Housing Credit Crunch

Report Outline
Effect of Tight Money on Home Buying
Sources of Funds for Housing Market
Proposals for Easing Housing Credit
Special Focus

Effect of Tight Money on Home Buying

Impact of High Interest Rates on Home Building

Housing is traditionally the first major industry to be hurt by high interest rates and a shrinking money supply. The year 1973 shows no sign of breaking with this tradition. The cost of borrowing has climbed to record and near-record levels, draining money from those savings institutions that are the chief sources of credit for home builders and home buyers. The resulting scarcity of mortgage financing has caused a decline in new construction and has added to the difficulties being encountered by American families looking for homes of their own.

The National Association of Home Builders (NAHB) calculates that 3.4 million potential buyers are removed from the market every time interest rates rise 1 per cent. For those able to pay, it adds $4,400 to the cost of a $30,000 house with a 25-year mortgage. Even before the so-called “credit crunch” of 1973 developed in the housing market, home-buying costs were soaring. From June 1972 to June 1973, the Census Bureau reported, the median price of a new single-family dwelling rose from $27,700 to $33,200. Higher costs for labor, land and lumber figured prominently in the bigger price tag.

Then in July the effective interest rates on conventional home loans rose at a national average of 0.5 per cent, to 7.87, according to the Federal Home Loan Bank Board (FHLBB), and surged on in August to 7.94. The Federal Housing Administration (FHA) reported that its surveys revealed even higher interest rates on conventional mortgages during those two months—8.40 and 8.85 per cent. These upward movements led to predictions of 9 and 10 per cent mortgage rates by fall. Short-term lending by major commercial banks to their best customers, the “prime” rate, had already reached those levels by the end of summer.