Mortgage Credit Availability and Residential Construction

Dwight M. Jaffee and

DMJ

Dwight M. Jaffee

Kenneth T. Rosen

KTR

Kenneth T. Rosen University of California, Berkeley

Discussants: Benjamin M. Friedman and

BMF

Benjamin M. Friedman Harvard University

Lawrence R. Klein

LRK

Lawrence R. Klein

THE EXTRAORDINARY STRENGTH of residential construction in 1978 (2.02 million starts for the year) and the relatively small downturn in the first half of 1979 (1.75 million starts at a seasonally adjusted annual rate, including 1.92 million starts for June) has surprised many economists. Most analysts had anticipated that high interest rates on mortgages, high and rapidly rising housing prices, and slow economic growth would produce a substantial cyclical decline in housing. Various factors, however, may have been working to offset this usual cyclical scenario. The transition of the “baby boom” generation to a home-buying age and the increased appeal of home purchase for investment purposes may have raised the demand for housing. The introduction of money-market certificates (MMCs) in June 1978 for banks and thrift institutions and the increased activity (mortgage commitments and purchases and Federal Home Loan Bank advances) by secondary market agencies may have increased the availability and reduced the price of mortgage credit .