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for a wide cost range, at assuring that all members of our increasing population (including the population now living in aging and deteriorating housing) will be assured of an opportunity to have a high quality home in any location in which they may choose to live, at costs more effectively controlled than in the past, and with low maintenance requirements.

To accomplish these goals, Operation Breakthrough not only addresses itself to the production process and the materials used in housing, but also to building code obstacles to new technology, and those zoning requirements that restrict the development of housing for certain of our people. It seeks expanded sources and methods of home financing, new franchising and licensing methods for local builders, acceptance and participation in the program by organized labor, improved land use, site planning, and site development, effective marketing programs which include improved land assembly and the aggregating of housing markets, and warranty provisions that assure product durability and provide customer satisfaction. All of these are vital elements of Operation Breakthrough.

The data available from Operation Breakthrough indicates possibilities for cost savings, particularly in high rise and multifamily projects, but also on single family homes. Just as important, the systems provided in Operation Breakthrough offer opportunities for limiting the continuous rise in housing costs that has caused so many of our problems over past years.

Further, as even the article concedes, the approaches being taken in Operation Breakthrough do offer clear and real advantages in the manpower area. As stated in the article:

“Industrialization will eventually help because it can bring more housing production from less skilled-hence less scarce-workers.”

"Industrialization will eventually help because it drastically cuts the weather-vulnerable part of the construction process.”

"Industrialization will eventually help because it will make more possible the use of more new materials in housing."

“So there's no doubt that industrialization will play a useful role in producing low income housing."

After making this case, the House and Home article takes the position that "the housing industry will industrialize anyway–when industrialization is feasible and necessary. This attitude too often has resulted in holding off an attack on serious problems until the problems developed to crisis proportions. HUD cannot accept the suggestion that we should passively accept the current rate of change when affirmative efforts will accelerate such change with all its concomitant benefits.

Indeed, the author of the February 1970, issue was quoted in the October 1969, issue of House and Home as saying, “even if we had the mortgage money and sites available to do two million units this year, the industry could not really produce them.” He was referring to the already serious labor shortage and went on to say, “nobody wants their kids to become carpenters or plumbers or masons. And no kids want to take up these trades. Industry must make these jobs attractive to your people.” This indicates the recognition of an already existing problem which Operation Breakthrough is now attacking.

Operation Breakthrough is in no way intended to serve as a substitute for the financial commitments this Nation must make if our housing goals are to be realized. Money alone will not do the job however, and while we continue to find assisted housing programs such as sections 235 and 236 to the full extent of Congressional authority, it is essential that emphasis continue on programs such as Breakthrough which seek to initiate basic changes in the way housing is produced, financed and marketed. The great interest shown by the housing industry's response to HUD's Request for Breakthrough Proposals indicates a recognition that such changes are necessary, and that the potential benefits from these changes are real and substantial.

Taken as a whole, we believe the programs we have presented to you, including Breakthrough, have a good chance of solving the serious problems we face in providing housing for all of our people.

Senator PROXMIRE. Do you have something else you would like to add ?

Secretary ROMNEY. Well, I don't know if it adds anything at this point, but with respect to the credit cards, I think the restraints you can bring into that field would be helpful.

Senator PROXMIRE. Very well. The committee stands adjourned. (Whereupon, at 1:30 p.m. the subcommittee was adjourned.) (The full prepared statement of Mr. Romney follows:) STATEMENT OF GEORGE ROMNEY, SECRETARY, DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT Mr. Chairman and me ers of the committee, I appreciate this opportunity to discuss the very serious situation in housing and, more particularly, the problem of housing finance.


The core of the current housing finance problem has been (1) the erosive and discriminatory inflation generated by inappropriate economic policies in an attempt to live beyond our means in previous years and (2) the monetary tightness that had to be implemented this past year to attempt to bring the accelerating inflationary spiral under control.

In this economic environment, as in all similar past situations, interest rates throughout the open market soared and private sources of mortgage credit rapidly evaporated. Housing again became the principal victim of inflation, excess credit demands, and the mix of monetary and fiscal policies adopted to bring these conditions under control.

