Construction Shambles

An often-heard comment on inflation is that prices have risen so high that most people could not afford to buy the houses they now own. An ominous variant surfaced at a despair-ridden conference on inflation and the construction industry that was held in Atlanta last week--one of the eleven "minisummits" leading up to the Ford Administration's economic summit Sept. 27 and 28. Cracked Lewis Cenker, president of the National Association of Home Builders: "The commercial banking system can not afford all the real estate it is about to own."

The quip drew a grimly appreciative laugh from some 80 builders, mortgage lenders, federal officials and Congressmen, who spent much of the all-day session listening to figures on the shambles that inflation and tight money have made of the construction industry. Among them: 901 builders went bankrupt in the first half of 1974, v. 706 during the same period a year ago. Construction-industry unemployment rose from 7.9% in February to 11.1% in August. Last week alone, electric utilities canceled plans to build nearly $2.5 billion worth of power plants, primarily because they cannot borrow at an acceptable cost.

Ideas for Help. Many conferees expected the annual rate of housing starts to fall below 1 million by year's end, from 1.3 million now and 2 million in 1973. One reason: thrift institutions (savings and loan associations and savings banks), which do the bulk of mortgage lending, lost $2.5 billion in deposits from April through August, the largest for any comparable period. Despite Cenker's jest, commercial banks are not yet hurting, but they could be if they have to start foreclosing some of the $10 billion in loans that they have made to real estate investment trusts, which finance such projects as apartment houses and shopping centers. "The effective cost of [short-term construction] funds is now 15.5% to 16%," said B.F. Saul II, president of the National Association of Real Estate Investment Trusts. "There is not a real estate project in the country that can support that."

To avert collapse, the builders and lenders almost unanimously called on the Federal Reserve Board to relax its tight-money policy, and many advocated a balanced federal budget to give the board more room to maneuver. But they also floated a variety of ideas for special help for home finance, several of which would scarcely help to hold down federal spending. Some of the proposals:

> A housing trust fund that could borrow up to $10 billion a year from the Treasury to finance low-interest mortgages. Republican Senator Edward Brooke of Massachusetts and Democratic Senator Alan Cranston of California are sponsoring a bill to create the fund.

> A return to the policy of allowing thrift institutions to pay more interest than commercial banks on term deposits. Since the policy was dropped in July 1973, S and L deposits have shrunk 43%, and savings-bank deposits 66%.

> Exemption from income tax of the first $1,000 of interest paid to any individual on savings deposits, a step that would cost the Treasury an estimated $1.8 billion a year.

> A 7% "housing tax credit" to be granted to developers, replacing the 7% investment tax credit now allowed to industry for capital expenditures. Developers currently can take little advantage of the credit because they buy little capital equipment; the plan would allow the credit on money they invest in new housing.

> A credit-allocation plan to make sure that more of the available loan money goes into construction. Alan Greenspan, chairman of the Council of Economic Advisers, shot down that idea. "Anyone who would like to allocate credit," he said, "will find very quickly enough people on his doorstep with very good claims to the money to take up 150% of what is available."

The Administration did not respond immediately to the other ideas. Housing and Urban Development Secretary James T. Lynn, who chaired the meet ing, said that he had come "to listen, not to talk." But he left the conferees with one final bleak thought: even if programs of special help to construction are enacted immediately, they "would have no drastic effect for four or five months."

The atmosphere was a bit more cheery at a Washington meeting of 29 labor leaders presided over by President Ford. The unionists applauded a chart presentation by Greenspan showing that wages have lagged behind prices and thus are not the primary cause of inflation. But the labor leaders voiced suspicion that Ford may yet resort to wage-price controls, despite his public disclaimers, and they sharply criticized the Federal Reserve's money policy. The bitterest attack was delivered in a separate forum by AFL-CIO President George Meany. In a speech in Kansas City, Mo., he declared that any Soviet economist who had as bad a record as Federal Reserve Chairman Arthur Burns would be "promoted" to Siberia.

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