The Big Buildup in Housing

As the driving force in an otherwise laggard U.S. business recovery, the housing industry is heading toward a record year. Builders, cheered by the temporary freeze on material costs and wages, are counting on the exuberant demand to continue throughout most of 1972. Though the Commerce Department reported last week that housing starts fell in September for the first time in five months, industry leaders remain buoyant. Says Eli Broad, chairman of Los Angeles' Kaufman & Broad, a big home builder: "I still think we're going to reach a record 2,000,000 starts this year."

September starts fell to an annual rate of 1,958,000 units from 2,235,000 in August, mainly as a result of a slowdown in apartment building. Developers backed off from planned projects because they were uncertain about the implications of a possible continuation of Government rent controls. Another reason for curtailing starts: builders anticipated last week's cut, from 6% to 51%, in the banks' prime interest rate, and are waiting to see if other interest rates also decline. As a result of last month's slowdown, unused permits now exceed starts, a rare circumstance that may well lead to a strong building surge late this year.

Two Years in One. An important effect of the housing rush is that it creates employment. Builders estimate that one new house provides at least two new jobs in the construction industry alone. In addition, each new home owner spends an estimated $400 the first year on furniture, rugs and the like.

Builders have every reason for optimism. Housing starts in this year's first nine months ran 30% ahead of the same period last year. The total value of new resident construction this year is expected to be $39.7 billion v. $30.3 billion in 1970. Still, demand continues to outpace supply. Home vacancies are at an alltime low of .9%. Noting that many people who held off buying during last year's recession are now swelling the ranks of home purchasers, Michael L. Tenzer, senior vice president of the Larwin Group, one of the nation's largest, builders, remarks: "We're having two years' demand in one."

Demand has been fanned by low loan rates most of this year. Conventional mortgage rates now average 7.6%. Moreover, to attract ever more buyers, the Federal Housing Administration has determinedly held to a ceiling of 7% on mortgages that it will insure. To raise their return to the prevailing market rates, lenders have used a complex device of charging added fees on these FHA mortgages. In order to keep the cost of money down and housing starts up, the Government has lately begun, in effect, to pay the lender part of these fees. Increasingly incensed critics charge that this policy is giving the Government too much control in the housing industry, distorting the mortgage market by keeping rates unrealistically low, and adding to inflation.

Rapidly spreading Government housing subsidies are another equally controversial prop for the housing market. For example, Section 235 of the 1968 Housing Act enables "lowincome" families* to have the Government pay all but 1% of their interest on a 30-year housing loan of up to $24,000. In fiscal 1970, the Government's four principal subsidy programs totaled $523 million. This year such subsidies will finance an estimated 30% of all housing starts at a cost of $1.4 billion, and by 1978, the annual figure could rise to $7.5 billion, according to Housing and Urban Development Secretary George Romney. Opponents of subsidization contend that it discriminates against middle-income consumers, ignores the very poor, and breeds fraud and shoddy workmanship.

Bargain-Hunting Grounds. Beyond modest mortgage rates and subsidies, buyers in certain parts of the country get extra advantages. In California, for example, where the climate eliminates the need for deep foundations and basements, a $25,000 house is usually bigger and has more fixtures than a comparable model in the Midwest. Another bargain area is San Antonio, Texas, where land and labor costs are low. The worst area for house hunters is the high-priced, heavily unionized Northeast. Nationally, the average price of a new house including land is now $25,000, compared with $23,400 last year. Most builders see prices continuing to rise by 5% to 10% for each of the next few years, as a result of increases in the costs of land, labor and lumber.

One promising alternative to skyrocketing housing costs is mass-produced, "module" houses built room by room in factories where the workers generally do not belong to highly paid crafts unions. Modular construction has doubled in the past five years, and this year will account for 80,000 new houses. Some large builders like National Homes and Stirling Homex turn out modular homes that are put together like building blocks on the development sites. The nation's biggest builder, ITT Levitt, operates one of the most modern of these plants in Battle Creek, Mich., turning out one complete house every hour. The modules are hauled to the building sites, where cranes hoist them into place on prepared foundations and workers nail and bolt them together in 20 minutes. Cost of an average town house: $22,500.

*Eligibility extends to families earning up to $10,000 a year.

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