WHY HOUSING COSTS ARE GOING THROUGH THE ROOF
A middle-aged executive recently got that big break--a promotion that transferred him from a branch office in Washington, D.C., to company headquarters in Manhattan. His professional leap forward sharply set back his personal standard of living. For the first time in his life, he cannot buy a house or rent an apartment that fits both his means and his expectations. He moved out of a $400-a-month, eleven-room house in the capital; he is willing to pay $600 for less space in an area that has commendable schools and is not more than one hour's commuting time away from Manhattan--but cannot find anything suitable. He is also willing to buy a house. "When I tell real estate agents that I can only go up to $60,000," he says, "they just laugh."
Another executive was recently shifted from Manhattan to Chicago. When he put his suburban New York home up for sale, one eager would-be buyer offered him $500 to be first to bid on it. He sold the house for a large profit. The disillusionment set in after he moved to Chicago and sought a house in the suburbs. "I had to pay much more for less house," he complains.
A $19,000-a-year associate law professor at Boston College began looking last March for a $30,000 four-bedroom house within walking distance of his job and in a neighborhood with reasonably good schools. He and his wife are still looking--even though they have raised their limit to $40,000. "We're in a bind," says the professor, who now pays $275 a month for a six-room apartment three miles from his work. "We cannot find a decent house, and we cannot afford to stay in an apartment."
Finding a place to live today is a trauma for millions of Americans. During the past two years, the price of houses has risen almost twice as fast as the over all cost of living. The average new house in the U.S. now sells for about $26,000; the same one would have cost $20,200 in 1966. In many suburbs, prices have jumped a good deal faster than that. At the same time, the overwhelming demand for apartments has pushed up rents, and vacancy rates have fallen to the lowest level in twelve years.
"We shape our buildings; thereafter they shape us," observed Winston Churchill. The crisis in housing is beginning to warp American life. Housing is by far the largest expense for most families; when that cost soars, something else in the budget has to give. Most of the 40 million U.S. residents who move each year must now make difficult compromises: they must pay higher prices than they had budgeted, or accept less living space, longer commuting or lower school standards. The problem affects almost everybody--the rich in luxury apartments, the middle class in suburban subdivisions, the poor in festering slums. In order to make bigger down payments, many middle-class families are forced to borrow from relatives. The poor feel the pinch most of all, since they pay a larger share of their incomes for housing than better-off Americans do. Housing costs the average U.S. family 15% of its income, but those below the poverty line spend 35%.
More often than ever before, young singles have to double up or triple up in cramped apartments if they hope to pay the rent. The latest trend in New England is for married couples to get together in pairs and lease a house. Quite a few young marrieds are forced to postpone having children because they cannot afford enough space for larger families. To avoid the problem of searching for a reasonably priced place in which to live, company executives sometimes resist transfers to different cities.
In all, the difficulty of finding reasonably priced housing has contributed to the feeling of frustration in the nation. The Nixon Administration recognizes that the housing problem is fanning popular discontent about inflation. Moreover, rising pressures in the housing market may well aggravate tension in the ghettos. Rent strikes, led by predominantly Negro tenant unions, have occurred recently in St. Louis, Los Angeles and other cities. The strikers demand better living conditions, lower rents--or both. In Milwaukee, 14 couples and their 70 children not long ago took up unauthorized residence in an abandoned Army disciplinary barracks. The squatters have dubbed the place "Fort Homeless."
The Money Famine
Prices continue to rise partly because the supply of houses and apartments is not adequate. The U.S. has long taken pride in being the best-housed nation in the world, but today--despite its riches and technological power--it has slipped behind the pace of almost every big country in Western Europe in construction per capita (see chart following page). Even the U.S.S.R. puts up more housing than the U.S., though the Soviets' prefabricated apartments are so cramped and shoddy that most would be unrentable to middle-class Americans. George Romney, the Secretary of Housing and Urban Development, calculates that new housing in the past four years has fallen more than 1,000,000 dwellings shy of the amount needed to keep up with population growth and losses from fires, storms and bulldozers.
This year, starts of houses and apartments dropped from an annual rate of 1,900,000 in January to 1,300,000 in August. Despite a September upturn, which most economists dismiss as a freak performance by volatile statistics, the rate of housing starts may dip below 1,000,000 by year's end. "We are facing the worst housing shortage that we have had since the end of World War II," says Walter Hoadley, executive vice president of California's Bank of America. "The crisis is going to get worse."
