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HOME BUYERSMAKING SOUND DECISION If you've been putting off buying a house until the tight-money period is over and mortgage interest rates have declined, you should have some second thoughts on the subject. The truth of the matter is that we are very likely to remain in a period of more or less tight money for a long . time to come, and there is little likelihood that mortgage interest rates are going to decline appreciably in the foreseeable future. While there may be some reduction in mortgage rates, whatever savings may result will likely be more than offset by other increases in housing and related CQStS. Any prospective home buyer should ask himself this Question about interest rates: Are the current rates simply high by historic standards, or are they "reasonable" or even low by comparison with what they will be in 1968 or 1970? The answer is they probably are not too high in terms of what's likely to happen over the next few years. Hardly 18 months ago most savings and loan executives would have scoffed at the idea that interest rates would soar to their present levels and then remain at a relatively high plateau for a long time. At that time, of course, most of us didn't anticipate that we would be in the middle of a military crisis, or that, if we were, that we would try to wage it without any interruption of the civilian economy. And yet, at the time of this writing, this is exactly what we are doing. Nor did most of us believe, even as the involvement in Vietnam deepened, that we would commit ourselves to invest, both the public and private sectors, in programs designed to educate our own and everyone else's children, eliminate our slums, purify our rivers, solve the smog problem, and in general do everything possible to attain a better life. Incidentally, since most of these commitments are politically bipartisan, the bulk of these projects will continue to go forward, regardless of which party is in power. HOUSE SHORTAGE EXPECTED We are moving in a new age in the American economy, and it is my feeling that the housing picture is going to be affected considerably. Now the next question: What does all this mean to you in deciding whether to buy a home? To begin with, the market for homes has been "sluggish" for the last few years. One of the reasons was that the much-heralded "war baby" crop of home buyers failed to materialize on schedule. The war babies did grow up, they got married, they had families -- but there was no concerted rush on their partto buy homes. Getting a start in life, these couples were not at the economic point where home ownership was readily attainable. So they moved into apartments. This situation will change, of course,"as these young families expand, have higher incomes, and accumulate more of the world's goods and comforts. As far as the construction of new houses in concerned, there has been a decline in housing starts for almost the past ten years. In 1959, for instance, there were 1.2 million single-family homes built; in 1960, 987,000; and by 1965, this figure had shrunk to 941,000. During 1966 there were approxftnately 775,000 single-family homes built, and it is expected that in 1967 the number will be even less. FEWER HOMES BUILT This. low rate of home construction does not augur well for the potential home buyer who puts off looking for a house for a few years. It is inevitable that with the low rate of construction, many areas are going to see a housing shortage in the foreseeable future. As the supply of single-family homes begins to tighten, there will be an inevitable increase in prices, an increase caused not only by a scarcity of homes but by other economic factors which I will mention later in this article. There is no question that the major factor in the ills besetting the housing industry in 1966 was a severe shortage of mortgage credit. With the increase in interest rates being paid on bonds and government agency obligations, manv of the nation's savers began to abandon their traditional form of savings -- passbook savings at commercial banks, mutual savings banks, and savings and loan associations declined dramatically. Since passbook savings provide the vast bulk of mortgage lending funds, it is easy to see how this severely affected an already troubled home-building industry. As savings available for home lending began to drop in the early part of the year, interest rates began to edge upward. This surprised no one because as the supply of mortgage money dwindled there was spirited bidding for what was left. Mortgage loans in most cities were quoted at rates above six percent -- often well above. As a consequence, many families decided to put off buying until interest rate© decreased. This is a normal reaction on the part of prospective home buyers, and one that is easily understood by the people in the housing and home financing industries. However, this thinking is based on the premise that financing is the only element involved. HOME COSTS IN 1964 Let's say the house was $25,000 in 1964. With5%percent mortgage loan made for 80 percent of the appraised value for a period of 20 years, you would have had to make a down payment of $5000. The mortgage would amount to $20,000. The home would require $137.58 in principal and interest payments each month, plus $25 for taxes and insurance, for a total monthly payment of $162.58. HOME COSTS IN 1966 Now, let us move up to last year, 1966, and see what the situation would have been regarding the same hypothetical new house. If purchased in 1966, the house would have had a price tag of $26,500. This hike would have been due to increased labor, material, and land costs. The mortgage interest rate would have risen 1 percent to 6% percent. You would have been required, in order to get a 20-year, 80 percent mortgage, to come up with a down payment of $5300 ... $300 more than in 1964. Your mortgage loan is now $21,200, up $1200 from two years ago. The principal and interest payments each month would amount to $158.08. Taxes and insurance (conservatively speaking) would add $26 per month, making your total payment $184.08, an increase of $21.50 over the 1964 payments. This is precisely the situation you would have faced last year -- if you could have obtained the necessary mortgage financing. Perhaps you didn't like the deal; you decided to wait for a few years. Let's look at the situation in 1968. PROBABLE HOME COSTS IN 1968 This same house in 1968 will bear a price tag of $28,500, an increase of $3500 since 1964, and $2000 since 1966. We'll assume that mortgage rates will have dropped Vi percent, to 6 percent. A 20-year, 80 percent mortgage will now require a down payment of $5700, or $400 more than needed in 1966. Your total mortgage will be $22,000, $1600 higher than two years prior. Principal and interest payments will have risen to $163.36, plus $27 for taxes and insurance. Your total monthly payment will be $190.36, or $6.28 a month greater than in 1966. And so it goes. Above is a table showing the exact dollars involved. We have excluded taxes and insurance in these calculations. While the insurance would not vary greatly, there is every reason to believe that real estate taxes will increase substantially. Anyone looking at these figures can see that the housing picture is constantly being repainted. Natural economic forces keep pusliing prices up and up, and all evidence indicates that this trend will continue for quite a few years. The only solution for the prospective home buyer would seem to be buy now. Any exceptions? Of course. The prospective buyer who already owns a home will find his home rising in value as new - home prices continue upward. Thus, if he plans to buy a new home in a price bracket only slightly higher than the one he now owns, this person might profit by waiting for a conservative dip in interest rates, which is expected this year or next. This brings us to the next point. In any consideration of the housing market, families should keep in mind that there are existing homes as well as new ones, and it is in this area, particularly today, that bargains often await the shrewd buyer. The chief reason is the fact that under 1966's tight - money situation, the home seller often found himself without prospective buyers. True, people might have looked, thought his price reasonable, and agreed to buy. But in many cases, the financing simply was not available. I think that the figures speak for themselves. 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