Those Better Houses

From Washington's economists last week came news that the slipping U.S. home-building industry may finally have hit bottom and bounced back. Preliminary estimates of housing starts in April show an increase of about 20,000 units more than in March, the first sizable increase in eight months. To give the bounce even more lift last week, the House passed and sent to the Senate an omnibus housing bill that will 1) sharply lower Federal Housing Administration-insured mortgage down payments, and 2) increase the mortgage buying power of the Government's Federal National Mortgage Association by another $1.25 billion to $2.85 billion.

Supply & Demand. While Congress acted to make more mortgage money available, builders and bankers argued whether the housing slowdown is primarily due to tight money or to a more basic slump in housing demand itself. Speaking to bankers in Buffalo last week, President George S. Goodyear of the National Association of Home Builders declared that it was largely due to tight money. Countered Manhattan Life Insurance President Thomas E. Lovejoy Jr.: "The supply and demand for housing has more to do with the drop in starts than high interest rates. Since 1948, we have been building so many houses that the supply has finally caught up with the demand."

This would be hard to prove. While overall housing starts are down some 20% this year, virtually all of the drop has been in the type of low-cost (under $15,000) Government-insured housing, where mortgage money is not available. There is little evidence of any slackening in demand for more expensive houses financed by conventional mortgages, whose 5 1/2% to 6% interest rates (v. 4 1/2% to 5% for Veterans Administration and FHA-insured mortgages) are competitive with other loans. Actually, as tight money has cut off the flow of funds for low-cost houses, it has spurred an upgrading in the entire industry. Many low-cost housebuilders have been forced to switch over to bigger houses in the $20,000 to $30,000 price field. Those who have made the shift report that there is a strong and growing market from families anxious to upgrade their standard of living by trading in their old houses for something better.

Quality v. Quantity. In San Francisco builders who concentrated on $12,000 to $15,000 houses in 1955 are building and selling $18,000 to $30,000 houses this year. A Seattle builder is busy with a 75-house development ($25,000 and up), is selling to families who lived in $15,000 homes a few years ago. One Dallas builder has made 72 sales of $22,000 houses since Easter. In Atlanta, where overall building is down 30%, builders of $25,000 houses are selling all they can build; some report a waiting list of customers.

The shift from quantity to quality is hard on some builders, may force margin al operators out of business. But in the long run it should be a good thing for everyone: buyers, bankers and builders alike. Bankers estimate that there is enough money available to finance 1,000,000 new housing starts annually at interest rates that are competitive with other loans. Builders are learning that the moneyed U.S. public is willing to pay them a higher profit for the right house in the right place. Says one San Francisco real-estate operator: "This is an upgrading market whose members have spent some time in cheaper houses and who know something about buying houses. The industry has educated millions of people to better taste since the war, and it doesn't know it. The builders will just have to adjust to a new situation."

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