Suggested amendment No. 5

Amend section 304 (a) (p. 52) (i) by striking the words "of such quality, type, and class as to meet generally the purchase standards imposed by private institutional mortgage investors" and substituting in lieu thereof the words "inherently sound and of a type and general class which will assist in constituting a prudent base for the issuance of debentures to private investors;" and (ii) commencing at line 14, strike the words "at or below the market price for the particular class involved, as determined by the Association" and substitute in lieu thereof the following: "at a reasonable price level, as determined by the Association, taking into consideration the market price for the particular class of mortgage involved, the reasonably foreseeable market for mortgages of the same general class, and current yields on, and reasonably foreseeable price trends of, long-term Government bonds and other forms of long-term investment."

Suggested amendment No. 6

Delete all of section 303 (g) (p. 51, line 16, to and including p. 52, line 3). Suggested amendment No. 7

Amend section 304 (d) by inserting at page 56, line 1, following the word "Association," the words "(including mortgages purchased out of the portfolio of the Association which is subject to management and liquidation under section 306 hereof)."

Suggested amendment No. 8

Amend section 304 (b) commencing at page 53, line 12, by striking all following the word "but" through and including the word "and" at line 16.

Suggested amendment No. 9

[From Fortune, February 1954]

THE INSATIABLE MARKET FOR HOUSING

(By Gilbert Burck and Sanford S. Parker)

THE CHANGING AMERICAN MARKET: VII

The dynamic changes that have remade the Nation since the war are also transforming the housing industry, which is making more progress and showing more promise than it has in a century. Housing today is the only 1 of the Nation's four largest markets that has strong potentialities for growing faster than the economy as a whole.

Probably no American industry has had more heads shaken over it than the housing industry. Only 7 years ago is was being described (by Fortune, among others) as the industry that capitalism forgot. For the past 4 or 5 years many economists have been predicting an early slump in housing. Only a few weeks ago Colin Clark, the noted British worrier about United States business trends, was lamenting that housing provided no hope for America's faltering 1954 economy because housing costs are too high.

The fact is that the housing market-barring war or depression-now holds promise of providing the great United States growth situation of the 1950's and the 1960's. Housing is the only 1 of the Nation's 4 largest markets (the others are food, clothing, and autos) that today has strong potentialities for growing faster than the economy as a whole. It is now close to a $20-billion market, already larger than the auto market, and promises to become larger still. And-because new houses mean new furniture, new appliances, new stores, new highways, new schools-housebuilding is bound to play a portentious role in keeping the whole American economy prosperous.

The housing market also provides an edifying illustration of how a free, vigorous economy advances. The progress does not occur in a dramatic, revolutionary upheaval, or in a neat, ordered sequence. It comes in fits and starts, sometimes with incongruous manifestations, in a series of changes that usually seem insignificant by themselves. But the propitious time arrives when these changes combine to produce a palpably important change, and it is this that enthusiastic writers later describe as a revolution. Well, the revolution in housing is going on right now, and these are the changes that have produced it: People need a lot of housing. Households are increasing at an unexpectedly high rate. The average age of the country's housing stock is 25 percent higher than it was in 1930. It would take perhaps 10 million new units to restore the 1930 age distribution.

People can afford a lot of housing. Cash income per family unit (1953 dollars) has risen 40 percent since 1929, but the value per occupied housing unit has fallen 30 percent.

Better houses are costing less. The major obstacle to replacing substandard houses was high costs. Today, however, leading builders are using massproduction principles to offset the high cost of everything that goes into a house, and are reducing both costs and prices. Many boast plausibly that a house today is a better buy compared to a 1946 house than a 1954 car is compared to a 1946 car. Certainly the day is close at hand when almost anybody with a job can afford to own a house.

Financing, underwritten by the Federal Government, is easy and cheap, and Eisenhower administration policy is to keep it that way. One little-known but very important example of how the Government has helped: During the war, to get emergency housing erected, FHA committed itself to guaranteeing mortgages before the houses were built. This practice has been extended, and enables builders to put up five times as many houses with the same capital as they did before the war.

