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JAMES C. DOWNS, JR.
Editor and Publisher
ANTHONY DOWNS CHICAGO * NEW YORK * WASHINGTON, D.C. * DALLAS « ST. LOUIS * OMAHA
Special Research Reports LOS ANGELES * SAN FRANCISCO * MINNEAPOLIS-ST. PAUL
VOL. 21 —No. 11 $20.00 PER YEAR MARCH 1967
That's the absorbing question which is
being debated vigorously by the business and investment communities as the
economy feels its way cautiously into 1967.
The difficulties of a definitive answer to the question first stated above lie
in the apparent contradictions contained in the business and financial news as
it unfolds day after day. For example: the rally in the stock and bond markets
in the month of January seemed to be saying that the doubts and uncertainties of
the year-end were really unfounded; that .1967 was going to be another strong
year after all. And yet there was a nagging persistence to bearish bulletins
about business itself. Automobile production was down 18% in January and 21.5%
in the first half of February. Steel-making thus far in 1967 is off last year's
pace, with mills currently operating at only 70% of capacity. Durable goods
orders in January were down 5.1% from last year and business inventories were
Through it all the war_in Viet Nam keeps requiring more and more money: President
Johnson's messages to the Congress point up the urgency of expanding the
perimeters of the Great Society; unemployment in January held at the low level
of 3.7% of the labor market (with many cities still below the "point-of-shortage") ;
and wages are continuing their trend of the past six months.
Although the rally in the bond and stock markets faltered in mid-February and
bad news once again seemed to capture the spotlight of the public's attention,
we have certainly not turned bearish. We still see no recession in the offing
(by our definition) and we still would put 1967 in the "plus" column as a whole.
, During most of the year 1966,
financial and capital factors were in bad trend. The stock markets were sagging,
the money markets were demoralized and the whole real estate sector of the
economy was dispirited. Yet consumers were more numerous, more prosperous and
more fully employed. And business was good indeed:
In spite of the anomalous developments thus far in 1967, consumers are in better
basic condition than they were a year ago: In most metropolitan areas, employment
in this January was better than last year's. In all such areas, the average
income of consumers is higher than it was at this time last year. And it is
moving still higher!
It is true that about’October 1, 1966, the chilling winds of doubt blew over the
consumers of the U.S. with the result that their willingness to spend (not their
capacity to spend) was momentarily curbed. While they waited to experience a
resurgence of their buying enthusiasm, they increased their savings. In other
words, they rested their buying oars and took advantage of the biggest inventory
of their own goods in the history of the American family. But they did not
change their fundamental habits! As spring comes --~- and if their incomes hold
(we think they will) --- they'll get right back into the spending stream to take
dvantage of the higher living standards which are within their grasp. And once
they do that, we'll forget about the dwindling profits in the last quarter of
1966 and the first of 1967. e
COPYRIGHT 1967 © Real Estate Research Corporation @ 73 West Monroe, Chicago, Illinois 60603 © Reproduction in whole or part prohibited.
PAGE 2 the National MARKET LETTER
REAL ESTATE ACTIVITY NOT ONLY FAILED TO TURN AROUND in the first month of 1967,
but it slipped further into the doldrums which had marked the last months of
1966. One of the reasons that the year-to-year comparisons with the first month
of 1966 look so bad is that --- if you remember accurately --- last year started
out impressively on the strong side, at least in the major activity factors of
local real estate markets, with sales, mortgage lending and new construction
well ahead of the previous year, in most areas.
Here is how these activity factors performed in the latest month for which
complete national figures are available (January 1967):
Real Estate Sales
Off a little less than they were in December, sales for the nation were
down 14.7% in January, with the following regional compar teas with the
same month last year:
Region Percent Change
Northeast ------ +--+ +++ -°- 8.0
Great Lakes - =- - Ss -s © == = 5s 2s ss =< == Lad
REAR oS CS ea Se te me ee a ese alee, ae | 6.2
Central Prairie and Mountain - -------- . 18.4
Pacific West ------2f fff fff 20.01
The reasons for the slow selling pace were not much changed from those
which have prevailed in the past few months. The sharp drop in new home
construction and completion was a major factor. Normally the sale of a
new house results in from two to five sales of other dwelling units as
occupants play a game of "musical chairs" in the upgrading process. No
new houses; no occupancy shifts down the line. In addition, the promise
of lower mortgage money rates (given
wide publicity, especially since
Selected NATIONAL Economic Indicators October) has caused many prospective
= buyers of existing houses to wait for
[VALUE OF DOLLAR (1939 = 100) 41.54¢ better terms.