Shortages and soaring prices are the outcome of many forces, but the problem right now is that, as Secretary Romney notes, "housing is the first casualty of the anti-inflationary fight." By making credit scarce and costly, the Government has choked off many of the sources of mortgage funds. More than any other U.S. industry, housing depends on private long-term credit. When interest rates rise rapidly, as they have this year, the financial institutions that normally provide most of the credit run short of money. Savings and loan associations and mutual savings banks have been hard hit by withdrawals; depositors have simply shifted their money out of savings accounts paying 5% and put it into Government bonds that offer an enticing 81%.
Even if the Government would permit it, most S. & L.s and mutual savings banks could not afford to raise the rates they pay to depositors. The bulk of their assets is invested in 20-year to 30-year mortgage loans at the much lower interest rates of bygone years. Insurance companies, normally the third biggest source of mortgage money, have increasingly withdrawn from the housing field. Wary of inflation and eager to improve their profits, they are funneling most of their property loans into projects in which they become part owners.
Builders complain that housing is being squeezed by the Government for the fifth time in 15 years. Paul McCracken, chairman of the President's Council of Economic Advisers, admits that they have a point. Because housing depends so greatly on credit, he concedes, the industry lies "at the end of the economic whipcracker." When the Government snapped that whip by severely tightening money in 1966, housing absorbed 70% of the resulting cutback in lending. Builders had not yet made up for their 1966 production losses before they were hit again in 1969.
The Nixon Administration has tried to cushion housing from the impact of tight money. The Federal Home Loan Bank Board has lent nearly $4 billion to savings and loan associations. The Federal National Mortgage Association, which is privately owned but Government-controlled, has become the principal source of funds for Federal Housing Administration and Veterans Administration loans. But money is so scarce that average private mortgage rates have risen from 6.4% two years ago to 8.1% now. Many borrowers must pay 81% or even 9%. Though the rates may fall a bit next year, they will probably stay high by historical standards. Any would-be buyer who holds off in hopes of a significant drop in overall housing costs is likely to be disappointed.
Excluding the Negroes
Beyond the immediate problems caused by inflation and tight money, there are other, longer-term reasons for the trouble in housing. The home-building industry is like a sprawling Gulliver, pinned down by gremlins. The industry is snarled in a tangle of little, mostly local restraints that make houses and apartments cost more than they should. A modern Mr. Blandings who tries to build or buy his dream house often finds the experience turning into a bad trip. Among the difficulties that he faces:
BUILDING CODES. They often perpetuate make-work practices, waste, and the use of yesterday's materials and methods. U.S. communities operate under at least 8,300 different building codes; the provisions often conflict, making it impossible to standardize such items as the type of wiring, piping and plumbing. This not only inhibits architects and engineers from developing cost-cutting innovations (for lack of a big enough market), but often prevents builders from reaping the economies of standardized plans and production. Few other big industrial countries permit such a senseless riot of diversity. Code uniformity has helped Western Europe to pass the U.S. in making use of new technology, including precast concrete panels and high-precision assembly systems. in the construction of tower apartments.
ZONING AND PLANNING. These rules are twisted by countless suburbs to keep housing prices high. The effect is to exclude unwanted families, notably Negroes. Localities often require one-acre or even two-acre lots, or needlessly wide and costly roads. Many have resisted developers' plans to cluster houses in compact groups, which would lead to a considerable saving on sewers, roads and other facilities and provide surrounding open space big enough to serve as a park.
FEATHERBEDDING. Make-work practices imposed by building unions can grossly inflate the cost of a house or apartment. In 1967 the U.S. Supreme Court upheld the right of Philadelphia carpenters to refuse to hang doors that had been precut and equipped with knobs and hinges in a factory. Construction unions regularly insist on hefty wage increases, arguing that building is a seasonal business. In contracts signed so far in 1969, construction unions have won average wage gains of 15% a year for two or three years. Construction wages are the fastest rising part of the U.S. economy's labor costs, and they are the main reason why total construction costs during the past twelve months rose by 71%, the sharpest gain in 24 years.
CLOSING COSTS. Archaic title-search and title-transfer requirements needlessly inflate closing costs and provide lawyers with fees that many home buyers consider excessive. By some estimates, home buyers pay $1 billion a year in closing costs.
