October 11, 1977
The performance of the residential construction sector in the Tenth District continues to be strong over all, despite some hints of a slight softening. Industry representatives suggest that further rapid increases in construction costs and rising interest rates are the factors most likely to reverse the current favorable situation. The new wheat crop is off to a good start, and crop prospects are very good compared with this time last year. Commercial bankers report both strong loan demand and signs of a slowdown in time deposit growth.
Conversations concerning residential construction activity and its financing were held with representatives of savings and loan associations and home builders associations in the District's metropolitan areas and in some additional urban locations. Over all, the situation is one of continuing strength in savings inflows and mortgage activity at the thrift institutions and in the construction and sale of new housing units. In virtually every reporting area, sales of new homes continue to be very strong. Inventories of unsold homes range from "zero" in most places to "manageable" in other locations. Housing starts are also almost uniformly described as especially strong, particularly in single-family units. Exceptions to this generally bullish picture are found in reports of a slight softening in activity in Nebraska and Oklahoma.
Scattered shortages of construction materials, along with sharply rising prices and dealer rationing, are common across the District. Prices of lumber and insulation are of special concern, as is the availability of insulation, sheetrock, cement, and brick in some areas. According to most respondents, further rapid increases in the cost of new construction and rising interest rates are feared as the factors most likely to reverse the industry's favorable situation.
Responses from Tenth District savings and loan institutions suggest that they are watching savings inflows carefully to see whether the recent easing is only seasonal and whether market interest rates are beginning to influence inflows. Inflows are variously described as satisfactory although erratic; not what they have been; holding up, but a little lighter; and a little below projections. Comments about demand for mortgage funds and about mortgage commitments, together with the comments on savings inflows, leave a feeling that these respondents believe that an easing away from boom conditions is occurring. Mortgage interest rates are reported to be steady-to-firming. Nearly all respondents report no recent change in rates, but a majority say they expect a moderate rise in the months ahead.
The new wheat crop is off to an excellent start throughout the District. In contrast to last year, when farmers were quite concerned about drought, soil moisture levels this year are generally very good. In fact, a few localities have encountered planting difficulties because of too much rain. For the most part, however, wheat planting is running on or ahead of schedule, and in the southern part of the District the wheat has germinated and is beginning to grow. According to one director from an agricultural area, the quality of the wheat stand is excellent and the crop prospects for the coming year are "very good when compared with this time last year."
If the new crop continues to receive rain, wheat pasture will be available for grazing and some ranchers will probably take advantage of this cheap source of feed. Thus, prices for light cattle may strengthen as a result of this activity. Because most farmers were uncertain about the details of the new farm program when they started planting their wheat, acreage in the District's major producing states is expected to be about equal to 1977 levels. However, as farmers become more familiar with the program, some of the crop will probably be destroyed so that their eligibility for full Government benefits will not be jeopardized. This strategy may be employed because, with the huge stocks of wheat now on hand, the price outlook for the coming year is not bright for producers.
Most Tenth District bankers contacted report strong loan demand, especially in energy-related businesses and in real estate loans, both residential and commercial. Consumer installment lending is also increasing rapidly, with credit card use and auto loans responsible for most of the gains. A Denver banker reports that his bank's overlines to correspondent bankers are being reduced as the smaller bankers succeed in obtaining repayments of some agricultural loans. Bankers also expect that during the next month the demand for loans will continue to strengthen, as businesses try to borrow before lending rates go up further.
There are more definite signs of a slowdown in time deposits. Only the smallest banks surveyed indicate continued strong growth, while larger banks report either slower growth or declines. Most bankers have increased their use of CD's to meet loan demand, and expect that further increases in their CD portfolio will be necessary as loan demand increases.