Inflation has generated large wealth shifts among the various population groups involved in housing. The most significant shift is a gain of mortgage borrowers at the expense of lenders and savers. Homeowners, however, have not profited as uniformly as is widely believed, and landlords have generally suffered a sharp decline of net operating income. The severe cycles in residential building since the early 1970s reveal the destabilizing impact of inflation. The housing sector as a whole obtained a disproportionate share of total credit, but its growth and quality improvement did not accelerate apace. Credit expansion without equivalent expansion of real capital illustrates one of the striking maladjustments during inflation. Under a new regime of sustained price stability, housing will still be exposed to prolonged aftereffects of the inflation, notably the reconstruction of a shattered mortgage finance system. The recent trend toward larger and more luxurious dwellings will give way to leaner products. Whether the viability of the rental sector can be restored remains questionable. Under continued or renewed inflation, however, the prospects for housing are far worse.
Get full access to this article
View all access options for this article.
References
1.
1. Successful stabilization is compatible with moderate increases of the price level. According to U.S. experience, a price rise averaging about 2-3 percent per year does not generate the inflationary expectations caused by protracted higher rates of price advances.
2.
2. At this writing, some financial analysts perplexed by persistent high interest rates in the face of receding inflation conclude that the real rate has risen above the conventionally assumed 3 percent. Be that as it may, this analysis deals with the period preceding the current debate about nominal versus real interest rates.
3.
3. See Policy Development and Research Division, Department of Housing and Urban Development, and Census Bureau, Department of Commerce, Annual Housing Surveys (Washington, DC: Government Printing Office). The numbers are reported each year in Part D of the Annual Housing Survey, which deals with recent movers. The data refer only to households with the same head before and after the move. The total in the text assumes that the 1976-79 sellers bought their property before 1976. It is imprecise to the extent that a mover from an owner-occupied to a rental dwelling unit may have later moved again to an owner-occupied house.
4.
4. The 10.3 million is derived from the source given in footnote 3 and represents the recent movers from one owner-occupied housing unit to another in each year of the 1976-79 period. The qualifications stated in note 3 apply to this estimate as well. At this writing, home mortgage lenders report a sharp increase in delinquent loans, but there is no information on whether delinquencies are concentrated among borrowers who bought homes during the height of the house price inflation.
5.
5. For the extent and market impact of speculation, see Leo Grebler and Frank G. Mittelbach, The Inflation of House Prices (Lexington, MA: D. C. Heath, 1979), pp. 58-66.
6.
6. The Annual Housing Survey of 1979 (Part I: General Housing Characteristics) reports 51.4 million owner-occupied housing units. Of these, 23.4 million were occupied by households that had moved into their homes before Apr. 1970. To arrive at the larger number of pre-1973 owners, I used the annual average of moves into owner-occupied units for 1970-79 to estimate the number of owners who moved into their units between Apr. 1970 and 1972: 7.9 million. Adding this figure to the 23.4 million yields 31.3 million.
7.
7. Creative financing takes many forms. In one variant, property sellers finance buyers with relatively short-term purchasemoney mortgages at below-market interest, which usually provide for only partial amortization or none. If the sellers were to dispose of such loans, sizable discounts from par would cut their proceeds substantially. In another variant, builders facilitate sale through buy downs—that is, they undertake to pay for several years the difference between the market interest rate and a stipulated lower rate. These practices entail considerable risks. The builder, for example, may discontinue contributions to interest payments when in financial difficulty. This would impose the full interest burden on the buyer. In the case of short-term unamortized or partially amortized purchase-money mortgages, the buyer may be unable to refinance the loan balance when due and the seller would be forced to take the property back.
8.
8. First-time homebuyers accounted for about 50 percent of all home purchasers in the mid-1970s but less than 40 percent in 1979. The 50 percent is derived from data on previous renters becoming homeowners (Annual Housing Surveys, Part D). The 1979 survey reports directly that 39 percent of all movers into owner-occupied dwellings during that year were first-time buyers (after adjustment for unreported cases).
9.
9. The data are from the Annual Housing Surveys, Part D, and represent the income of families and primary individuals.
10.
10. Source: Annual Housing Surveys, Part D. Broken family is my shorthand designation for the census categories “other male head” and “female head” of households with two or more persons. Complete families in census parlance are “male head, wife present, no nonrelatives.” The owner-occupied sector shows also increasing proportions of broken families and one-person households, but at a much lower level.
11.
11. Ira S. Lowry, Rental Housing in the 1970s: Searching for the Crisis (Santa Monica, CA: Rand Corporation, Jan. 1982). This section of the article owes much to Lowry's analysis.
12.
12. Housing starts of structures with three or more dwelling units accounted for 42 percent of all private starts in 1972-73, only 21 percent in 1975-76, and 31 percent in 1980-81. The increase between the last two periods is deceptive. It includes a portion of the rapidly growing volume of subsidized Section 8 housing under legislation enacted in 1974.
13.
13. On the basis of seasonally adjusted data, the amplitude of fluctuations of housing starts in the last two cycles was in the range of 160 percent (the sum of percentage rise and fall), as against an average of 86 percent for the preceding five cycles. The latest figure used in this calculation is for the last quarter of 1981.
14.
14. This reckoning necessarily ignores multiple changes in tenure during the 1973-79 period.
15.
15. Flow of Funds Accounts, Federal Reserve Board. “Long-term debt” is identified in the source as “debt capital instruments,” consisting of state and local government obligations, corporate bonds, and mortgages.
16.
16. See footnote 1.
17.
17. See Harold Robinson, “Readjustable Mortgages in an Inflation Economy—A Study of the Israeli Experience,”Journal of International Law and Economics, 5(2):169-184 (Jan. 1971).
