Sunday, May 27, 2007

The Movement of the Mortgage Market

In the past three decades variations in residential construction expenditures have played an important role in business fluctuations. Because the thrift institutions have invested so heavily in mortgages their problems have affected the rate of construction.

Many, though not all, economists believe that the decline in thrift deposits in 1966 led to severe rationing of mortgage credit and consequent reduction in residential construction. Housing start in 1966 were 20 percent below 1965. Within the year they fell even more.

In 1969, short-term interest rates again rose sharply and savings deposits fell even more sharply than 1966. The inflow to thrift institutions declined by one-third from 1968. Though this could have cut their mortgage lending by one-third, the resulting impact on the housing industry was cushioned by a very large expansion of mortgage lending by federal credit agencies. Nonetheless, housing starts declined by 25 percent between the beginning of 1969 and the beginning of 1970. It should be noted that the activities of federal credit agencies may increase interest rates and draw more funds from thrift institutions. Savings and loan deposits were affected by the rise in Treasury bill rates in even more severe credit crunch of 1973-74. Housing starts fell by more than 50 percent from their peak in 1973 to the trough in 1974, through other factors, for example, a large number of unsold condominium units as well as disintermediation, were responsible for the decline.

The sharp rise in interest rates which began in mid-1978 led to the most severe depression of the postwar era. Other factors, e.g., a reaction to earlier speculation on housing prices may have been at work, but high interest rates clearly played a major role.

There is a clear association between tight money, rising interest rates, and reductions in housing construction. However, there is as unusual some controversy as to the causal factors involved. Since houses last a long time, their value is more sensitive to change in interest rates than the values of other capital goods. One would therefore expect residential construction to be adversely affected by rising interest rates regardless of the channels through which mortgage credit flows. It is widely believed, however, that variations in the flow of funds to the thrift institutions cause a greater variation in residential construction than would be expected from the rise in mortgage interest rates as such. As already noted there is a good deal of evidence that mortgage lenders ration credit during periods of tight money and that the gap is not filled by other lenders. However, some economists do not find this evidence convincing and believe that the rise in mortgage rates is sufficient to explain the decline in residential construction during tight money periods.

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Mike said...

Thanks for your information man. Good job for you.

Suray said...

Thanks for leaving a comment on my post.

Zakman said...

Hi Suray!

Excellent research, I must say.

I'm gonna send this to some friends who're really in this game of mortgages, finance, etc.

Cheers bud!

suray said...

Thanks Zakman, you have posted some related topics that are very amazing too.

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