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Moreover, there is a point below which home-financing costs in the form of interest and necessary initial charges cannot go if we are to maintain in this country a system of private enterprise for the building and financing of homes. Interest rates on mortgage loans are depending on the rates of return necessary to attract thrift capital. For example, if the public generally were satisfied to take a 1 percent return on their long-term savings, our institutions could lend their funds at 3 percent or less, and would be glad to do it. But they cannot do the impossible by making the money available at or less than cost. There is also the necessity, as you well know, of building reserves against possible losses resulting from lending operations.

It seems clear that building costs and not interest rates are the real problem faced by the potential home buyer these days, and yet building costs themselves, high as they are, are the effect of the postwar inflation. The largest single item in the cost of building a home is labor. As we all know, the wages paid for the labor that goes into a house both on the site and in the mills and factories which produce the materials are substantially higher than they were before the war. We are not recommending that these wages be reduced for they must be consistent with the costs of consumer goods. Possibly some of the profits of some contractors and subcontractors became higher than normal during the period of acute shortages of housing supply against abnormal demands for housing. If this were true, a fast-increasing competition will soon squeeze out any excessive profits.

But again I wish to emphasize that it is the total cost of a finished house that is the greatest deterrent to home buying and lower rents. It is also a fact that many potential buyers have held off even if they had the money with which to buy or build new homes, because of their expectation that costs would decline. Costs have declined somewhat, but are leveling off.

It is our understanding that the purpose of the proposed legislation is to make it possible for more people to acquire homes because of anticipated reductions in monthly carrying charges. It is our understanding that reduced monthly carrying charges would be brought about by extending the term of financing and by reducing the interest rate. Possibly the term of financing can be extended safely. ever, I am sure this committee would not wish to see a large segment

I of our population assume mortgage indebtedness far in excess of the capacity of individual families as the result of the deluding influence of so-called easy payments.

And if housing cooperatives build rental housing and the rental rates are established on the basis of very long term financing, such enterprises probably some day will have to go through the wringer in order to adjust their debt load to the then economic rent level. And our Government would pay the bill under this proposal.

It is our understanding that the funds which would be advanced by the National Mortgage Corporation for housing cooperatives to the local housing cooperatives would be obtained by the sale of the Corporation's obligations with a full guarantee of principal and interest by the United States. We do not see any difference between the net effect of such financing and the making of direct loans by the Government. We must oppose in principle a Government guaranty of the obligations of the proposed National Mortgage Corporation just as we have in the past opposed proposals for direct Government loans to housing cooperatives.

In our considered judgment there is no need for this proposed legislation. Private institutions have always financed low-income groups including those which this legislation is designed to assist. Millions of homes have been bought and paid for by families with incomes in the lower levels of the middle-income group. Yes; and by families in the lowest one-third income group. It is very true that such families which have bought and paid for homes have had to deny themselves some of the luxuries of life temporarily. They haven't been able to buy the latest model automobile nor many other gadgets, but they have had the real satisfaction of becoming home owners with all the security which debt-free home ownership brings.

We have asked a representative group of institutions located all around the country to supply us with data regarding their lending to finance homes for the lower-income families. I regret to say that because of the short time since we requested these facts we have not yet received any substantial number of reports. I would like, however, to have the privilege of filing with the committee for the record the results of our survey on this very important question.

Senator SPARKMAN. That will be done. We will be very glad to have it.

Mr. KREUTZ. Meantime, I would like to tell you about one report which came in yesterday. This is from a savings and loan association on the west coast. Last year that association made 750 loans totaling $6,000,000 to finance the construction of new homes for veterans. The prices of these completed homes ranged from $7,500 to $8,500; 80 percent were under $8,000. They were sold to families with an average monthly income of $275 or $3,300 per year. The average monthly payment including all charges is $50. These loans were made for 25 years at 4 percent interest without any down payment, and all are guaranteed by the Veterans' Administration. These houses range in size from 750 to 825 square feet. Each house has two bedrooms, a a living room, a dinette, a kitchen, an electric refrigerator, a gas range, and an electric washing machine. Each house is described as being of No. 1 California construction with wood shingle roof and oak floors. A garage went with each house.