People want to own houses. Because houses are becoming so attractive, people are bestowing on them something of the pride and interest they have long lavished on autos. A house is not only home sweet home, it is something to look at, read about, talk about, fix up, improve, and even to stay in. Just as popular desires and aspirations in the twenties centered around the auto, so American desires and aspirations now seem oriented back to the home, or at any rate popular aspirations are sufficiently expanded to embrace a house as well as a car. Home ownership is becoming a kind of mass movement that almost surely will accelerate greatly the development of the market.

THE BASIC NEED

The need for housing, even after the so-called building boom of the past 8 years, is now much greater than anyone thought it would be. That need may be divided into two categories. One is the fundamental, almost irreducible need based on the net increase in households each year, plus an allowance for destruction and vacancies. This is what the economy must have merely to maintain the ratio of housing stock to population. Barring depression or war, it may be considered rock-bottom demand.

This basic demand, created mainly by household formation, is staying unexpectedly high. As Fortune has explained in previous articles in this series, the wartime and postwar marriage boom is tapering off, but not so much as once appeared likely; and single people are setting up more households than appeared likely a few years ago. Thus household formation, which averaged 1,325,000 annually in 1945-49, is averaging a little better than 900,000 annually in 1950-54, and, given peace and prosperity, is not likely to fall below the 800,000 mark in 1955-59. (As the chart on p. 104 shows, household formation will rise steeply again after 1960, when the baby crop of the 1940's begins to reach marrying age.) To this 800,000 units of basic demand, there must be added 300,000 to make up for demolition, and to maintain a reasonable vacancy rate as the housing supply increases. So 1,100,000 housing units are needed annually just to satisfy minimum requirements in the years 1955-59.

THE REPLACEMENT NEED

The second kind of housing need is for the amount the Nation should have to raise its standard of housing as high as its overall living standard has risen, and to keep it rising at about the same rate. It is called the replacement need because it involves, in the last analysis, the scrappage of old houses. This is not to say that housing standards have not been rising. But the point is that the housing supply has not improved as much as the supply of household appliances, food, and automobiles. There were bathtubs before automobiles were thought of, but today there are fewer bathtubs in the United States than autos.

Estimates of the replacement need usually depend on who is doing the estimating, upon the assumptions he makes about minimum standards, and upon how fast he thinks the Nation should catch up on obsolete housing stock. In 1950 the Housing and Home Finance Agency figured that 6,300,000 units of the nonfarm home supply were substandard, and that 7,700,000 would be so by 1960; to wipe out this substandard housing in, say, 10 years, would require about 700,000 units a year, in addition to the 1,100,000 needed to satisfy basic demand. Other estimates have assumed that the housing stock of the country-now 44 million nonfarm units ought to be replaced or rebuilt every 100 years, which would mean a replacement-market potential of nearly 450,000 housing units a year.

Instead of estimating an arbitrary need, Fortune has tried to gage the realities of demand, based on the relationship between income and the worth and age of existing housing units. The chart above is the result. It shows, in effect, that the Nation's standard of housing has failed, and failed by an astonishing margin, to keep pace with the Nation's real income.

How account for this phenomenon? For one thing, it reflects the underbuilding during depression and war. For another, most houses built since the war, thanks in part to FHA's emphasis on low-cost housing, were relatively low priced. Finally, housing seems an excellent example of what economists call a price-elastic commodity; when its price rises more than the general price level, people feel so inhibited about buying that they end up by spending less on it. Between 1929 and 1947, according to imperfect indexes available, the cost of homebuilding rose more than half again as much as the general price level. People responded, apparently, by spending a smaller proportion of their income on it. Even in the housing boom of 1946-53, when Americans bought nearly 10 million new units, they probably did not spend so large a percentage of their annual income on new housing as they did in the 1920's. The builders, as we shall see, have done a lot to correct this imbalance, but they still have a long way to go.

The number of family units with $4,000 to $7,500 in disposable cash income (1953 dollars) has increased more than threefold since 1929-from 5,400,000 to

1 This estimate includes 100,000 farmhouses and 200,000 net conversions, mostly big single units cut up into smaller units; thus the minimum need is for some 800,000 new units of nonfarm housing.

nearly 18 million. How much did a family in this income bracket pay for a house in the 1920's? Up to 3 times its income, or in other words, from $12,000 to $22,500. But since 1929 the number of housing units worth $12,000 to $22,500 (in 1953 dollars) has increased by only about 30 percent-from 4,800,000 to 6,300,000. To put it another way, some 11 million families in the middle brackets are living below what might be called their 1929 standard of living.

