August 10, 1973
Tenth Federal Reserve District home builders report a noticeable decline in activity relative to last year and earlier this year. Although some exceptions were noted, most respondents indicated difficulty in securing mortgage funding as a key reason in dampened building activity. District savings and loan associations report that new and higher costs for mortgages have discouraged demand and that the new rate ceilings, while serving to reduce the rate of outflow, have substantially added to their cost of doing business without significantly affecting their ability to attract funds. The agricultural situation in the Tenth District is marked by record or near-record crops, with prices up substantially over past years as a result of strong domestic and foreign demands. A number of commercial banks throughout the District report continued tight credit conditions. These banks have been net buyers of Federal funds, had raised their prime lending rate to 9 percent as of last week, and have increased their time and savings rates to the new ceiling levels.
In a telephone survey of a number of Tenth District home builders and home builders' associations, a pronounced softening in activity relative to last year or early this year was noted by nearly all respondents. Looking ahead to the remainder of this year, the outlook for building activity was pessimistic, with one respondent observing that "builders are spooked by the money situation". In fact, the "money situation" relating to the high cost and difficulty in securing mortgages was cited as the major reason for the weakness in residential construction in the Tenth District. Where state usury limits preclude mortgage above an 8 percent level, anywhere from 2 to 4 points are being assessed on mortgage loans of 80 percent or over. The 95 percent loan has been largely discontinued, as have been FHA and VA loans. The savings and loan associations contacted were nearly unanimous in indicating that the new rates for savings had not added to their ability to attract funds, but rather had aided in reducing their rate of savings outflow, albeit at a significant cost to them.
A particularly bright spot within the Tenth District economy is the agricultural sector. Wheat production is forecast at record levels, and as of August 1, corn and soybean production was headed for record harvest, with the expectation that grain sorghum production would be only 1 percent below the 1971 record. Despite the huge grain harvests anticipated, prices have continued to push on to new highs. Wheat prices recently moved into the $4 to $5 range, a historic high. This price strength for wheat and for grains generally is the result of unusually strong domestic and foreign demand, combined with very tight carry over conditions for food and feed grains.
Tenth District banks contacted report tight credit conditions continue to prevail. Faced with heavy business loan demand, major banks raised their prime lending rate to 9 percent in the past week. Related to the strong agricultural situation noted earlier, banks in Kansas City, Omaha, and Tulsa reported large increases in agricultural loans resulting from box car shortages and increased grain and storage costs. Nearly all survey banks have been net buyers of Federal funds, have raised rates payable on savings and consumer time deposits to new ceiling levels, have offered a four-year certificate paying either 7 percent or 7 1/2 percent, and have maintained CD rates at levels quoted by New York City banks. As a consequence, several bankers reported that the increased cost of funds has significantly reduced their profit margins in the past month. Rather than curtail their lending activity, these banks have felt obligated to accommodate the heavy demands of regular customers, even though it has become increasingly less profitable to do so.