INDICATOR HOM A On On the income property side, the rapid
drop in money rates acted to lower
PRICES: realistic capitalization rates faster
Wholesale Prices 1.5 0.3 than prospective buyers could adjust
Building Costs 4.2 0.0 their sights. Moreover, improved
Feat Eroci, Sree = Boe = a5 market conditions in most space markets
onsumer Frices e . j i
Dow Jones IndI’s (ds of 2/23) |-11.0|= 0.4 (especially in the Northeast, Great
Lakes and South regions) caused poten-
PRODUCTION, EMPLOYMENT, tial sellers to scent higher occupan-
INCOME: cies and rentals --- thus causing them
Total Production ae = hs to firm their ideas of value. Finally,
Menvfocyrisg be 0.3 = a a rapidly rising stock market proved a
hata Ueto 0.5 7 Res lure to speculators looking for a fast
Construction Employment a, . 2 0.2 return on investment.
Wages Ee ae We look for unfavorable year-to-year
7 SSA: tat comparisons in the sales markets to
emt ee 1a 4 1.6 continue for the first quarter of this
ee ; = Sry bays year, after which we expect measurable
Currency in Circulation 0.6 O.1 J ‘
Government Debt oT = D7 smprovement .
Checks Cashed (Dollars) 15.4 4.6 2
Value of Dollar =t.2 0.0 Mortgage Lending
Dats latest available for each factor. The national decline since last year in
mortgage lending for the latest month
THE REAL ESTATE FORECAST AUTHORITY PAGE 3
(January) was 33.5% in the number of mortgage loans closed and 42.4% in the
total dollar volume of those loans. While mortgage money conditions con-
tinued to improve, the actual volume of lending was still low, due to the
highly selective and cautious nature of lenders returning to the markets.
Here are the regional comparisons between the mortgage business in the
latest month and that of the same month of 1966:
Dollar Volume Number of Loans
Percent Change Percent Change
Northeast 50. 29.6
Great Lakes 43. 26.7
South 0% 22.0
Central Prairie and Mountain 40. 29.7
Pacific West ‘ 42.1
It is obvious from the above statistics that, through the month of January
at least, the improvement in mortgage money conditions was largely
theoretical and technical rather than actual --- as far as real estate
lenders and borrowers were concerned.
As noted above, the drop of interest rates in the basic money markets during
the month of January was a little less than remarkable. However, at the
end of that month and all during February, these trends were reversed.
Yields on treasury bills, municipals and corporates were up steadily,
week-by-week in February.
This yo-yo action of money rates in the first eight weeks of 1967 was not
reflected in the mortgage money rate situation. Reason: the supply-demand
ratio in the mortgage money markets did not parallel that in the basic
money markets. Here were the differences:
1. The savings flow into real estate-oriented institutions was
greatly improved over a year ago. On the other hand, mortgage
demand (in the kind of loans scared lenders now consider acceptable)
was disappointing. As a result, on balance, there was more money
than there were loans.
In the basic money markets, demand held high and supply was not
meaningfully improved. Money lenders found that they had under-
priced their commodity and took a second look at their potentials.
We see no particular "threat" in the February developments to the long-term
trend of mortgage money. 1967 will continue to score improvements in this
One of the much-touted "bullish" factors cited by those who are optimistic
about 1967 is the belief that the ailing home-building industry will stage
a comeback in the year. So-called building stocks have shown outstanding
strength on the nation's stock markets as speculators have hungrily snapped
them up in anticipation of higher sales and earnings.
These sentiments have not only been encouraged by the statistics of housing
construction in the past three months (January housing starts were at a
seasonally adjusted annual rate of 1,243,000 units --- up 14.6% from
December and up a whopping 47% from last October's postwar low), but by
the longer range prospects for a dramatic increase in the number of young
married couples starting in 1968.