Thus, net new residential mortgage lending from all purely private sources dropped from an annual rate of $17-12 billion in the last half of 1968 to $15-12 billion in the first half of 1969, and then further to an annual rate of $8-12 billion in the third quarter and a rate of only $5.8 billion in the final quarter of last year. Forward commitments for residential mortgage loans by savings and loan associations, savings banks, and life insurance companies are now far below the high reached in the middle of last year.

Sizeable efforts by the Government and Federal agencies made up for part of the loss of private mortgage money. But with the overall scarcity of finance, many homebuilders have not been able to proceed with construction plans. Housing starts have dropped almost steadily from a temporary annual rate of more than 1.7 million units in the first quarter of 1969 to a low of less than 1.2 million last month. Even after allowing fully for the increased efforts of the mobile home industry, total production of new dwelling units is down more than a quarter from the rate a year ago. No other economic sector has experienced such a squeeze.

This past year's decline in housing production comes on the heels of four immediately preceding years in which production did not achieve the levels needed to keep pace with new household formations and the loss of run-down units. In the past five years, the housing production shortfall has been at least 1.2 million units. This production gap may actually have been as high as 212 million units if all the families who bought mobile homes during this period do not consider their housing needs adequately met. For the remainder of th decade, the nation's total housing need certainly exceeds the 26 million additional units Congress called for in setting a 10-year national goal in the 1968 Housing Act.

The acuteness of the housing shortage is clearly shown by vacancy rates across the nation—now at the lowest levels since the immediate post World War II period. Moreover, the shortage has combined with the general forces on inflation to push up the cost of new housing to a level well beyond what most families can reasonably afford.

Seventy percent of new rental units have monthly rentals of $150 or more. The median price of conventionally built new homes offered for sale has risen to $27,000. Practically no conventionally built new homes are available for less than $15,000. In some areas of the country, few if any new homes are available at less than $25,000. Without the increase in mobile home production, buyers of lowcost housing would be out of luck.

Monthly housing expenses on the typical new median-priced home-financed with a 30-year, 842% mortgage-probably total more than $290, including taxes, insurance, utilities, and maintenance and repair. To "afford” such a house without stretching beyond reason, a family needs an income of nearly $14,000 a year. Fewer than one family in five has this high an income. By contrast, the medianprired house offered for sale five years ago before the current inflationary spiral probably could have been "afforded” by two families in five.

I want to emphasize that this rising cost of housing cannot and should not be pinned on any single element. Cost of money, land, construction labor, materials, taxes, insurance, maintenance and repair are all up-and significantly.

The rising cost of money has hurt most however, Its cost—both for construction and permanent financing—has risen by an exorbitant and unwarranted 15-25% during the past year to the highest levels in a century.

Labor costs, while accounting for a relatively small fraction of total housing costs, have also shot up at an exorbitant and unwarranted rate during the past year. The median wage settlement in the construction industry in 1969 provided a first-year increase of 14%, and an average increase over the life of the contract of 13% per year. A few contracts had even more exorbitant increases of more than 30% a year.

Land now typically accounts for a fifth of the cost of a new single-family house. Despite a steady decline in average size, the price of a typical singlefamily home site has risen by nearly a fourth since 1965.

Materials cost averaged 572% higher in 1969 than a year earlier, even with a welcome reduction in lumber prices as the year proceeded.

And monthly homeowner expenses for taxes, insurance, utilities, and maintenance and repair have continued to increase dramatically.


I have tried not to pull any punches in describing the current housing situation because I believe that the problems truly are critical. I also want to emphasize that the Government has not been idle or unmindful of the need to check these serious trends. If it had not been for the Goverment's extensive and aggressive efforts of the past year—actions which far exceed the steps taken in any previous housing crisis—the mortgage market and homebuilding would be in far worse shape than it is.

First and foremost in terms of an ultimate solution has been the President's strong determination in the face of tremendous pressures from all sides—to maintain a sound fiscal situation with a surplus in the Federal budget. Total national demand must be held within the bounds of the nation's potential gross national product if inflation is to be brought under control. After years of deficit financing, a surplus budget is essential. I cannot overemphasize this point. There simply will not be enough funds available to finance housing if the Treasury is also borrowing a substantial amount in the market to finance a budget deficit.

