GNMA to pay up to four percentage
points of the interest on an FHA-insured mortgage for a new house for a
5-year period. A growing equity (GEM) feature annually increased the monthly
payments to principal over that same period, thus effectively cutting the
mortgage term to 19 years instead of 30. Legislation proposed mortgage
limits of $67,500, income limits of $30,000, both limits higher in high cost
areas maximum write-down to ll%, recapture of subsidy (without interest) on
resale of house. Major advantage: relatively low budget impact. Major
disadvantage; mortgage and income limits, and formula for allocations of
funds to states may dilute effectiveness of program.
(4) Tax credits for purchase provide credits against income taxes for
anyone purchasing a qualified (new, unsold) home. H.R. 5322 provides up to
$5000. Major advantage: administrative simplicity. Major disadvanta .:
previous experience with credits (in 1975-6) indicates large tax revenue
losses were mainly windfalls to households which would have purchased in any
case.
CRS-l3 IB78086 UPDATE-O8/19/82
(5) Tax benefits for savings mainly take the form of allowing use of
individual retirement accounts for one home purchase or setting up a parallel
program of individual housing accounts. The accounts allow a deduction for
savings as well as accumulation of tax—deferred interest for the, purpose of
making a down payment. (H.R. 5800, H.R. 5769) Major advantage: assistance
to first-time purchasers with no existing equity. Major disadvantage: a
long—term program, it would not provide immediate stimulus.
Indirect aid through assistance and encouragement to mortgage investors:
This category includes both immediate capital infusion and mortgage
warehousing assistance for thrift institutions, long-term restructuring of
asset powers of mortgage lenders, restructuring of the Federal Home Loan
Mortgage Corporation, and easing of rules affecting pension funds.
All Capital infusion and warehousing proposals basically attempt to
relieve thrift institutions of protfolios of low-yielding mortgage assets to
cure their unprofitability and make future lending possible. To some extent,
because of bookkeeping methods, programs of FHLMC and FNMA, the major
secondary market makers, have already been addressing this problem. For a
growing number of institutions, however, greater assistance may be necessary
to avert failure. One warehousing proposal would allow regulators to
exchange capital certificates yielding the average Government borrowing rate
for old mortgages, with the Treasury paying to the assisted lender the
difference between the interest due on the certificates and that earned on
the old mortgages. The exchange could last for up to 5-years before
redemption of the certificates would be required. H.R. 5568 (St. Germain) is
a capital guarantee plan that allows the banking regulators to issue
certificates to S&LS, which would be redeemable only in the event the
institution failed and had to be liquidiated. The proposal sets maximum net
worth and other financial requirements for an institution to be included in
the program. Potential cost is about $8 billion. Major disadvantage: no
immediate budget outlays. Major disadvantage: creates large contingent
Federal liability, slows market adoptation of thrifts.
Lgl Restructuring proposals generally allow thrift institutions to .become
more like commercial banks, enabling them to seek profitability through more
flexible lending capabilities than at present. S. l703 would also overturn
state laws prohibiting due-on-sale clause enforcement, and broadens authority
of Federal insurers to aid troubled institutions. S. 1720 (Garn)
incorporates S. 1703 and also expands asset powers and flexibility of all
depositories. Major advantage: recognizes and adapts to radically changing
nature of financial institutions in recent years. Major disadvantage: frees
thrift institutions from any mortgage lending requirement, thus leaving the
housing S€COtI' With I10 dedicated primary lenders.
ASL Restructuring of the Federal Home Loan Mortgage Corporation (FHLMC)
would take the Corporation out of its current status as a wholly-owned
subsidiary of the Federal Home Loan Banks, would allow sale of stock to users
and other investors, and by thus expanding the capital base of the secondary
market maker, would allow expansion of its housing and mortgage programs.
Major advantage: would expand capabilities of a major conduit for investment
in mortgages, thus increasing efficiency and funds available for housing.
Major disadvantage: FHCMC expansion in the current market could create
severe financial difficulties for FNMA the other, larger, federally-sponsored
agency.
(4) Easing of rules and other changes affecting pension funds includes a
variety of proposals to encourage the large and growing pension funds to
CRS-14 IB78086 UPDATE-O8/19/82
invest in mortgages. Some proposals would amend ERISA rules governing
pension investments to allow greater mortgage purchase (H.R. 6781). Many E
these proposals (plan asset and prohibited transactions rules) are being
pursued currently through regulatory mechanisms and may not require‘
legislation. Major advantage: the pension funds are the largest potential
source of long-term funds which could support long-term mortgages. Major
disadvantage: it is conceivable that unwise investments, particularly in
low-interest rate loans, could harm funds.
lgl Tax changes to encourage mortgage investment include the Al1—Savers
Certificates and IRAs as a means of lowering the cost of funds or securing a
supply of funds by lenders. ASCs will expire Dec. 31, 1982 and are unlikely
to be renewed. IRAs, at present, are not inexpensive and are not tied to
housing except to the extent that the acquiring lender makes mortgages. A
new proposal, Mortgage Interest Reduction Act (to be introduced), allows
lenders or holders of special mortgages to receive a 25% ‘exclusion from
income of interest earned on the mortgages. Qualifying mortgages would have
to bear interest at a rate 10% below market rates. Major advantage: thrift
institutions could profit on such mortgages through use of the secondary
market, potentially enticing new sources of funds by taking advantage of. the
spread between taxable equivalent yield and the stated mortgage interest
rate. Major disadvantage: the interest rate reduction may be too small to
create much stimulus.
