has more than doubled. The percentage of homeowners has increased from 41 percent of all nonfarm families in 1940 to about 57 percent today. During that time we have added more than 15 million families to the ranks of the homeowners in this country. In the postwar decade, this industry has produced better than 10 million new, singlefamily homes. During this period also, the cost of shelter and the percentage of consumer income devoted to shelter have risen less sharply than have personal incomes. See exhibit B attached. Yesterday the insurance group testified before you and I have this statement I would like to read: In this connection, I would appreciate it if we could have the privilege of submitting a supplemental statement for the record in answer to testimony and figures submitted to this committee yesterday by the Life Insurance Association. We have not had time since the testimony to compile what we believe are the true statistics and correct conclusions from them. However, we want to note on the record that the testimony given by Mr. Shanks with respect to building costs is in our opinion mistaken in its interpretation of the data which he cites. Senator SPARKMAN. We will be very glad to have you submit that statement. Mr. HAVERSTICK. Thank you. (The supplemental statement referred to follows:) Hon. JOHN J. SPARKMAN, NATIONAL ASSOCIATION OF HOME BUILDERS, Chairman, Subcommittee on Housing, Senate Banking and Currency Committee, Senate Office Building, Washington, D. C. MY DEAR SENATOR SPARKMAN: During my testimony before your committee yesterday I requested and was granted permission to submit for the record comments on the testimony presented in behalf of the American Life Convention and the Life Insurance Association of America the previous day. We disagree with the selection of much of the statistical data contained in that statement since it tells only a small part of the housing story; we also disagree with the conclusions drawn from those limited statistics. Before presenting what we feel are the appropriate data and correct conclusions, it must be said generally that the basic philosophy underlying the views presented by the Life Insurance Association is simply that an economy of scarcity is bestof scarcity in flow of mortgage funds (and consequent higher yields to investors): of scarcity in home building volume; and scant progress toward meeting the legitimate housing needs and aspirations of the American people. It is precisely because the Congress over 20 years ago abandoned this philosophy that we have experienced the tremendous improvement in American housing of the last two decades. The real issues raised in this testimony were settled in 1934 with the passage of legislation which made the FHA a basic part of the American mortgage system. On repeated occasions since, the Congress has reiterated its belief that both social and economic soundness lie in the direction of a low downpayment, low monthly payment, low interest rate amortized mortgage system. Without it, home building could not have attained the 10 million units produced since World War II. Since 1940, because the Congress has fostered a home mortgage system geared to the needs of the family of modest means, the number of homeowning families has far more than doubled—in 1940, 3 out of every 5 families rented; today, the ratio is just about reversed with 3 out of 5 families owning their homes. This has enabled insurance companies and other investors profitably to invest billions of dollars. Where would those funds have gone had home building been possible only at greatly reduced levels and restrictive terms? We recognize that it is the obligation of the managers of insurance companies and other pools of capital to seek the highest possible return on their investment portfolio consistent with security and long-range stability. But we believe that the best interest of investors is not served by restricting the markets in which they make so large a share of their investments. In our opinion, the best interests of the American people as a whole and the enlightened self-interest of investor capital are best served by development of sound housing markets in which homes are available at terms that make economic sense for the average American. However, the gist of the argument presented in the statement on behalf of the Life Insurance Association is that credit for home purchase should be available only at top prices. This would inevitably result in a sharp cutback in housing production; it would tend strongly to influence the home building industry toward housing in the upper price ranges; it would, in short, assure return to conditions prevailing decades ago when mortgage money was available only on terms and conditions that made it difficult, if not impossible, for the great majority of Americans ever to own their own homes. I. USE OF COMMERCIAL BANK CREDIT The Life Insurance Association statement brands as unsound what it alleges to be the heavy reliance of the capital funds market on the commercial banking system. However, the figures adduced under this point prove exactly the contrary to be happening in the past year, despite an increasing volume of residential construction. In 1955, less reliance was placed in the commercial banking system (with the exception of the year 1953) than at any time since 1950. This is borne out by the Life Insurance Association's own charts 1 and 2. Percentagewise, in 1950 $1 out of every $3 used in the capital market came from the commercial banking system whereas only $1 in every $16 was so derived in 1955. In other words, in 1955, the year of greatest net demand for capital funds by the home building industry ($13.6 billion, an increase of 50 percent over 1950), there was a considerably reduced reliance upon the commercial banking system. It is interesting to note, however, that a fairly sizable amount of demand upon the commercial banking system during 1955 came from the insurance companies' own efforts to warehouse mortgage loans. Some $300 million of real estate credit had been extended to insurance companies by commercial banks as of November 15, 1955 (according to the Federal Reserve Board) with outstanding firm commitments of $147 million. They, in effect, invested more in mortgages during 1955 than their own funds could support-the very thing against which the statement argues. II. FEDERAL NATIONAL MORTGAGE ASSOCIATION The statement poses the question "Has the residential mortgage market been obtaining a fair share of capital funds accumulated in our national economy?" The question