Senator BRICKER. Was the garage in the cost?

Mr. KREUTZ. Yes. I think perhaps those costs would be higher on houses built in this area, or most of the areas in the east.

Senator BRICKER. They are a little higher in the Middle West, too?

Mr. KREUTZ. Yes. I would estimate that a similar house without the garage would cost $1,000 more.

The same institution expects to finance, and in fact has already made commitments on a substantial portion of 1,000 similar units, totaling $8,000,000 in 1950. In most areas of the country there is an adequate supply of funds at reasonable interest rates to finance low-cost houses of this general type for people of low incomes.

There are many existing aids for the encouragement of home construction such as we have never had in the history of our country. You are familiar with them. There are various Government aids in the development of new and better materials for home construction. Under the bill of rights—the GI bill of rights-provisions are made for the 100-percent financing of homes for veterans. Under the National Housing Act there are various types of liberal FHA plans which have encouraged home building in large volume. The Federal Home Loan Bank System with total resources of three-fourth billion dollars is functioning successfully and efficiently in providing a reservoir of credit for its member institutions which number nearly 4,000 and whose assets total 14 billion dollars. These local institutions are located throughout the United States and in our Territories.

Senator BRICKER. There is no inference that there are not many private research programs being carried on?

Mr. KREUTZ. No. I think they are much more extensive than are the Government programs; but I wanted to emphasize the things that the Government has already done in this field.

Senator BRICKER. Not only in the private field, but many of the colleges and universities are doing very extensive research in the field.

Mr. KREUTZ. Yes.

Senator BRICKER. Many of the larger plants are doing a tremendous amount of research at the present time in home building.

Mr. KREUTZ. That is right.
Senator BRICKER. Yes.

Mr. KREUTZ. In many of those cases, Senator, there are plans which have for their purpose the integrating of that material and of the collaboration of those groups so as to eliminate overlapping and some of this guidance is being provided now by the Government in the Department of Commerce.

In addition, the Congress has seen fit to pass the Housing Act of 1949 and the Public Housing Administration is now busily engaged with plans for increasing the housing supply for the lowest income groups.

And so I respectfully submit that there is no need at this time for the proposed legislation.

While lower costs are apparently one of the purposes of the proposed legislation, we cannot see how any substantial saving in costs can result from cooperative housing. The cost of professional services would not be decreased, and the contractors who would undertake to build the projects after bidding in open competition would, we assume, have to make a reasonable profit to stay in business. It is true that in some instances the services of an entrepreneur would not be required. That, of course, is assuming that these cooperatives would spring up under their own initiative and that their developers would require no compensation for their time and efforts. However, we suggest that the entrepreneur has been a very useful individual in our system. Certainly we can attribute our present high standard of living to the progressive, aggressive, and successful entrepreneur in every line of business. He has been willing to spend time, money,

. and energy, and take risks.

While we have no specific data to support the opinion, we do feel as a result of many inquires we have made around the country that construction costs in cooperative housing projects will in many cases exceed those of the traditional and orthodox type of undertaking. The reason is obvious. A housing project that has to please a large number of people, namely, the members of the cooperative undertaking, may easily result in higher costs than exist in the case of the standardized and, shall we say, hard-boiled management of the individual or corporate developers.

There is, we believe, another consideration which we think is important in this matter of costs; that is the very definite likelihood that additional easy credit, which would result from this proposed legislation, would have additional inflationary effects on building costs. Widespread liberal credit facilities in the home-construction field have historically produced higher construction costs. The reason is obvious. The more liberal the credit, the greater the number of buyers who bid against each other for the available supply of labor and materials

Let us take a look at the record of construction costs following World War I and likewise following World War II. Department of Commerce reports show that the peak of construction costs following World War I was 68.6 percent above building costs immediately preceding World War I. In contrast to that, building costs in 1948 rose to a point 86.6 percent above the same costs in 1939. The fact is that in the period following World War II we had a number of elements which produced easy credit in sharp contrast to the limited credit facilities following World War I. I need mention only the FHA and the guarantee of loans under the GI bill. It seems clear from this record that additional easy credit facilities such as are embodied in this proposed legislation would necessarily have the effect of increasing the competition among buyers for available labor, material, and supplies. The result of that kind of buyer competition in the past has always been higher prices and therefore higher cost to the ultimate consumer.

