FROM PAGE ONE

“BANNER YEAR"

The United States will be unable to supply
® the timber required to meet the peak demand
for housing during the 1980’s. The Presi-
dent’s Council on Wage and Price Stability
has forecast that the United States will
experience a minimum average annual
deficit of 6.6.million board feet of softwood
sawtimber during the 1980’s. And by 1990
the U.S. Forest Service has projected a
timber supply deficit of 12.6 billion board
feet. This shortfall will have to be made up
by increased imports, most of which will
come from B.C.

New home construction in the United
States has long been the largest single
market for B.C. lumber and other wood
products. In 1976 the U.S. housing industry
consumed 39% of all lumber, 40% of all
plywood and substantial volumes of other
wood-based panel products.

TYPE OF UNITS

‘lhe volume of lumber consumed by the
US. housing industry is dependent on the
number and type of housing units built. The
specific level of demand for those housing
units is affected by a variety of factors. This
discussion will focus on some of the more
important factors affecting that demand,
including the characteristics of the U.S.
population, the income profile of new home-
buyers and the significant changes which
have taken place in the U.S. mortgage
market.

During the last decade great numbers of
people have been added to the population of
the United States, and the Census Bureau
projects this trend to continue in the next
decade. For instance, between 1960 and
1970, 24 million people were added, another
17 million were added between 1970 and
1980, and if present trends continue another
21 million will be added by the end of the
1980's.

One of the most important population
changes has been the maturing of the post
World War II baby boom population. Unlike
Japan, West Germany and other Western
European countries, the United States
experienced a dramatic increase in the
number of new-borns between 1945 and
1960. During this 15 year period births
exceeded four million per year. In 1957 alone
25 Americans were added for every 1,000
® then alive. Between 1945 and 1962 the

United States population grew by a record
45 million people.

FIRST IMPACT

The housing industry felt the first impact
of this group during the early 1970’s when
these individuals were in their twenties.
Because their particular needs for housing
at that time generated a sharp increase in
the demand for rental units, a record 1.1
million apartment units were started in
1972. As this group entered its thirties
during the late 1970’s, their housing needs
changed radically. It is at this age level
when families are formed, careers develop
and family heads become predominantly
homebuyers rather than renters. It is for
this reason that housing starts reached two
million units during both 1977 and 1978,
and that 72% of these consisted of single
family homes. During the early 1970’s only
55% of total starts were single units.

Studies by the Census Bureau indicate
that two aspects of population growth
during the 1980’s will guarantee a continua-
tion in the strong underlying demand for
housing. The first is the rate of increase in
the number of persons who will be entering
the prime homebuying ages of 25 to 34 years.

Between 1970 and 1980 this groupincreased
at a rate of 43%, and during the 1980’s this
growth rate will continue. Forty-two million
people will enter their thirties during the
1980's, compared to 32 million in the last
decade. The second factor is the average
annual change in thenumber of households.
The Census Bureau estimates that by the
end of 1980 there were 80 million households
in the United States. This represents a
26% increase from the 1970 level, whichis a
remarkable rate of growth considering that
the total population increased by only 9%.
During the 1980’s the number of households
is projected to increase at an average rate of
1.6 million households per year. That rate is
approximately double the rate of increase
that was achieved during the 1950’s.

WYMAN TRINEER

The increase in the number of households
has signficantly altered the proportion of
single family units. In 1972 single family
starts accounted for 55% of total starts, but
by 1977-78 single family units increased
their share to 72%. During the 1980’s the
proportion of singles is expected to continue
to exceed that of the early 1970’s by one-
third. Because single units consume three
times as much lumber as apartment units,
the larger singles mix will require the
production of much more lumber than would
have been required to construct the same
level of housing starts during the early
1970's.

In addition, there has been a 15% increase
in the size of the average single family house
since 1970. This factor alone means that the
average house now consumes approxi-
mately 15% more lumber than it did in 1970.

These changes in lumber consumption per
housing unit mean that 1.5 million starts in
1979 would require as much as 2.0 million
units in 1970. Similarly, it would havetaken
2.9 million starts in 1970 to equal the 1978
record of 2.02 million starts.