PAGE 4 the Mational MARKET LETTER
Certainly (as this Letter has pointed out for several months), the
residential markets in most local areas have gained strength in virtually
all local areas --- and are postured for a burst of new supply in many.
In our opinion, the high expectations of the building industry (like
those which have pushed savings and loan stocks skyward since last fall)
tend to exaggerate the actual prospects for building profits --- either
on the part of the developer or the materials manufacturer. The reason:
the costs of money, materials, labor and land are such that development
profits must await a higher general rental market to encourage and
support a meaningfully higher volume of new construction.
The real profits are to be made in the purchase of good, sound, well-
located and well-designed existing property which will experience sharply
enhanced earning power before a new building boom can get started.
THE BIGGEST REAL ESTATE PROFITS IN THE PAST FIVE MONTHS have been made in real
estate stocks. Our readers will remember that we set up a Real Estate Stock
Index in October of 1965. On that date we assigned the figure of 100.0 to
the prices of these securities which prevailed on October 1, 1965. Here is
the record of those values, monthly, since that date:
Month 1965 1966 1967
January ~---- cc ttt rt tt 106.9 101.5
February --c fcr rt 7 7T cr ft 110.1
March = ---+ 252-57 5777-7? 101.4
Aprigiie? sos Seres She? TS See et 108.3
May ----c fcc ttt tr ttc ctco 96.6
June - =| sf, 5-2. 2 eee 95.1
II yos =o S505 Se Seer Sar Ss 93.3
AUgUIST, = =) — = =p" =) =e ee 83.4
September - ----- ttre 777 7 CDeut
October = =---f- fff F-7+ 100.0 75.2
November’ .<=.2.6.20=-S\5,)> S)53> =-= 106.9 80.8
December -------+-c 77777 105.1 84.4
Even if these real estate stocks had been purchased on October 1, 1965, their
owner would have done better than if he had bought the Dow Jones Industrials
on the big board.
*% CHANGE FROM A YEAR AGO -
warionar | NQEORT | SHECTONES | ncSiow'n | MOUNTAIN | MEET
REAL ESTATE SALES
(Number of Transactions) 17.2 14,0 13.1 9.6 14.8 21.6
(Number of Loans Closed) 33.9 33.1 28.4 19.7 31.9 42.1
(Dollar Volume) 38.0 42.6 34,7 15,9 46.8 42.6
(Dollar Volume) Tes 11.4 35.0 24.3 22.9 Zo)
(No. of Projects Started) eke a7 eZ 43.6 19.7 44,2 48.3
(Dollar Volume) 45.5 20 <0 47.6 28.2 ee 60.0
(Dollar Volume) 10.0 15.0 102.5 25.8 9,8 40.7
MARRIAGES 7.7 3.7 6.9 | 11.7 12.8 9.4
EVICTIONS 1.8 8.8 0.9 Lak 0.0 ca ae
*Figures are based upon extension to National and Regional Levels of actual rates for QUARTER ending January 31, 1967.
THE REAL ESTATE FORECAST AUTHORITY PAGE 5
SPECIAL RESEARCH REPORT
A LOOK AT THE "MODEL CITIES" PROGRAM
Last year, Congress passed legislation authorizing a new urban program to be
administered by the Department of Housing and Urban Development (known as HUD).
Originally known as the "Demonstration Cities Program," it was recently renamed
the "Model Cities Program" to placate Congressmen who feared their constituents
would think the bill encouraged civil rights marches and other "demonstrations!"
Since this program may have important impacts upon big-city real estate markets,
we will explore certain key aspects of it in this month's Special Research Report.
The Model Cities Program was originally devised to counteract the following
undesirable tendencies which had appeared in the Federal government's attempts
to aid cities, especially large central cities: -
1. An enormous number of Federal programs were being administered by many
different Federal --- and city --- departments without much coordina-
tion. A recent Office of Economic Opportunity manual lists over 250
Federal aid programs, most of which are applicable in cities.
