Business: Volcker's Pinch Begins

Soaring interest buoys the buck but starts a slide in housing

When he boldly 'tackled the twin problems of runaway inflation at home and a hemorrhaging dollar abroad by tightening credit and raising interest rates a month ago, Federal Reserve Chairman Paul Volcker was almost universally hailed. The road down from 13% inflation would be long and difficult, but it was also imperative; and Volcker's policy was acclaimed as necessary. Now the costs of the descent are beginning to become evident.

Since the Federal Reserve action, the prime interest rate paid by top corporations has jumped another 2% beyond its previously record heights to reach 15½%, and bankers believe that it may go still higher. Interest rates on Government bonds have leaped above levels prevailing at the outbreak of the Civil War, when Confederate forces were encamped at Manassas, ready to march on Washington. The Dow Jones index of industrial stocks since early October has slumped nearly 100 points and closed last week at 806.

The Fed's draconian measures have first hit the housing industry. Last week the National Association of Home Builders called an emergency meeting in Washington to bewail the high mortgage rates. The group's economist, Michael Sumichrast, darkly predicted that housing starts, which ran at a 1.9 million annual rate in September, will soon be cut in half. The soaring cost of money, he claimed, has already forced 10 million Americans to abandon temporarily plans for that dream house.

The first signs of a housing decline are evident around the country. Average mortgage rates have jumped over two points since January of 1978 to 11.2%, and in California, Colorado, Indiana and other places they are 13% or 14%. Monthly payments are often no longer listed in the handy books real estate agents carry, and salesmen have been forced to use hand-held calculators to compute the numbing bill. Residential loans in Washington, D.C., have virtually halted. In the

Los Angeles area, where home prices formerly rose fast and frequently, sellers have been forced to reduce $140,000 bungalows to $120,000. In Chicago, sales in new home projects are down 68% since January.

Worse than the high interest rates is the sheer shortage of mortgage money. Usury laws in two dozen states limit interest rates to below 13%. Thus many banks and savings institutions have stopped making loans because it is impossible for them to earn any profit. Traditional lenders are also running short of cash because people are transferring funds from savings accounts to booming money market funds, which invest money in high-yielding securities and pay twice as much as passbook accounts. Perhaps three-quarters of the savings and loan associations in Chicago have stopped making mortgage deals.

Signs of recession are also multiplying.

Big Three auto sales last month were down a jarring 23% from a year ago, and the industry has laid off 93,600 of its 765,400 hourly workers. Executive recruiters are receiving considerably fewer requests to find and hire managers.