To help curb inflation, the Federal Reserve last year had to apply stringent monetary tightness. Because monetary stringency needs to be eased, I have tried to do my part to keep total Federal budget expenditures below available revenues. In fact, in terms of housing, a much bigger surplus than the one proposed would be highly desirable. Thus, if total expenditures come in above the budget totals, I will be among the first urging consideration of appropriate tax measures to restore the surplus.

Beyond general economic policy measures, a number of specific actions have been aimed directly at mortgage market problems. Since this Administration came into ofice

FNMA has made $7.9 billion of commitments to buy mortgages, and her actual purchases have totaled $5.2 billion; more than $1.5 billion of new commitments have been made in just the past eight weeks, and just last week I authorized FNMA to borrow an additional $2 billion to fulfill its commitments for additional mortgage purchases through May 1;

Federal Home Loan Bank advances have increased by a net of $4.6 billion, and the Board cut liquidity requirements for member savings and loan associations by $1.3 billion;

GNMA has purchased approximately $830 million of mortgages, and has been authorized to make up to $1,180 million of special assistance commitments to facilitate the financing of newly produced subsidized housing units;

The Farmers Home Administration has helped more than 50,000 rural families obtain adequate homes;

The President ordered a postponement of 75% of Federal construction contracts; he also appointed a Cabinet Committee on Construction and a Building Trades Collective Bargaining Commission to help find ways of bringing more funds into the housing sector and gaining control over the exorbitant increases in wages and other construction costs ;

The FHA and Va interest rate ceiling was reluctantly raised to "meet the mortgage market”; and


What has been the result of this previously unapproached Government support of the mortgage market? I see three significant effects.

1. For the first time in any credit-induced housing crisis, we sustained production in the FHA-VA sector of the market. In previous credit crises, FHA-VA housing starts fell significantly more than starts financed with conventional mortgage money. Yet, in January of this year, FHA-VA 14 family starts were actually 15% above the previous January, in contrast to a 44% decline in all other starts. Further, the portion of housing starts in 1969 attributable to subsidized units increased to 15% of the total as compared with 7% in earlier years. By the end of 1971, we expect to have increased production of subsidized housing units to the annual rate necessary for meeting the 6 million national housing goal.

2. There is now in operation what seems to be an effective arrangement for assuring adequate financing on acceptable terms for housing units produced under subsidy programs. The new Tandem Plan for Section 236 mortgages, and a similar plan for Section 235, give builders and sponsors ready access to mortgage commitments free of excessive points, with FNMA borrowing capacity providing assured access to whatever funds ultimately must be raised. Thus, despite the general housing decline, we have been able to make good use of the subsidy authority provided by the Congress. For the first time, we have begun to achieve real volume production under the various subsidized housing programs.

In 1969, starts under all subsidized programs rose by 1412% to an all-time record level of 223,600 units. (See Table I.) Many of these units are in rural areas, as we have coordinated the allocation of subsidy funds with the Farmers Home Administration. This calendar year, budget plans call for achieving at least a doubling of last year's all-time record by starting more than 450,000 units under HUD and Farmers Administration programs.

The 1969 experience clearly indicates the limits on the capacity of our Department, which has direct control only in the subsidized housing field. In the past, subsidized housing starts have represented less than 7% of the annual volun of all starts. Last year they were up to 15%. The other 85% is beyond our Department's immediate control and depends basically on policies mostly in the purview of the Treasury, the Council of Economic Advisers, the Federal Reserve Board, the Federal Home Loan Bank Board, the Bureau of the Budget, and others.

3. These successes in the FHA-VA sector as a whole, and in the subsidized sector particularly, are only relative. The market as a whole, especially the broad middle sector, being squeezed as never before. This underscores the need for an effective program that deals with the total housing situation, not just a segment of it.


Against this general background, let me now turn to a series of steps that I believe must be taken to meet the overall housing problem. Some of these are basically long range, though early action in several instances could have beneficial effects this year. I will leave the special problems of finance to the end.

