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they get so tied up in the details of specific operations that I think they fall down on their policy job. So, from both standpoints, I feel that it is very important.
That was the idea behind the housing reorganization plan and some of the Members of Congress insisted on its being amended to make sure that each of the constituents would handle their own housing responsibilities. I think that view is still the better view and that is why we strongly urge that this program be set up in a constituent with a commissioner appointed by the President, but subject to the over-all supervision of the Administrator.
Mr. DEANE. At the best, the program will get under way slowly, will it not, sir?
Mr. KROOTH. Yes, sir.
Mr. DEANE. Do you have the estimate of the number of units that will be processed if the legislation is promptly enacted, during this year or next year?
Mr. KROOTH. I think we would do well if in the first year they were able to get as many as 40,000 houses under construction. I think that there will be a lot more applications come in and some of them would get started in the second and third year. As you know, the bill is
, limited to $300,000,000 the first year, and that wouldn't permit more than about 40,000 units.
The CHAIRMAN. Are you through?
Mr. MITCHELL. Did I understand you to say that you thought 40,000 units could be gotten under way in the first year?
Mr. KROOTH. Yes.
Mr. MITCHELL. You think that the interest is sufficient and the ability of the cooperatives to plan is great enough so that they could utilize the maximum amount, the maximum fund available?
Mr. K ROOTH. Yes. I think that because the veterans' organizations and labor organizations have been doing a good deal of spade work in organizations of cooperatives.
You may recall that the American Legion was the first to talk about cooperative housing in that homestead bill, and they have put out a number of pamphlets and stirred up a good deal of interest among their members in it.
Mr. MITCHELL. And that interest is pretty well spread about the country in the various local posts, is it?
Mr. KROOTH. It is spotty, naturally, at first, but I would think that there would be a tremendous volume of applications. With a sifting out of the applications, there is a reasonable expectancy of about 40,000 units the first year.
Mr. MITCHELL. Of course, if some of the people are right in saying that our housing volume may drop off to 800,000, which would be about 219,000 less than in 1949, your cooperative housing would fill only a very small part of that gap.
Mr. KROOTH. At the same time, I think that the success of the cooperative might be jeopardized if there was an effort to push it too fast. We should be thinking in terms of true cooperatives which have to be self-organized and the people have to get together and there is a certain period of their jelling into a group and deciding what they want to do. I think it is an important part of the democratic process, so far as those cooperatives are concerned, and it wouldn't
be well to push them, to try to push the program too fast because in doing so, I think it might react adversely on its success.
Mr. NÄITCHELL. My point there is that the 37,500 homes built in the first year, or whatever construction may go to in the second, third, and fourth years, will be a very small percentage of either the million units that we built last year or the million and a half units that we say, that a good many people say, we should build each year or the 800,000 units which some people fear will drop to in 1950.
Mr. KROOTH. I think that is true.
Mr. MITCHELL. So those people who say they should fear this program from the point of view of its taking over the housing field, actually don't have very much to fear.
Mr. KROOTH. I don't think they have much to fear because of the language of the bill in any case. To the extent that other metohds will solve this problem, I think that the administrators in charge of the program would have the duty to get the program operating in the field where the need isn't being met.
Mr. MITCHELL. You mentioned Murray Lincoln's testimony as showing a 20-percent saving through their own cooperative building company. Does that indicate that the normal profit margin of the private constructor is a 20-percent margin!
Mr. KROOTH. I don't think that by and large there is that margin. I think in part it was due to mass purchasing.
You know in the building industry, especially in home building, we have all these many layers of distribution, each of which takes the profit. When you take equipment and other things that go into houses—I remember seeing a chart that was prepared once which indicated that there was possibly as much as 40 to 50 percent of the price, of the final commodity represented by all these intermediate handling costs and intermediate profits. That is a reasonable thing when you are dealing on a rental basis and you have to have those outlets; but if there is a way in a larger program to deal direct with the producer, then those intermediate costs can be eliminated. Mass purchasing of that kind is one way of achieving economy, so I think that some of these economies that come are through a different method of doing things, rather than just eliminating profit.
Mr. MITCHELL. Apparently the private contractor is not taking advantage of industrial avenues open to him when a large-scale project does come along.
Mr. KROOTH. There are problems that some of them face in their own localities in doing that; but when you get a big enough program operating, then you become an important enough customer so that you can deal directly. I do think that there are some builders that have dealt directly that way. Some of the more successful speculative builders who have a good continuing volume have been able to establish direct contacts and to save, and that has put them in a better competitive position than others who built on a smaller volume.
Mr. MITCHELL. Thank you.
Mr. O'HARA. Mr. Krooth, my position on this bill is pretty well known, I think. In my opinion, it is a sensible approach to the solution of a problem that is very distressing to many of my constituents. But, nevertheless and regardless of what I may feel myself as the only Chicago member on this committee, I feel it my duty to present the viewpoints of others from Chicago, to which I may not subscribe.
