Beige Book Report: Dallas
March 12, 1975
Savings and loan associations in the District report the rate of net savings inflows, which quickened in the fourth quarter of 1974, has continued to accelerate since the first of the year. An influx of large deposits—$l00,000 and over—has accounted for a major portion of the increase. The cost of these funds, however, has been high. As recently as mid-February, large associations in the District were paying 8.5 percent annually on large certificates of deposit (CDs). As a result, portfolio costs have risen sharply. A large savings and loan association in Houston, for example, reports CDs with rates over 7.25 percent comprise 60 percent of their portfolio, or double that of a year ago.
With higher portfolio costs, lenders have been reluctant to reduce mortgage rates, which now average more than 9 percent on conventional loans. Some institutions, however, have reduced the number of points charged to customers and have cut the charges of other services to stimulate loan demand.
Nevertheless, loan demand has continued weak. Few new commitments have been made this year, and inventories of new unsold homes in metropolitan areas are still close to the peak levels of 1974. Indicative of the continued slump in residential building, housing starts in Texas are only slightly higher than their lowest level last year.
Increased deposit inflows and the sluggish demand for mortgage loans have left savings and loan associations flush with funds. Concerned that another round of disintermediation will result from the Treasury financing of the budget deficit, lenders have increased their liquidity to unusually high levels. In addition, they have had ample funds to pay off much of the borrowing they undertook in the period of disintermediation last year. Several of the largest associations in the District report borrowings from commercial banks have been completely repaid. Moreover, other lenders are considering repaying borrowings from the Federal Home Loan Bank early, even though a prepayment penalty would be incurred. With increased liquidity, savings and loan associations have increased their participation in the Federal funds market. In Houston, for example, several savings and loan associations are selling Federal funds for the first time in eighteen months.
Seasonally adjusted department store sales in the District have risen since the first of the year, reversing a downward trend that began last summer. Sales of big-ticket items, in particular, have moved well ahead of their sluggish pace of recent months. Retailers attribute much of the increase in sales to promotional campaigns designed to reduce unusually high post-Christmas inventories. According to a survey of the larger department stores in the District, most outlets have generally been successful in reducing stocks. In fact, the regional manager of one of the largest retail chains in the District says his inventories are in excellent shape.
Attempts to run off inventories have led to a marked change in the relationship between many retailers and their suppliers. Faced with shortages and rising prices during much of 1974, retailers generally accepted overshipments and late arrivals without complaint. Now, however, they are charging suppliers penalty fees for such deliveries. In addition, the controller of a big department store in Houston says his store has recently received merchandise at bargain prices from wholesalers that are anxious to lower their own inventories. This has prompted aggressive price cutting at the retail level—particularly by large national chains—in an attempt to recover lost market shares.
Commercial banks in the District continue to pay maximum allowable rates of interest on consumer-type time and savings deposits. However, since most banks already have relatively high liquidity positions, they are not aggressively seeking these types of deposits by advertising consumer savings programs. District bankers are generally opposed to lowering interest rates on these deposits, since they expect money market rates to rebound after midyear.
Bankruptcies in the Eleventh District rose nearly 40 percent in 1974, with much of the increase coming late in the year. The rate of bankruptcies so far in 1975 is about a tenth higher than last year's pace. Business reorganizations under Chapter 11 of The Bankruptcy Act are accounting for a growing number of filings. In Dallas and Houston, for example, nearly a third of the cases filed in February were under Chapter 11, up from 10 percent in January. According to Federal district courts, much of the increase in filings has been by construction firms.