This legislative summary does not include proposals for construction of
subsidized housing for low— and moderate-income renters (or homebuyers under
programs not intended to be cyclical in nature). Such legislation, including
H.R. 5731, could have a stimulative effect depending mainly on how rapi f
activity under such programs could be started or accelerated. For more
information on such proposals see IB79058: "Housing Assistance to Low- and
Moderate-Income Households." -
OUTLOOK
The housing market is operating in an environment that is quite different
from previous periods and is still changing. Federal policies favoring
housing are being eroded. Institutions which were mortgage financing's.
mainstay have lost protection from market forces and are being granted ~other
lending powers, and Federal underwriting of mortgages is under credit limits.
Regulatory changes have resulted in the continued availability of mortgage
financing but at a higher, and sometimes prohibitive, price. As a result of
this environment and the recession, privately owned housing starts in 1981
were an estimated 1.1 million units -- the lowest total since 1946.
Housing is expected to recover somewhat late in 1982 but starts for the
full year are unlikely to exceed about 1.1 million units. If mortgage rates
fall to a 14 and 15% range, sales of new and existing single—fami1y housing
may be stimulated as builders and sellers "buy-down" the rate to 12% or less
to entice and qualify buyers. This outlook will be altered, however, if the
mid-year tax reduction results in increased Federal borrowing, or if expected
recovery of non-housing sectors of the economy results in increased credit
demands and places upward pressure on interest rates. In any case, decliros
in short-term rates are expected to be more substantial than declines n
long-term rates. If more borrowers are willing to accept adjustable rate
mortgages (whose rates are tied to short-term rates) then the recovery in
housing will be stronger.
CRS-15 IB78086 UPDATE-O8/l9/82
For multi-family housing, most construction is thought to be either built
for the condominium market or for the subsidized rental housing market. Both
markets are affected by high interest rates.‘ High rate disqualify many
would-be condominium buyers and make it difficult for developers to
profitably provide rental units. While new depreciation rules and other tax
changes may stimulate some rental construction. Federal subsidies to aid the
construction of rental housing face possible cutbacks. Thus multi-family
housing is not expected to recover substantially.
LEGISLATION
P.L. 97-35
Budget Reconciliation Act. Housing and Community Development Amendments
of l98l. For Section 8 and Public Housing rental subsidy, authorizes $907.0
million and $l8.087 billion for annual contract and budget authorities for
FY82; tightens tenant eligibility requirements and increases required
contributions of tenants in rental subsidy programs; ends new assistance
under Section 235 homeowners subsidy program; authorizes funds for other
subsidized housing programs; extends authorizations for insurance and
guarantee programs of FHA, FmHA, and GNMA; other changes. Signed into law
August 13, 1981.
P.L. 97-34
Tax Incentive Act of 1981. Creates 1-year maturity, tax-exempt "A11
Savers Certificates" tied to mortgage lending; liberalizes terms on IRA and
Keoggh savings accounts; increases amount of capital gain on home sale which
is tax exempt for taxpayers 55 and over; increases roll-over period to avoid
tax on sale of home for younger households; liberalizes depreciation rules
for investment properties; cuts individual and corporate tax rates. Signed_
into law August 13, 1981.
S. 1703/S. 1720
Alternative versions of the Thrift Institutions Restructuring Act.
Removes asset limitations of savings and loan institutions; prevents state
prohibition of due-on-sale clauses; provides-for the acquisition. of thrift
institutions by bank holding companies in emergencies.
H.R. 5922
Emergency Supplemental 1982 authorizations contains $3 billion for a
mortgage buydown of up to 4 percentage points on FHA-insured growing equity
mortgages for houses started after passage of the bill. Income limits are
$30,000, higher in high-cost areas; funds must be committed by Jan. 1, 1983;
set aside of $400 million for unsold houses in builder inventories; state.
allocation formula based on population, unemployment, and housing starts
decline. Passed June 18, 1982. Vetoed by the President June 24, 1982. New
bill does not contain emergency housing provision.
H.R. 6781 (wyden et a1.)
Residential Mortgage Investment Act of 1982 permits investments by
employee benefit plans in residential mortgages. Introduced July 16, 1982;
referred to ways and Means Committee and Education and Labor Committee.
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