really should be "Do financial mechanisms exist through which capital may move into and out of the mortgage market as readily as in and out of other markets for credit?" Notwithstanding housing legislation (FHA and VA) which makes possible the flow of mortgage funds from the sources of capital into money-short areas, it is still far more difficult for funds to move into and out of mortgages than, for example, the bond market or the stock market. This is primarily due to the nature of the mortgage instrument and its consequent comparatively limited market. The statement comments that the purpose of FNMA legislation is to expand through Government action the flow of funds into residential mortgages. As we have pointed out to this committee, the FNMA amendments we offered are aimed at stabilizing (not constantly expanding) the mortgage market. In fact, it was lenders' excessive extension of credit in late 1954 which was largely responsible for the present tight mortgage market. At that time, insurance companies sold $1 billion of Government bonds in order to expand their mortgage investments. An FNMA whose function was to stabilize the mortgage market could have helped to limit credit in 1954 and to loosen it in 1955 and 1956. III. FLEXIBLE INTEREST RATES In the past, this phrase has generally been synonymous with an argument for a higher return to lenders. In the nature of mortgage lending, interest rates rise much more readily in periods of tight money than they decline in periods of easy credit. Flexible interest rates on FHA and VA loans mean higher interest rates. It would be interesting to discover what return insurance companies are making on mortgages acquired under today's high discount conditions. It would be interesting also to ask what interest rate insurance companies believe would currently prevail with VA and FHA rates "flexible." The information (chart 9) presented with the life insurance statement shows simply the net return to life-insurance companies based on total mortgage portfolio, including loans bearing a lesser yield than those currently being acquired by the life-insurance companies (3.86 on nonfarm mortgage loans-an increase of 50 points over the 1950 net). IV. AVAILABILITY OF MORTGAGE FUNDS It is interesting to inquire into the premise upon which the Life Insurance Association expresses its opinion (p. 7) that "of all the investment markets, the residential mortgage market will be the one least likely to experience a scarcity of funds over the next 5 years." We assume that this is based upon a yearly home building volume of 1.1 million a year, as estimated by various insurance company sources. (See, for example, Dr. Gordon McKinley, economist for the Prudential Insurance Co., in March 1956 Mortgage Banker.) This implies a decline in home building of 200,000 units from the 1955 level, involving a drop of almost $3 billion in annual home building dollar volume and a loss of more than 200,000 man-years of work for construction labor. We do not doubt that mortgage money will be more readily available if production is thus restricted. We do doubt seriously whether such a drop can be absorbed safely without serious damage to the entire economy. We are seeking-and we believe lenders should seek—a mortgage system which can be stabilized at terms to the consumer which will permit mass production of housing. "Mass production" is only possible through "mass financing." Otherwise home building must revert to the obsolete "handicraft" stage which characterized it until comparatively recently and homes must, consequently, sell at higher prices. V. BUILDING COSTS The implication and apparent intent of the Life Insurance Association's statement is that the terms under which mortgage credit has been available are predominantly responsible for the increase in construction costs in recent years. That this is not the fact is strikingly shown by a comparison between the trend of construction costs and the annual rate of housing starts between December 1954 and December 1955. Between those dates, the annual rate of housing starts declined steadily from a rate of 1.4 million plus a year to under 1.2 million. Yet the Boeckh index of construction costs rose 4 percent during that time and has risen another 1 percent in the first 2 months of 1956. The contention that the cost of home building has risen unduly is largely based on information (their chart 5) which shows the increase in "average estimated per unit construction cost of privately owned homes." This does not accurately reflect changes in building costs. It is not an apt comparison because 1. The chart merely shows the change in the dollar amounts of building permits. It does not (as incidentally recognized in the life insurance statement) provide any measure of comparison between the small (mostly twobedroom) homes built quickly to meet the postwar emergency and the larger more elaborately equipped homes produced in 1955. 2. Home building accounts for about one-third of all new construction. Even if home building had been substantially limited, as suggested by the Life Insurance Association's statement, there still would have been (and will be) extraordinary demand for construction materials and labor from those other sectors of the construction industry which account for about two-thirds of total construction. Such demand, and not home building alone as suggested in the life insurance statement, was responsible for the increase in the cost of building materials and in construction labor which, between December 1946 and December 1955, rose, respectively, 56.1 percent and 74 percent. This compares with an increase during the same period of time of 52.4 percent for residential construction cost and 60.4 percent for the cost of office buildings and other construction. 