An Unsubsidized Slump?

IT had long been obvious that the construction industry could not continue in 1973 the blistering pace of last year, when it started a record 2.4 million dwelling units, but economists and builders originally expected only a mild and healthy decline that would halt incipient overbuilding. Now, however, the National Association of Home Builders fears that starts will fall 20%, to around 1.9 million, the lowest since the recession year of 1970. That would be about twice as sharp a drop as first anticipated, and enough to put a painful crimp in builders' profits and hardhat payrolls.

The outlook has been darkened by President Nixon's decision to halt new federal money for subsidy programs that last year financed the construction of 14% of all housing starts. Three key programs are involved:

1 ) The Public Housing program, under which the Government pays to local housing authorities about two-thirds of the rent charged low-income tenants in projects designed for them.

2) Section 235 of the Housing Act of 1968, under which the Federal Housing Administration helps families with average annual incomes of about $7,000 to buy houses. Such families can get FHA-insured mortgage loans of as much as $24,000, and pay as little as 1 % interest on them; the FHA pays the rest.

3) Section 236 of the Housing Act, under which the Government pays most of the interest on mortgage loans to banks and other lenders for apartment houses for poor families. That enables the authorities operating these buildings to charge much lower rents than they would have to if they paid all the interest themselves.

The President ordered that no new projects be approved under any subsidy programs for as long as 18 months, while federal officials re-evaluate the programs' effectiveness. But the order specified that projects already approved by Jan. 5 could go ahead, and it was originally thought that enough work was under way to keep builders busy all year. Indeed, George Romney, who was Secretary of Housing and Urban Development when the freeze began, insisted that at least a quarter of a million subsidized units would be finished this year, about as many as in 1972.

Now, though, it has become obvious that the freeze will not only prevent much new building, but will stop many slum-rebuilding projects in midcourse, halting site-clearance work or even actual construction already in progress. Housing officials in some cities move such projects along on the basis of verbal commitments from federal officials. They sign a formal subsidy contract only when the builders are about to begin putting up steel and pouring concrete, or have already begun.

According to New York City's housing chief Andrew Kerr, the city, acting on Government promises of aid, had begun construction of 6,000 units. But because no written agreement had been signed, no federal funds will now be available, and the future of the housing is uncertain. "The Government left us holding the bag," Kerr asserts. The Chicago Housing Authority had applications pending with the Government for 8,500 units; now all work from planning to demolition has stopped. Plans for public-housing projects also have been interrupted in Milwaukee and Baltimore, and will be resumed only in the unlikely event that local officials can find money to replace federal financing.

The effect of the freeze on some builders will be drastic. In Georgia alone, it is estimated that the suspension of the subsidy programs will cost contractors $383 million in potential business over the next year and a half -- $44 million just inside Atlanta. Newark, N.J., officials put the likely loss in construction payrolls in that city at $86 million. Black-owned mortgage-banking firms that have sprung up to specialize in subsidy work will be hurt even more than the builders. Dempsey Travis, president of Chicago's Sivart Mortgage Corp., the nation's largest black-owned mortgage company, has cut his staff 25% since the freeze began. He says he knows of at least seven other black-managed mortgage concerns around the country that have been pushed into bankruptcy or merger.

The programs have not been formally scrapped, just suspended while officials ponder whether they do enough good to be continued, possibly in changed form. A case for such restudy can certainly be made. Some of the subsidy programs have been scarred by scandal. Before a belated FHA crackdown, fast-buck operators in a few cities bought or built ramshackle dwellings under Section 235, got inflated valuations from FHA appraisers and sold the buildings to unsuspecting buyers at unjustifiably high prices. In addition, the attempt to move public housing out of the ghettos and scatter it through white middle-class neighborhoods has met with increasingly stubborn resistance in communities from Black Jack, Mo., to Forest Hills in New York City.

Builders concede that there have been abuses, but argue that tighter management from Washington could eliminate them without battering the construction industry or stopping needed slum clearance. They fear, however, that it will be a long time before they get any federal subsidy again--and with good reason. HUD officials in Chicago have not yet even received federal guidelines for evaluating the success or failure of the suspended programs. That lack indicates that the federal restudy is likely to use up the full 18 months, and then some.

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