1. Last week, I announced the full housing-system winners of our Operation Breakthrough competition, through which we hope—among other things—to reduce the cost of housing. But I think a few points on this program are worth bringing to the Committee's attention.

When we first announced Breakthrough last summer, we could not be sure of what might realistically be accomplished. I think it fair to say that the possibilities we now see surpass most initial expectations. Great interest has been demonstrated. The program has already shifted the industry's focus from construction to production and from two-dimensional to three-dimensional thinking. This has well prepared the way for accelerating innovations and progress.

There is an opportunity for some immediate cost reduction. Even more important is the opportunity to make use of a broad range of labor skills and thereby help to overcome the labor shortages that drive up costs and impede expansion of housing production.

But we want more than just a breakthrough in production technology. Our objective is a total Breakthrough—not only in technology, but in land use and costs, management, financing, marketing, appearance, user satisfaction and the overall environment.

Many of the organizations submitting Breakthrough proposals are consortiums, which have strong overall capability for the total housing business. These team organizations have financial muscle and are prepared to use it—to raise construction financing, and even to help obtain financing for ultimate sale of the units they produce.

Several states have moved to overcome barriers to volume and more economical housing production.

Several building trade unions have also taken constructive action to facilitate improved housing production systems.

In short, I am more confident than ever that housing can again be produced in large volume, at high quality, with effective use of all types of labor, and at controlled costs that most Americans can afford. I intend to push ahead on this as hard and fast as I can. I hope we can break through code, zoning, and trade practice barriers using a voluntary approach with the authority we now have. But if it turns out that we cannot, we will have to develop alternative measures that will enable all American families to benefit from the free flow through itnerstate commerce of improved materials, technology, and financing techniques.

2. We do know that action is needed now to provide more effective ways of encouraging orderly urban growth. In the next 30 years, our population will increase by 100 million people. We cannot afford to continue haphazard and fragmented urban development. We need effective tools for encouraging metropolitan-wide planning and action in general, and in particular for encouraging the assembly of large land sites, at reasonable cost, and in suitable locations. Efforts are also needed to encourage removal of barriers to the development of balanced community housing and other facilities. State involvement in land use controls and land development must be increased. Some states and European nations have lessons on which we should begin to draw.

Our Department has been working with the Urban Affairs Council to develop new approaches in the new communities field. The Council is meeting this week to consider this subject.

3. It is imperative to find ways to remove the present discouragement-and indeed to provide positive encouragementfor maintenance, repair, and rehabilitation of existing buildings and neighborhoods. In many metropolitan areas, the present housing supply is being destroyed or abandoned faster than it can be replaced. Last year's Tax Reform Act began to deal with this problem at the national level. But state and local effort is also necessary, because the present local property tax system penalizes the maintenance and improvement of housing and other property. We in the Department are studying these problems and this Committee may also wish to do so.

4. Prompt action must be taken to increase substantially the supply of both skilled and unskilled construction labor. The exorbitant construction wage settlements reached over the past year reflect a basic shortage of qualified workers. This shortage will become even more acute as housing production expands to levels consistent with the 10-year goal.

Entry into apprenticeship programs and union membership must be made more open, especially to minority citizens. Training periods must be substantially shortened, particularly for housing workers. Manpower and vocational training for construction workers must be substantially increased. Some progress is being achieved in some cities—but much more must be done, and quickly. The Cabinet Committee on Construction is about to submit specific recommendations to the President in this area.

5. We must insure the availability of construction materials at reasonable cost. Particular attention must be given to increasing the nation's supply of softwood timber. Meeting our housing goals will require perhaps as much as 50% more softwood timber by 1978. Some of this need will be filled through the development of reasonably priced lumber substitutes. HUD is working on this. But substitutes will not be enough. To meet this pressing need without damage to our woodlands environment, we must promptly improve the management of public and private timber resources. The National Forest Timber Conservation and Management Act, which proposes an accelerated management program for national forests, is a first step. I urge its enactment.

6. So far, I have concentrated on the physical and financial aspects of our national housing problem. But the social aspects are just as important. And as I have frequently said: "Every American should have the opportunity to live within a reasonable distance of his job and daily activities."

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