A Three-Story Pinch

Despite the apparently exuberant health of the U.S. economy, one of the nation's biggest industries--housing--is growing sicker week by week. It is pinched three ways: by listless demand, tight money and climbing construction costs. In February, the annual rate of private-housing starts slumped to a three-year low of 1,318,000, or 12% below the lackluster 1965 level. The Federal Reserve Board estimates that the slide grew even worse in March.

Last week, in a move aimed at bolstering housing by allowing it to raise its bid for increasingly scarce and costly mortgage credit, Washington lifted the interest ceiling on mortgages backed by the Federal Housing Administration and the Veterans Administration. The increase, from 5 1/2% to 5 3/4%, was the second 3/4% rise in just over two months. It pushed the FHA rate to a level reached only once before in its 32-year history, from September 1959 to February 1961. With FHA's 1/2% mortgage-insurance premium, it meant that FHA home buyers will pay 6 1/4% on loans negotiated from last week on.

"Sacrificial Goats." The interest hike got few cheers from anyone. "We don't want to be sacrificial goats in the effort to curb inflation," grumbled President Larry Blackmon of the National Association of Home Builders last week. "We believe other sectors in the economy should share in the restraints."

Housing's chief woe, of course, is a shortage of mortgage money more severe than at any time in the past 30 years. It began when the Federal Reserve, to fight inflation, boosted the discount rate last December. It has rapidly worsened in recent weeks as commercial banks have bid up interest rates on savings, thereby luring huge deposits away from such major sources of mortgage loans as savings and loans and mutual-savings banks. For lack of funds, several savings banks in Massachusetts, a traditional source of housing loans for the capital-shy South and West, have stopped buying mortgages entirely. Interest rates on conventional home loans have climbed to 6 1/2% in Chicago, 6 3/4% in Atlanta, and 7% in Los Angeles and San Francisco.

FHA and VA, which underwrite the loans on 16% of the nation's new homes, fiddled while rates flared. When FHA hiked its rate from 5 1/4 to 5 1/2% in February, the Treasury Department and the Council of Economic Advisers overruled the agency's plea to boost the rate to 5 3/4% at once. While the second boost was debated, the price of mortgage money shot up past 6% in the FHA market. Many institutions that ordinarily make FHA loans allocated funds elsewhere. Worst of all, the Federal National Mortgage Association cut its upper limit on loans from $30,000 to $15,000.

With mortgage money as costly as it is now, the only way builders can persuade lenders to make 5 3/4% FHA loans at all is to pay them a 5-c-; penalty on every borrowed dollar. Though FHA theoretically prohibits builders from passing that 5% "discount" on to home buyers, the industry has long since learned how to hide such costs in the sale price of its product. In the sale of existing homes under FHA, the "discount" inflates prices almost automatically because the seller must absorb the entire amount.

Disqualified Buyers. On top of all that, builders are being hit by rising prices of such items as copper pipe, aluminum windows, lumber and plywood and, in some areas, by shortages of construction labor. The resulting cost increases, as well as higher interest rates, will disqualify some prospective home buyers because FHA will require proportionately higher incomes to meet the higher monthly payments. Six months ago, Miami Builder Ken Laurence was selling a $12,500 model with a total monthly payment of $74, including taxes and insurance; last week, with the interest tab up 1/2% and maximum FHA terms sliced from 35 to 30 years, the same house sold for $13,000, with a $99 monthly payment. "It's sure to kill a lot of our sales," said Laurence.

At week's end FHA Commissioner Philip Brownstein forecast that mortgage money will soon begin to flow back into FHA loans. Said he: "I think that the worst of the money shortage is behind us." Many builders remained skeptical, if only because housing has long been recognized as the easiest big industry for Washington to turn on and off, simply by choking its mortgage money life line.

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