Beige Book Report: Kansas City
February 21, 1978
Heavy snows and long cold spells have undoubtedly held back Tenth District business activity, but the economic outlook remains bright. This is the consensus, at least, of principals in the homebuilding industry and of bankers in the District. Homebuilders and executives of savings and loan institutes are virtually all in agreement that funds will be adequate to support another year of high mortgage demand. In one important District sector—agriculture—the outlook has improved as new forecasts now project higher prices for cattle and hogs. In banking, loan demand continues at very high levels.
Builders of homes continue to enjoy very high demand throughout the District. They say that they cannot build fast enough, and wish they could find the labor to put together additional crews. Most builders still are having problems getting certain materials, but half say that the shortages seem to be less severe. Housing starts so far this year are off a bit from the same period last year in some parts of the District, but only because of worse weather. Homebuilders expect 1978 to be as good a year for their business as 1977. All see interest rates rising, especially in the second half of this year, and several express concern about Federal Reserve policies. Most homebuilders, however, believe that sufficient funds will continue to be available for mortgage lending.
Savings and loan associations in all parts of the District report very high mortgage demand. All associations, except one whose mortgage rate is higher than its competitors, say that loan demand is equal to, or higher than, last year's. All report lower deposit growth, particularly in passbook savings accounts, than during the comparable period in 1976. However, one-third say that deposit growth so far this year is substantially improved from the last quarter of 1977. None expects to be able to meet its 1978 mortgage demand with cash flow from deposit increases and mortgage repayments. However, all expect to be able to meet mortgage demand by obtaining funds from other sources. Two-thirds plan to increase their borrowings from the Federal Home Loan Bank. One contemplates issuing mortgage-backed bonds and another may issue a pass-through security. Several plan to increase sales of mortgages in the secondary market, while others have already cut back on, or stopped, purchasing mortgages or participations.
Mortgage rates in the District have increased from 3/8 to 3/4 per cent in the last year, with current rates ranging from 9 per cent in some cities in the eastern part of the District to 9 1/2 per cent in the western cities in the District. An additional 1/4 per cent increase in the next few months is generally anticipated. The respondents are not tightening nonprice terms or credit standards, nor do they plan to do so in the next 6 months. All believe that some combination of increasing rates and obtaining funds from nondeposit sources is preferable to changing underwriting standards, and that this combination of higher rates and nondeposit sources of funds will prove sufficient to meet the expected high level of mortgage demand.
Tenth District bankers generally report continued strong loan demand. demand for business loans, particularly for energy-related industries, remains high. Demand for construction and other types of real estate loans is also very high. Banks in Albuquerque, Kansas City, and Omaha report strong deposit growth, but banks in Denver and Tulsa have recently experienced losses of funds and they expect to borrow in either the Federal funds or CD market to obtain the funds necessary to meet their strong loan demands.
Recent reports on livestock inventories contain a number of surprises which have important implications for prospective production levels and prices. Based on the December 1 Hog Report, it was expected that pork output in the first quarter would rise enough to effectively hold the lid on prices. Although some of the current strength in the hog market is related to weather-delayed marketings in the Corn Belt, the general tone of the market suggests that numbers in the December 1 report may have been overestimated and that hog prices in 1978 will not decline as much as originally anticipated. The probability of hog prices falling below $35 per hundredweight anytime this year now appears small.
Similarly, the outlook for cattle prices has improved in the past few weeks. A recent report on the cattle inventory shows that numbers declined about 5 per cent in the past year. At 116 million head, the cattle inventory is about 2 or 3 million head smaller than most analysts thought it would be on January 1. The stage is rapidly being set for some rather explosive price increases in the cattle industry, and if pork production fails to expand as rapidly as currently projected, stronger cattle prices could easily occur in 1978. Although production estimates for 1978 must now be shaved down in light of this new information, total meat supplies should still match—and will probably exceed—last year's record. In 1977, prices for both hogs and fed cattle averaged about $40 per hundredweight. Average prices for cattle in 1978 should run $3 to $5 per hundredweight above last year's figure, but hog prices are expected to average somewhat lower. Nevertheless, in both instances, the new forecast price levels are several dollars higher than originally expected. While this is good news for the farm producer, consumers will hardly be overjoyed by this prospect.