Although population statistics indicate a
strong underlying demand for housing
there is some debate as to whether potential
homebuyers will be able to afford the costs
of ownership. Recent increases in residen-
tial mortgage rates as well as a general
inflation in housing prices havemademany
observers skeptical of the prospects for the
United States housing industry in the
1980’s. A few critics point out that the cost of
home ownership appears to be moving
beyond the reach of potential homebuyers.
Those critics fail to recognize, however, that
recent changes in the structure of the
residential mortgage market as well as
changs in the income profile of new home-
buyers has dramatically altered the way in
which inflation and interest rates affect the
housing market.

Most young homebuyers during the late
1970’s have been able to qualify for higher
levels of monthly mortgage payments
because of the significant increase in the
number of two income earner families. By
the end of 1979 nearly one half of all married
women worked, up considerably from one-
third in 1965.

As a result, almost one half of all home-
buyers now have two income earners in the
family. Prior to 1975 mortgage lenders did
not permit the wife’s income to be counted in
assessing whether family income qualified
for a mortgage loan. Federal legislation
passed in that year now requires that the
wife’s income be counted. The old rule-of-
thumb was that monthly house payments
could not exceed 25% of the husband’s gross
income. The addition of a second income has
enabled more families to move from the
status of renter to homeowner.

HOME VALUES

Rising home values have altered the
first-time homebuyers perception of the
value of home ownership. Between 1973 and
1980 the average price of homes in the
United States increased at a rate one-third
faster than the increase in other prices and
the value of those homes increased at a rate
one-third faster that the average increase in
personal incomes. Inflation has simply
made it profitable to buy a home because
the debt will be repaid over a long period
with inflated dollars.

The deductibility of mortgage interest
costs from federal income tax in the United
States has increased the attractiveness of
homeownership because the homebuyer
receives a measure of protection when
mortgage interest costs increase. Even
when the mortgage interest rate has
exceeded the rate of inflation, the home-
buyer has been able to absorb higher inter-
est rates because the high costs were offset
by lower personal income tax. For the
average U.S. homebuyer in the 33% tax
bracket, the combination of inflation and
mortgage deductibility has reduced the
effective mortgage interest rate consider-
ably. Deductibility reduces the mortgage
rate by approximately one-third, leaving an
effective interest rate that is often lower
than the rate of inflation.

Unfortunately, inflation has threatened
the economic viability of the savings and
loan associations, which in normal years
provide 60% of mortgage loans in the United
States. The supply of mortgage funds has
been derived by providing attractive short
term interest rates for savings accounts.
The interest rates paid on these accounts are
covered by the money generated from long
term mortgages. Because inflation has
caused short term interest rates to fluctuate
dramatically, the income from mortgages

KEY PROBLEM

has become insufficient to persuade savers
to keep their deposits in the associations.

The key problem for the savings and loan
industry has been the type of mortgage
instrument it has been using. Since the early
1930’s the primary instrument has been the
fixed-rate mortgage. This type of mortgage
is written for periods of 25 to 30 years, and
unlike the typical Canadian rollover mort-
gage, does not permit periodic adjustments
of mortgage interest every three to five
years.

The United States government moved to
correct this situation in July of 1979 when
the Federal Home Loan Bank Board, the
agency which oversees the savings and loan
industry, authorized federally chartered
savings and loans to issue Variable Rate
Mortgages (VRM’s). As the name implies,
this new mortgage allows the lender to vary
the mortgage interest rate every six months
during the term of the mortgage. The pro-
posed maximum increase in interest rates
that the savings and loans may charge
homeowners is half a percent every six
months, with a maximum of one percent per
year and five percent over the life of a
80-year mortgage. The basis of these
increases is an index of mortgage rates at
the regional Federal Home Loans Banks. If
the index moves up the homeowner's mort-
gage rate may be adjusted up, and must be
adjusted down with declines in the index.

SEE “BANNER YEAR” PAGE EIGHT

Lumber Worker/January, 1981/7