2. Funds passed out under these programs tended to be widely dispersed
over the urban landscape. Instead of really trying to upgrade a small
area by focusing a whole battery of urban renewal, health, anti-
delinquency, manpower training, education and other programs on it,
the Federal government was scattering its shots too broadly. Hence
each slum received too little assistance to counteract the forces
"naturally" dominant there.
3. Each program assisted with Federal funds tended to be the same in all
parts of a city, and often all over the country, both because one set
of Federal rules governed it and because big-city bureaucracies wanted
to adopt “uniform and equal" policies in all neighborhoods. As a
result, specific programs were often badly adapted to the peculiar
needs of non-typical neighborhoods, especially low-income ghettos.
4. A great deal of urban renewal assistance was designed not so much to
eliminate blight or improve the living conditions of low-income
residents, but _ to bolster the sagging economies of big-city downtown
business districts. Thus the wealthy were the biggest beneficiaries,
and the poor were merely shifted from one slum to another.
These complex maladies demanded a complex remedy --- and that is just what the
Model Cities Program is designed to produce. In fact, the Guidelines describing
how to apply for a grant to plan (but not execute) this program are over 50
pages long. Hence we can only mention their most salient features here, before
analyzing some of their major implications.
Participation in the program by any given city involves three stages. The
pre-application stage lasts until an application for a planning grant is completed
and approved by HUD. No Federal financing is available for filling out an
application. Yet it is so complex that many cities have spent months at it and
only four have formally filed applications (as of February 25, 1967). HUD is
likely to disapprove of almost everyone's application at first until it is
adjusted to reasonable conformance with the many criteria described below. After
HUD approval is obtained, the planning stage begins. This can last from six
to twelve months, and can be financed up to 80% by HUD grants (though the
total authorized to HUD for such planning is only $24 million over two years).
Finally, for those few cities receiving final approval, the execution stage
arrives. In this stage, each city will apply for normal Federal aid for specific
PAGE 6 the National MARKET LETTER
programs in the Model City Area (such as 2/3 financing for urban renewal), and
can get an additional "block grant" for up to 80% of the local share it would
otherwise have to put up. This bonus can be used for additional activities in
the Model Cities Area which would otherwise not be eligible for Federal
The myriad specific criteria which Model City plans must meet include the
following major ones summarized from HUD's Program Guide:
1. The program must be comprehensive. Specifically, it should contain
the following components: physical improvement, housing, transporta-
tion, education, manpower and economic development, recreation and
cultural, crime reduction, health and social services and public
2. The program should provide for administrative machinery at the local
level to carry out all its aspects on a consolidated and coordinated
basis. Preferably, this means direct linkage to the mayor or other
3. It should make a substantial impact on the physical, economic and
social problems in the model neighborhood area.
4. It should remove or arrest blight and decay in the selected area or
areas of the city.
5. It should be of sufficient magnitude to contribute to the sound
development of the entire city.
6. It should make marked progress in reducing social and educational
disadvantages, ill health, underemployment and lack of social services
necessary to serve the poor and disadvantaged of the area.
7. #It should provide for widespread citizen participation.
8. It should provide maximum opportunities for employing residents of the
area in all phases of the program and enlarged opportunities for
work and training.
9. It should contribute to a well-balanced city with a substantial
increase in the supply of standard housing of low and moderate cost.
10. It should contribute to a well-balanced city with maximum opportunities
in the choice of housing accommodations for all citizens of all
ll. It should contribute to a well-balanced city with adequate public
facilities, commercial facilities adequate to service the residential
areas, and ease of access between residential areas and centers of
12. It should provide for a comprehensive plan for the relocation of
individuals, families, business concerns and nonprofit organizations.
In addition, each program should require re-examination of local laws, be
consistent with comprehensive metropolitan-wide planning, be initiated within
a short period of time (under five years), embody high standards of urban design,
maintain historic sites, make maximum use of new technology, use cost-benefit
analysis, conform to civil rights requirements, encourage maximum private
enterprise, not reduce previous local spending in the Model City area, and be
backed by adequate local resources.