On the other hand, if the present high level of home-building volume is allowed to continue without any additional stimulae in the form of Government subsidies we should soon reach a point where supply and current demand are almost equal. In fact, there are already reports around the country of increasing vacancies in some types of properties, particularly section 608 projects. If such vacancies increase and it seems likely they will, the effect will be lower rents and finally lower construction costs.

Senator BRICKER. Do you have figures available on the amount of unoccupied units there are throughout the country?

Mr. KREUTZ. No; we do not. I simply have statements made by various people to us of increasing vacancies in this country.

Senator BRICKER. If we should continue to build a million units a year, approximately, as we did last year, how long do you think it would be before we catch up with the increased number of families to saturate the market to where you had a buyer's market?

Mr. KREUTZ. I think it may not take very long. The thing that makes a buyer's market is generally a very little thing. In the depression, as you recall, when real estate was a drug on the market, the percentage ratio of vacancies was not very great. It was just enough to create more housing than there was demand. As soon as you have that condition, you have a drop in rent and you have a drop in prices.

Senator BRICKER. How long do you think it will be before those economic conditions start to depress your rental costs?

Mr. KREUTZ. I think it wouldn't take more than a year or two, Senator, before we would approach a point of equalization of supply and demand.

The ultimate effects of the proposed legislation could be seriously damaging to our existing system of private home construction and financing. Once you start the wide-scale use of Government credit to assist one class or group of our population, how can you prevent the expansion of this type of subsidy to include the next higher income group level and the next and the next? If the $3,500-a-year family is able to get better living accommodations through a Government subsidy than he could otherwise afford, won't the $5,000-a-year family want similar help in the near future?

Too much help, whether it comes from doting parents or a paternalistic government, will soften the young couple starting out in life, and too often dull the ambition of the wage earner. I don't doubt that some of the great men of our own history, including many Members of Congress and heads of our Government, would never have risen above mediocrity if they had not had to work hard and put up with many inconveniences of their early life.

It has been axiomatic in our business that the home buyer should have some initial equity to insure a continuing interest in keeping his home. Our experience has also proved that home buyers should pay off their indebtedness during the middle years of their earning period.

Finally, it seems to us that our Government cannot afford to assume additional debt beyond the absolute necessities for the maintenance of peace abroad and stability at home. We cannot see any such necessity in this proposed legislation.

To summarize, we believe that (1) there is no need for the proposed legislation, (2) that there would be no substantial saving in construction costs of cooperative housing projects and, in fact, there might well be inflationary increases in building costs if this proposed legislation is passed, and (3) the ultimate effects of the proposed legislation could be seriously damaging to the existing system of private home building and financing. Therefore, we recommend that this legislation be not approved.

With regard to the amendments numbered 1 to 11 which have been submitted by Senator Maybank to replace previous sections in S. 2246, dealing with the FHA program, we would in general be in accord. However, we would have to submit to our membership the question whether FHA title I should be permanently retained. We, in the past, have endorsed continuance of title I on an interim basis, and a number of savings and loan associations have used title I insurance facilities for the making of improvement and repair loans particularly. They have reported their belief that this title has been of considerable value in enabling private business to increase the available supply of suitable older dwellings.

With regard to the elimination of section 608 and the substitution of new provisions in section 207 providing for 90 percent FHA loans on the first $7,000 value per family unit plus other extensions in the title II program, these amendments would also meet with our general approval. We urge, however, that section 608 be retained through March 1, 1950, because many mortgage-financing institutions and builders have made construction commitments to this date. Certainly it would be better to provide a mortgage-insurance program on this or similar basis instead of the cooperative housing proposal in title III of S. 2246.

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