REAL ESTATE CREDIT CONTROLS AS A SELECTIVE INSTRUMENT OF FEDERAL RESERVE POLICY*

Abstract

SELECTIVE CONTROL OF stock-market credit is widely accepted; control of consumer credit is hotly debated; little attention has been paid to selective control of real estate credit, despite the fact that it was in effect (as Regulation X) for about two years in 1950-52. The purpose of this paper is to analyze the experience of the Federal Reserve authorities with real estate credit controls during that period. As background, Part I contains an analysis of the principles of such controls. Examination of the importance of real estate and real estate credit and their extreme instability in the past suggests that developments in this sector of the economy are of great significance for monetary policy. General credit controls can contribute toward more stability in this field, not through their effect on the demand for real estate credit, but primarily by their influence on the supply. General controls are particularly effective when rates on FHA and VA loans are held artificially low; but even if FHA and VA rates were free to rise in response to market forces, general controls probably would still have some restrictive effect, largely because rates on mortgages tend to be somewhat sticky. Selective controls differ from general controls primarily in their directness. They apply directly to the specific sector of real estate credit, they affect all lenders directly, and they impose requirements directly on those who seek to buy real estate. Probably for this last reason it is sometimes stated that selective controls impinge on the demand for credit, while general controls affect supply. Strictly speaking, this is not so. In both cases a reduction in the amount borrowed comes about from a shift in the supply curve of credit. Selective controls restrict the amount borrowed principally through two devices: the down-payment requirement, which is essentially a liquidity requirement, and the monthly payment, which is an income requirement. The operation of real estate credit controls in 1950-52 had two