THE REAL ESTATE FORECAST AUTHORITY PAGE 7
In setting out this extraordinarily ambitious set of requirements, HUD is like a
bachelor stating he will only marry a girl with Jacqueline Kennedy's poise,
Jayne Mansfield's figure, Grace Kelly's face, Elizabeth Taylor's allure and
Barbara Hutton's money! In fact, he would be fortunate to get any one of these
charms, as HUD will be fortunate to get even a majority of its requirements
actually met by any given city. Although each individual criterion seems
justified, the group taken together constitute too radical a departure from
present urban government practice to be fully achieved in any single city.
Specifically, we believe that HUD's program will encounter five major obstacles
and will have to compromise with them in many cases. These are as follows:
1. <All three of the major objectives of the Model Cities Program ---
coordination, innovation and specific adaptation of programs to ghetto
areas --- run counter to well-entrenched bureaucratic tendencies in
city governments. City --- and Federal --- departments used to
carrying out their own functions without much checking with each
other will resist intimate cooperation in planning their programs.
Moreover, innovation requires changing established behavior patterns,
and few things are more difficult for large bureaucracies. Finally,
the development of new programs tailored to the needs of ghetto
residents, and different from programs in the rest of the city, will
run counter to tendencies toward “equal treatment" and "uniformity"
long established in some city departments,
All three of these frictions will probably be greatest regarding big-
city schools. Many school boards are relatively free from direct
political control by city governments; hence it will be hard for
mayors to get them to change their ways to fit these criteria. Yet
schools are the most important single public institution in almost
all ghettos. They alone have the potential power to make up for many
of the home deficiencies suffered by children from deprived families.
Hence if they are not effectively integrated into the Model Cities
Program in a city, and given part of its bonus "block grants," it
cannot really achieve its major goals. So one of the key tactics for
any city trying to make this program work must be convincing school
authorities of the need to create new programs specifically designed
for ghetto areas, including programs which use school buildings for
many kinds of non-educational activities (such as recreation, social
service distribution and adult vocational training).
Concentration of leadership efforts on one Model City neighborhood
will be necessary to make this program work; yet this contradicts the
fundamental "Law of Over-Dispersion" sacred to politicians. The desire
to gain widespread political support naturally leads elected officials
to spread the benefits of any program to all areas under their juris-
diction, even though this causes a loss of the economic benefits of
concentration, Hence city politicians will be sensitive to the charge
of focusing too much attention on the Model City neighborhood,
especially since it will be a low-tax-paying ghetto area. So they may
provide only half-hearted leadership in support of such concentration,
Even if local areas succeed in establishing coordination among their
own city departments and related agencies, there is no guarantee that
Federal agencies will similarly cooperate in n_ Washington. For example,
when a city asks for a grant from the Department of Health, Education
and Welfare that is urgently needed for its Model City Program, it may
find itself at the end of the long "normal processing line" along
with a11 other requests, including those in no way associated with
PAGE 8 the National MARKET LETTER
4. In large cities, it will be impossible to simultaneously meet the two @
criteria of significant impact on the city as a whole and intensive
impact in the Model City neighborhood. If an area is large enough to
be a significant slice of the entire city, it will be too big for this
program to effect intensively, since total Model City funds are quite
5. The housing requirement in the Guidelines is ambiguous. At one point,
it says that the program must provide "a substantial increase in the
supply of standard housing of low and moderate cost."' But in the
next sentence, it says "The program should add to the overall supply
of low and moderate-income housing, not decrease it." The latter
requirement is virtually impossible, since any clearance of sub-
standard and deteriorated units, or reduction in overcrowding, will
cause a decline in total supply of low-income housing. Even building
new public housing will probably not increase this total supply,
though it could easily increase the standard supply.
In spite of these drawbacks, the Model Cities Program is definitely a worth-
while experiment which could have significant long-run benefits --- if it is
truly conceived of as a means of demonstrating techniques which will later be
applied on a much larger scale. Specifically, it may create an incentive for
at least some cities to do enough innovating, coordinating, concentrating
and adapting of programs to particular needs to give local governments a "shot
in the arm." But eventually this tiny shot must be followed by much larger
appropriations than those as yet made for Model Cities if the lessons learned
are to have any truly sizeable impact upon U.S. urban problems.
(The Special Research Report series on Change in Modern Society will be Ge
continued in a later issue.)
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