LAND COSTS AND TAXES. Since 1950, the price of land for homes has climbed by 16% a year. Land accounts for one-fifth of the total cost of a new house, compared with one-tenth two decades ago. Inflation of land prices is greatly fostered by the U.S. system of real estate taxation. Localities generally tax vacant land lightly; that makes it easy for speculators to hold land off the market in hope of selling for more later. Heavy taxation on building inhibits both new construction and improvements on existing structures. Today, most cities collect two or three times as much revenue from taxes on improvements as from taxes on land. The arrangement subsidizes blight, decay, slum formation, suburban sprawl, and even the premature carving up of fringe acreage into subdivisions.
All these housing problems are compounded for the people who live in the center of cities, particularly in the slums. The Government, in its well-intentioned effort to rid cities of slums and help the poor, has adopted a complex array of subsidy plans, notably in public housing and urban renewal, but both programs have failed to reach their laudable objectives. Some 757,000 U.S. families now live in public housing, which often costs much more than private housing of the same size because of Government red tape, excessive specifications and exorbitant site costs. For every unit of public housing built, state and local governments have torn down two other dwellings. Columbia Professor Charles Abrams, the venerable pundit of public housing, argues that until many more units are built even slums must be considered a national asset. Buying up slum sites costs as much as $485,000 an acre, and the success of one project often makes the next one more expensive by driving up realty values.
The National Commission on Urban Problems, headed by former Senator Paul Douglas, has castigated urban renewal as "a failure quite irrelevant to the housing needs of the poor." Some projects have turned into slums as squalid as the shanties that they replaced. St. Louis' Pruitt-Igoe project, hailed as an architectural gem when it was built in 1954 for $117 million, has become a center of vandalism, muggings, dope, sexual perversion, rape and homicide. Stairwells and hallways reek of old garbage and excrement. Recently, elevator repairmen refused to work in the buildings because of repeated sniping incidents. Despite low rents, the project today is 43% vacant. Says the Rev. Buck Jones: "People are moving out because they are scared to death."
Because of soaring operating costs, 55 of the 85 largest public housing authorities in the U.S. face a financial crisis. Instead of raising rents, the authorities have been neglecting maintenance; now Congress is considering a bill to increase federal subsidies. Over the past three decades, the Federal Government has put more than $7 billion into housing subsidies and urban renewal. Still, one-sixth of the U.S. population lives in overcrowded or substandard housing.
Romney's Promising Plan
What can be done to bring down the costs and expand the supply of living space? Housing Secretary Romney figures that one solution would be to enlist industrial expertise and capital to improve the technology of subsidized housing for low-income and moderate-income families. Though his program goes by the corny name of "Operation Breakthrough," it is nonetheless quite promising. Under it, 650 companies have submitted proposals for mass-producing houses or component parts. Many of the entries come from big firms that have hitherto been little involved in housing, including Republic Steel, General Electric and Union Carbide. Next month ten or 20 of the Breakthrough proposals will be selected by the Housing and Urban Development Department to share $15 million in research grants. Prototypes will be built on eight sites to be chosen from among hundreds that have been eagerly offered by 170 state and local governments.
Romney's program is no panacea, but it is likely to attack some of the real obstacles to better and cheaper shelter.
The new technology may help builders to avert an almost certain shortage of skilled labor in the years ahead. More important, the localities offering sites have agreed to suspend their building codes and zoning laws for the Breakthrough models. Nothing quite like that has happened before, and Romney obviously hopes to use the program for a persistent attack on local barriers to housing. Later on, he expects localities to combine their building plans into giant orders so that industry can justify capital outlays for factory-produced housing. To induce municipal officials to get together, he can offer them favorable treatments on their bids for other HUD grants, notably for renewal, planning, sewers and public housing.
Move to Mass Production
The housing crisis has put pressure on the industry to modernize its methods. For decades, the ancient heritage of local controls was reflected in the industry's organization, methods and vision. The typical builder was an ex-carpenter who kept his office in his hat, drew plans on an old paper bag, clung to stick-by-stick construction techniques, operated with shoestring financing. Now dozens of major U.S. manufacturers and other large enterprises are moving into housing and land development with bulging bankrolls, big teams of experts and grand plans.
In partnership with two local builders, Westinghouse Electric is buying 8,000 acres south of San Francisco for a complete oceanside community. Beer-making Anheuser Busch recently bought 4,000 acres of Virginia countryside near Williamsburg and will develop an industrial town. Boise Cascade Corp. (1968 sales, $1 billion) has spread into almost every corner of the business: factory-built houses and mobile homes, on-site homes, apartments, leisure-home projects and urban renewal.