The number of family units with more than $7,500 in disposable income (1953 dollars) has more than doubled since 1929-from 2 million to 5,300,000; but the number of houses worth more than $22,500 has decreased from 2.200,000 to 1,800,000. In other words, what was once a modest surplus of higher-priced houses has turned into a large deficit. If the housing industry had been anywhere near as successful as the auto industry in getting its share of middle- and upper-income purchasing power, the United States might have, instead of its 1,800,000 houses worth more than $22,500, nearly 8 million of them.

The number of family units with $2,000 to $4,000 having disposable cash income (1953 dollars) has increased from 13,100,000 to 16.200,000, and the number of housing units worth $6,000 to $12,000 has increased much more proportionately-from 8,400,000 to 13,800,000.

The number of family units with $2,000 or less in disrosable cash income (1953 dollars) declined from 16 million in 1929 to 11,500,000 in 1953. But the number of housing units worth $6,000 or less increased from 14,500,000 to 24,200,000. This suggests that millions of family units with more than $2,000 a year in disposable cash income (1953) dollars) are living below their standard of housing, and perhaps above their standards in television and cars. Moreover, the bulk of these 24,200,000 housing units are more than 30 years old, and although a lot have been remodeled, probably a quarter of them are substandard.

Thanks to

The housing stock is considerably older than it was in the 1920's. the postwar building boom, to be sure, 12 million dwelling units, or 30 percent of the nonfarm supply, are less than 10 years old, against 8,500,000 in 1930. But 24 million units are now more than 30 years old, against only 11 million in 1930. These are the basic facts in Fortune's estimate of replacement needs, which now may be defined more specifically: The amount of housing required to bring family income and housing value back to their 1929 relationships. The figures above suggest that a total of 10 million new units, or 500,000 a year, must be turned out to meet the full replacement need for 1955-75. But the 10-million estimate is of course based on the total housing supply, and hence includes units needed to make up for demolitions in the minimum estimate. These will run to about 200,000 a year. This leaves the number of additional new housing units required to restore the 1929 relationship between housing value and income at 300,000 a year.

So the maximum projection for 1955-59 works out to 300,000 plus 1,100,000, the minimum requirement: and the 1,400,000 includes, besides 200,000 conversions and 100,000 farmhouses, 1,100,000 new nonfarm units-almost exactly the annual average of new farm units for 1950-54. And the 1,400,000 total, in effect, amounts to an ever normal housing boom for the rest of the 1950's. What is more, a new boom will begin in the 1960's, when the war and postwar babies form households of their own.

THE DOLLAR VOLUME

So far we have been talking in housing units, not in dollars that might be spent on housing. How much is the market worth? The maximum projections for 1955-59 call for an annual average of 200,000 net conversions and 1,200,000 new units, including 100.000 farmhouses. The new units should be worth about $12 billion, since the 1,200,000 new units built in 1953 were valued at $12 billion. Nobody knows exactly what the repair and remodeling market amounts to, but estimates vary from $5 billion to $9 billion. Thus the housing market is already approaching $20 billion.

To realize this figure during the next 5 years, the industry must build 300,000 replacements a year, and to build them it probably has to reduce costs and prices. This, however, does not mean that its gross will surely decline. Just as people inhibit their spending on a durable whose price increases inordinately, so they tend to spend more on durables whose prices decline encouragingly. The possibility exists that the industry can achieve a high dollar volume by making both new and remodeled houses so attractive, physically and financially, that people who can afford to pay more will be willing and even eager to spend more. Can the industry improve its product that much?

44750-54-pt. 1—48

NEARLY HALF THE UNITED STATES HOUSING DEMAND IS FOR HOUSES IN THE $7,500TO-$12,500 PRICE RANGE

This $8,695 house, which Life last year called the Best Buy in low-cost development houses (on display in National Home Week), shows that a determined and resourceful mass builder can give a lot of house for little money where the local market is big enough. Designed to meet the rising demand of growing families for larger houses, it has two baths and four bedrooms and comes complete with lot, fruit trees, shrubs, even a fence.

The builder was Earl ("Flat Top") Smith, who in 1947 decided to develop a cheap, modern, flattop house. FHA and the banks were horrified, but Smith built a model house and proved it would sell. Last year he turned out no fewer than 2,000 houses.