The Housing Slump

How Much Should the Government Help?

IN THE current credit pinch, the loudest howls are from the U.S. homebuilding industry. Construction of new houses dropped from a near-record 1,300,000 new homes in 1955 to an estimated 1,100,000 this year. The chief reason is that the lending market for low-interest Veterans Administration and FHA-insured mortgages has dried up. Housing starts with VA and FHA mortgages have plummeted 30% to 467,400 units v. only a 1% drop for homes without Government-guaranteed mortgages. Last week the big argument was over the U.S. Government's newest move to help builders by hiking the interest rate on FHA-insured mortgages by 1/2% to a maximum of 5% (TIME, Dec. 10).

Few builders--and fewer economists --look for much improvement from the new FHA rates. "The FHA move is a drop in the bucket," wired Levittown Builder William Levitt to President Eisenhower, adding politely, "but when your bucket is dry, even a drop tastes good." Low-interest VA and FHA mortgages simply cannot compete in the tight-money market where businessmen are paying interest rates of 5 1/2% to 6% without a murmur. Even in the mortgage market itself, conventional, non-Government insured loans currently bring as much as 6% in many areas, are far more attractive to banks, life insurance companies and savings and loan associations.

In Los Angeles, for example, only the Bank of America still handles FHA loan packages in any quantity. Chicago's Merchants National Bank, which once had as much as 75% of its mortgage portfolio in VA and FHA homes, has cut them out entirely. As for life insurance firms, says President Maynard Harris of Boston's Franklin Savings Bank, "they are not going to invest in FHA when they can buy bonds yielding as much and buy conventional mortgages yielding more." Neither will savings and loan associations, which currently guarantee a 4% interest payment to depositors in some areas, thus must ask 6% to stay in business. Furthermore, the new rate may do as much harm as good. Instead of siphoning money away from businessmen, it may simply dry up completely the market for VA loans, which are still limited to 4 1/2%. The Administration may ask Congress next month for permission to boost VA rates to 5%, but congressional approval is still in doubt.

Actually the Federal Reserve's decision last week to permit commercial banks to pay 3% interest on savings accounts may prove a greater help to housing. By paying higher interest, banks will encourage saving, and thus increase the flow of lendable funds available to builders.

In any event, many builders feel that the Government's entire mortgage program should be overhauled. Among the ideas proposed: 1) a central mortgage bank created by the Government, which would operate much as the Federal Reserve does for commercial banking by making rediscount loans to regulate the fluctuating supply of credit; 2) a boost in the buying power of Fannie Mae, the Government's secondary mortgage-buying agency, from the current $1.1 billion to $4.5 billion; 3) more direct loans from VA to home buyers.

At the very least, builders hope for a flexible interest rate for Government-aided mortgages to make them more competitive with other loan demands. But one big trouble with a flexible-rate system is that Government mortgage rates would tend to rise with the market, might get so high that they would defeat the purpose of low-cost, Government-backed mortgages.

The biggest problem is not so much how to boost the building industry but whether any large-scale assistance is wise in today's inflated economy. Many thoughtful economists question the entire idea of pumping up housing credit at a time when the Federal Reserve is struggling mightily to hold down the boom. When housing was clipping along last spring, there were not enough materials to go around. Shortages developed and prices soared. Now that housing has slipped, prices for housing materials are coming down to earth again. Plywood has dipped some 26% from its March high, insulation materials are down about 3%.

The best hope for the housing industry is a general easing of the overall national-credit picture. Economists note that the rate of savings is climbing again after a year of downturn; there are also indications that business investment may level off temporarily in the third quarter of 1957, thus releasing more funds for mortgages. Moreover, conventional interest rates of 6% are approaching the cutoff point where they are so expensive that people may cut borrowing, which in turn would make VA and FHA loans look better to banks and other lenders. But until then, if tight credit is necessary for the good of the nation, builders may have to suffer like everyone else.

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