3. The base year selected (1946) was a year of rapid price change reflecting the removal of price controls on homes later in the year. The increase for all of 1946 to all of 1955 is presented as 61 percent; had the comparison been made between December 1946 and December 1955, the increase would have been 52 percent. In short, the growth situation of our entire economy-and not easy credit for home building-has resulted in postwar increases of cost and consequently of prices in all lines. This could not have been prevented by forcing the man of modest means to remain poorly housed unless at the same time the huge demand from other sectors of the rapidly expanding postwar economy had been curtailed. Respectfully, JOSEPH B. HAVERSTICK, President. Mr. HAVERSTICK. Moreover, approximately one-third of the housing production was in price classes within the reach of families of modest income. In 1955, for example, an estimated total of nearly 450,000 homes were produced to sell for less than $12,000. These included 93,000 homes selling for less than $7,000; over 140,000 selling between $7,000 and $10,000; and over 208,000 between $10,000 and $12,000. (Based on BLS Survey of New Housing Starts First Quarter 1955 November 15, 1955.) In addition, during this period of high housing production, American incomes have risen phenomenally. It is estimated that nearly 1,300,000 families each year now progress from an annual income below $5,000 to above that figure. We have attached to this statement an exhibit showing the upward trend of incomes for the last 20 years, together with a quotation from the Commerce Department's March 1955 Survey of Current Business which may be of interest to the committee. See exhibit C. The tremendous change in family incomes and purchasing power is well illustrated by the following quotation from the monthly business letter of the First National City Bank of New York for March 1956: In other words, the group with purchasing power equivalent to $4,000 or more at today's prices has increased 31⁄2 times as fast as the general average. More than half of all consumer units are now in the $4,000 to $10,0000 bracket. Many of these families have moved into income brackets where for the first time they are able to buy a new car, to afford a home of their own, to upgrade their durable-good purchases, and to command the credit needed to satisfy these desires. In view of these amazing changes in economic conditions and in the light of the home building industry's proven record, we fail to see any justification for continuance of the public housing program as it is now constituted. We are convinced that the present public housing program is not and cannot properly do the job of providing housing for the lowest income groups as intended by its originators. We feel that if the committee made careful investigation, it would be surprised to learn of the high current cost of public housing as contrasted with that of private building, the vacancies in existing projects and the increasing demand for higher and higher income limits for admission and continued occupancy of public housing. This is the time, we believe, when the Congress should pause to consider the country's true situation with respect to income and available housing. There should be a thorough restudy of the best means for providing housing to those families unable for one reason or another to obtain adequate and decent housing. We certainly would offer our services and resources to cooperate with the Congress or the administration and with other interested groups in such a program. We feel that housing for the dwindling residue of low-income families whose economic problems are proper cause for concern is part of 75333-5645 the whole problem of helping them to become self-sufficient. Federal assistance for this purpose should be devoted to aiding States and communities in the rehabilitation, education, and training of the breadwinners of those families to the end that as many as possible can become economically self-sufficient. Insofar as housing legislation is concerned, we feel that the Federal Government should confine its efforts to such devices as mortgage insurance, a soundly functioning FNMA, and similar mechanisms which will make it possible for private enterprise to continue to expand its horizons, and to urban renewal and redevelopment assistance designed to induce local communities to enforce decent housing standards within their boundaries. Under the principles which I have just described, it is obvious that we oppose those provisions of S. 3158 which would establish a Government corporation to make direct loans that could run as high as $2 billion a year. If such activity were to be undertaken by Government, the resultant distortion in private mortgage lending would, on balance, impede rather than assist in the production of new housing. Eventually, we feel, this would mean that all residential lending and consequently all home building would be controlled absolutely by Government. Our proposal for a revised and revitalized FNMA, operating within the private enterprise system, is in our opinion the proper method to provide an adequate flow of credit at the lowest feasible cost. We should like to add our support to the proposals in S. 3186 for the creation of a Commission on National Housing Policy. In addition to the purposes set forth in that bill, the restudy of more effective means of housing our lowest income families might well be included as mentioned above in our testimony. Certainly we feel that such a Commission would be of great aid in studying the ways and means of encouraging the flow of investment capital to mortgage financing. We are encouraged by this recognition of the problem. Thank you very much. We appreciate the opportunity to testify. Senator SPARKMAN. Thank you, Mr. Haverstick, and the gentlemen with you. Your statement will be most helpful. (The appendixes to Mr. Haverstick's statement follows:) EXHIBIT A AMENDMENT OF SECTION 221 (A) OF TITLE II, NATIONAL HOUSING ACT Amend section 221 (a) of title II, National Housing Act, to read as follows: "SEC. 221. (a) This section is designed to supplement systems of mortgage insurance under other provisions of the National Housing Act in order to assist in housing families of low income who, without the benefit of this section, would be unable to buy or rent decent, safe, and sanitary dwellings. Mortgage insurance under this section shall be available only in those localities or communities in which the Administrator of the Housing and Home Finance Agency has determined that a need exists for such low-income family housing: Provided, That the Commissioner shall prescribe such procedures as in his judgment are necessary to secure to any families living in an urban renewal area or being displaced by governmental action-a preference or priority of opportunity to purchase or rent such dwelling units: Provided further, That the total number of dwelling units in properties covered by mortgage insurance under this section in any such community shall not exceed the aggregate number of such dwelling units which the Housing and Home Finance Administrator, from time to time, certifies to the Commissioner to be needed to serve the needs of low-income families who are not otherwise able and eligible to buy or rent decent, safe, and sanitary dwelling |