Continued inflation is a major cause of the problems besetting America's housing and forest products industries, according to a recent RFF briefing for Congressional staffers.
Organized by Roger A. Sedjo, senior fellow and director of RFF's Forest Economics and Policy Program, the meeting featured informal presentations by Marion Clawson, RFF senior fellow emeritus; Anthony Downs, senior fellow at the Brookings Institution; and Sedjo.
Clawson described the recent history of the housing industry in terms of building cycles, which he said average a 40 percent variriation from high to low points. Of eight such cycles since 1948, he saw the seventh as exhibiting the most serious variation. The current cycle, he said, already is the longest, its end is not in sight, and it may not yet have reached its low point.
Pointing to a fivefold increase in housing costs from 1950 to 1980, Clawson delineated three factors that have contributed to that escalation: cheapening of the dollar, debt relief, and the expectation of continued inflation. On the final point, he explained that, of the $60,000 price tag for an average house in 1979, $10,000 could be identified as expected inflation. By the end of 1980, that expectation had plummeted to $4,000 and today disappeared completely. [See Clawson's article in Resources 1969 (March 1982), for a detailed exposition of his views on housing.]
Expected inflation on the part of financial institutions was one of three "major revolutions" that have rocked the housing industry since 1980, according to Tony Downs. When the suppliers of capital "finally woke up and realized they had been subsidizing borrowers," Downs explained, they began to demand high real interest rates and to change the type of instruments they use as a way to protect themselves against uncertainty.
The second revolution he described centered on the nature of monetary and fiscal policy, specifically the Federal Reserve's abandoning its goal of moderating four-year business cycles. The result, Downs maintains, is a 90 percent decline of growth in real Gross National. Product.
The third dramatic change on his list was the housing industry's loss of a sheltered position in credit markets.
Addressing the implications of these problems for the forest products industry, Roger Sedjo struck a somewhat more optimistic note in forecasting that a drop in interest rates would promote a "return to normality, but at a lower level of housing starts." Reduced domestic demand, he suggested, can be offset partially by the international market, which could well pick up in the next decade.
Sedjo noted that although 75 percent of total net exports (continent-to-continent) of forest products now belong to the United States and Canada, U.S. products cannot compete effectively in international markets if the dollar continues to appreciate. Pointing to the correlation between interest and exchange rates, he stressed the need for a decline in interest rates in order to pave the way for expanded U.S. exports to soak up excess capacity in the forest products industry.
Author Rachael M. Nilsson is director of RFF's Public Affairs Division.
A version of this article appeared in print in the July 1982 issue of Resources magazine.