I received a letter from the vice president of the Heitman Mortgage Co. It is a very large, reputable concern in the city of Chicago, engaging in real-estate loans, investment, and property management and insurance. The letter raises a question, which should receive our serious and respectful attention. I think I know the answer to that question. I would say that Mr. Nicholson, my distinguished and wellliked colleague from Massachusetts, has suggested the answer when he pointed out that if one can afford it, it is better to have his own home that he is buying on his own individual mortgage financing and paying off in a short period of time so he can come into complete ownership or title. But if he can't afford it, then he must go homeless or find something else which does furnish him with a decent roof even though he has to sacrifice some of the advantages of individual ownership. The man who gets the superior product pays a little higher price. Because of your study of this problem and your position of prestige in the field I would like your answer to the question raised by my good Chicago friend.
I read from his letter: In considering these bills, we should like to have you bear in mind the impact which a large-scale building program, financed by 3 percent mortgage money, amortized over 50 years, will have on some 18,000 veterans who had purchased homes under GI financing at 4 percent interest at 15 to 25 years amortization. There has been approximately $10,000,000 of such residential construction. In our opinion, these veterans, where they find themselves paying 20 percent more at least per month for their homes over those that can be acquired under a program such as proposed, will simply drop the homes which they are presently buying and will move into the homes, financed by the new program.
What is your answer to that question?
Mr. KROOTH. I personally don't feel that those veterans would do that. They bought those homes and they get an identification with them as their homes. They are getting very reasonable charges. A 4-percent, 25-year mortgage is an attractive kind of financing. They continue to live in the house and when they want to move out, they can sell it without restrictions on resale prices. If they were to go into a cooperative, they have to give up certain things. For one thing, they have to agree that if they move, they can't just sell the house to anyone they like. They have to sell it to someone who has to be approved as an eligible family. They can't make a profit on it.
In addition to that, there may be other obligations that are attached, such as obligations of self-maintenance and other limitations of that kind. I would think that in the administration of a program of this kind where, at best, a limited amount of housing can be provided, those who are administering it would give a preference to projects for people who need the housing. As to the GI's you are talking about, if they are in a house financed that way, they don't need this housing. I would think that there would be real doubt as to their eligibility to come into the housing. The bill sets up certain preferences on housing undertaken by nonprofit corporation.
The urban redevelopment program is going to displace a good many moderate income families. The first preference for this housing has to go to those displaced families.
Then there are other preferences that are set up on these projects, so that I would think that as a practical matter in administration even if they would want to come into the housing, there is real doubt as to their eligibility to come in. More than that, I think that the people who went out and bought their own homes and have their own, mortgages on them probably won't want to come under this bill. There are a lot of people in America who would want to be financed that way if they could carry their houses. These veterans couldn't have bought their houses under the regulations that are set up unless the Veterans' Administration and the mortgage company decided they had enough income to carry them, so I personally think that they are unduly alarmed by it. I think that there are some people who will oppose and I don't say that about these gentlemen, because I know something about that institution—but there are some people who will oppose any new program to add substantially to the supply of housing, because they get a benefit out of scarcity. They can sell whatever they are building more readily and they can make more profit in a scarcity operation. As businessmen, they are looking at it from the point of view of the best return they can get.
On the other hand, people who are not in that business and the Congress have a responsibility to take a much broader view and think of it in terms of the public interest.
Mr. O'HARA. Thank you very much.
I may now write to the vice president of this mortgage investment company in Chicago, my esteemed friend and a gentleman of high standing in his field, and tell him that you have made an intensive study of this entire field of housing, and are of the opinion that his fears are groundless and that one reason why the purchasers of these GI homes will not want to give them up and go into the cooperative system is that they do have in certain phases, at least, something better. That is, they can come into complete possession of their home in a shorter period of time, that they have the title and they can sell it at a profit any time the opporunity presents itself and they so desire.
Mr. KROOTH. That is right, sir.
Mr. MULTER. Mr. Krooth, are you familiar with the methods that private industry uses in arriving at what the rent should be on a building costing a given sum of money? For instance, in the city of New York, we have more or less a rule of thumb where a man will, say, on a five-story tenement house, take his annual rent and multiply by five and that would give him the approximate cost of the building. In a six-story, elevator apartment house, he would take the annual rental and multiply by six and get the possible value or price he would care to pay for that building?
Mr. KROOTH. I know of such rules of thumb. There are certain ones that apply to older buildings and others that apply to newer buildings?
Mr. MULTER. Do you know what they usually figure on a six-story, elevator apartment house in the metropolitan areas?
Mr. KROOTH. I know on the 608 rental projects what they found they hari to charge was 1 percent a month of the capital cost. So take a $8,100 mortgage, the capital cost is $9,000 and $90 a month is about what they would charge.
Mr. MULTER. In other words, if private industry would get all the advantages of the financing, that a cooperative could get under this new bill, they still could not, would not rent at a sum equivalent to the gross monthly charge that is contemplated by this bill.
Mr. KROOTH. I think there isn't any question about that in my opinion, sir.
Mr. MULTER. In other words, he takes his cost and divides by a certain number to arrive at what he must get by way of rent to give him a return on his money and a fair net profit after payment of
taxes in every unit. It is going to be much more than a cooperative would have to charge if this bill becomes law. Is that not so?
Mr. KROOTH. That is right, sir.
Mr. BUCHANAN. If there are no further questions, the committee stands adjourned until 10 o'clock Monday morning.
(Whereupon at 12:10 p.m., the committee adjourned to reconvene at 10 à. m., Monday, February 6, 1950.)