Housing High

Why homes are the hero

Daniel Brill, chief economist at the Treasury Department, was startled when his son phoned to say that he had lined up financing for his first house, which is in the Boston area. The cost: 9.75% mortgage interest--plus 2.5 points (a one-time finance charge). Admits Brill: "I gulped. I remember bitching when I had to give up my 4% G.I. mortgage."

Though lots of Americans are gulping at the high cost of mortgage money, housing remains one of the brightest spots in the economy. Earlier this year, the Administration privately forecast about 1.8 million "starts" in 1978. So far, construction is not only hovering above 2 million houses and apartments a year, but it is defying the long established principle that housing is always hit hardest when interest rates climb. Says Brill: "The old rules no longer hold. Housing is no longer the first area of the economy to boom or the first to bust."

In the past, housing collapsed when interest rates rose, because mortgage lenders ran out of cash. Depositors would take their money out of savings and loan associations, which are limited by law as to how much interest they can pay, and put it into Treasury bills and other higher-yielding paper. But lately mortgage lenders have developed new financial gimmicks that enable them to compete for funds, even when money gets tight. One innovation: high-interest certificates of deposit (CDs), with a yield that is one-quarter of a point above the Treasury bill rate at the time of purchase. In July and August alone, mortgage lenders sold $27 billion of these new CDs to savers.

Housing demand remains high, although prices have jumped more than 16% in the past two years (the average price of a new house now is $63,000), and mortgage rates run 9% in and around New York City, 9.75% in the Chicago area and 9.75% to 10% in Southern California. Many people, burned by the stock market, figure that real estate is their best hedge against inflation and a good long-term investment. The baby-boom kids of the mid-1940s are now setting up housekeeping; most of these young families have two earners, and they confidently assume the burden of double-digit mortgages on houses that often run to six figures. This house-hungry group could keep homebuilding strong for years.

Yet the housing boom could hurt if the Federal Reserve tightens credit much further in its battle against inflation. Last week the discount rate hit 8% and bank prime-interest rates reached 9 3/4%--in both cases the highest levels in nearly four years. Worried that tight credit might cause a recession, President Carter last week said he thought rates were "too high," and added that he hoped the Fed would soon be able to ease the squeeze.

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