The high cost of conventional housing has spurred the development of a new kind of dwelling: the inexpensive, mass-produced "modular homes." This year scores of companies are bringing them out. Such instant housing consists of room-sized sections--generally 12 ft. wide and up to 60 ft. long--that are built, wired, piped and often decorated on cost-cutting factory assembly lines, then trucked up to 400 miles to a site, swung onto foundations by a crane, and fastened together. Builders claim that the modules are 10% to 25% less expensive than conventional houses.
The trend to modules was started by Canada's Alcan Design Homes, which brought out a line of completely furnished aluminum-clad houses priced from $8,500 to $12,500, not including the lot and foundation. Indiana-based National Homes, one of the biggest manufacturers of prefabricated houses, opened its first modular plant last January. In a major industrial counterattack, National has also moved into mobile-home construction.
Mobile homes have become the nation's main source of low-priced shelter. The mobiles come with wheels and a steel chassis, but once they are placed on foundations, few are moved again. Because they are factory built and beyond the reach of cost-boosting local regulations, mobile homes are cheap (average price: $6,000), if generally small (about 700 sq. ft.) and boxy. This year some 220 companies will produce 400,000 mobile homes, double the output of the industry only two years ago.
The Nixon Administration's main plan for helping housing is to stop inflation. Unless that is done, construction, and especially land costs will continue to rise, and mortgage money will become still scarcer and costlier. The result could be a housing famine that no politically conceivable amount of public subsidy could alleviate.
The Importance of Surplus
Whenever the end of inflation permits interest rates to decline, housing's prospects will improve. The key to the situation is consumer savings. If bond interest rates come down enough so that the public will deposit more money into banks and savings and loan associations, mortgage money will flow again. Even after prices have stabilized, the Federal Government would have to run substantial budget surpluses for several years to assure a plentiful supply of housing money. If the budget were in surplus, of course, the Government would need to borrow less in the private money market, thus making more funds available for home finance.
Budget surpluses will be essential if the U.S. is to reach the ambitious target set by the 1968 Housing Act. That goal is to wipe out slums by building and rehabilitating 26 million houses and apartments by 1978. Many builders and bankers think that the goal is unrealistic. To achieve it, the nation would have to reallocate its financial resources, raising housing's share of the gross national product from 31% to 41% . The shift may sound small, but it would amount to a multibillion-dollar increase, and leave that much less for corporations and other borrowers.
Breaking the Roadblocks
No simple formula exists for raising the supply and holding down the cost of conventional housing on a long-term basis. "There is such an interwoven web of resistances, so many barriers, that we will not break through unless we have a really big national push," says John Gardner, chairman of the Urban Coalition.
As part of that push, several things could be done:
>Construction unions should stop perpetuating shortages of skilled workmen, as they do through their current practices of excluding Negroes and limiting apprenticeship training. The unions' appetite for hefty wage increases would presumably diminish if industry would provide year-round employment, as it might in factories that mass-produce houses and components.
> The Federal Government should adopt national building standards and insist that they be applied at least to all federally aided construction. The Government might also try providing more incentives for private enterprise to rehabilitate slum housing. Faster tax writeoffs and other income tax breaks are obvious possibilities.
-- Local governments should reform the lax administration of property assessment and revise their real estate tax laws in order to tax buildings lightly if at all and land heavily--instead of vice versa. That would significantly alter the whole economics of property ownership. Speculators would have to develop their land or sell out; it would be too costly merely to hold on to property and make no improvements, while waiting for prices to rise. Landlords would no longer have reason to neglect the upkeep of old apartments, except where rent controls persist. A recent study in Milwaukee shows that such changes should force cities to build up instead of out, end the need for urban renewal subsidies, and very likely depress the price of acreage on the suburban fringes.
> Local authorities should accept some new forms of government, or at least governmental cooperation, in order to put an end to the zoning and planning warfare by which suburbs fight to remain enclaves for the well-to-do. As Alcoa Chairman Fritz Close said last week in San Francisco: "Enabling the poor to find housing in the suburbs, where the jobs are, is probably the biggest single step this country could take toward solving its social problems."
Few if any of the fundamental reforms are likely to occur unless the public really demands them. The status quo is defended by many powerful forces --some unions, bureaucrats, local-government officials, even by elements of the fragmented housing industry itself. Until now, the existing scheme of things has been supported by public ignorance and apathy. Yet millions of people are being victimized--the mobile executive who cannot afford a comfortable house, the city resident in the greatly overpriced apartment, the slum dweller who has a tough time finding any housing that qualifies as decent. The lives of these people are indeed being shaped by the buildings in which they live, and they are impatient for change.
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