from somewhere else. For example, on page 987 of the transcript you said:

We are going to be in a capital shortage anyway because of the credit demands which are coming through the credit cards which we haven't any particular controls on yet.

Am I correct in assuming that you regard the widespread proliferation of credit cards as a factor in decreasing the available supply of credit for housing?

Secretary ROMNEY. I don't recall having talked about credit cards. Maybe I did. In any event, they are a part of the picture. I don't question the fact, the credit cards do constitute part of this total picture.

Senaor PROXMIRE. The reason I raise that is that we have credit card legislation in front of us right now, reported out of this committee and we are going to expect to act on that in a few days. Your position on this as the man more responsible for housing than anybody else would be most helpful.

Secretary ROMNEY. The kind of restraint you are talking about would be most helpful.

Senator PROXMIRE. Well, thank you very much, Mr. Secretary. Let me ask you to respond to this question for the record. House & Home-you may be familiar with this article-has a very interesting article and it is quite persuasive. It is a letter to you and to me and the President and all the members of Congress, you particularly, on Operation Breakthrough. It says Operation Breakthrough will not reduce building costs or help increase technology, et cetera. I think an answer should be made because this is widely circulated.

Secretary ROMNEY. It is an interesting article but it starts from the wrong premise. It doesn't deal with the breakthrough program as we are undertaking it. It deals with it as they conceive it and they don't conceive it the way we are undertaking it. So they arrive at erroneous premises.

Senator PROXMIRE. Would you give us an answer to that for the record?

Secretary ROMNEY. Yes.

(The following information was received for the record:)

ANSWERS TO QUESTIONS SUBMITTED BY SENATOR PROXMIRE

Question. Would you respond to the criticism of Operation Breakthrough which appeared in the February issue of House and Home?

Answer. As I pointed out in my very brief comment on the question, the House and Home cover article of February 1970, is based on certain erroneous assumptions. The article assumes that (1) Operation Breakthrough alone is intended by this Department to overcome all problems of our housing crises; (2) that "the real problems have been virtually ignored, and it is all too possible that in the flood of publicity Operation Breakthrough is receiving, they will continue to be ignored until the crisis has turned into a disaster."

The statement I presented to the Senate Banking and Currency Committee on March 3, 1970, and a reading of the full content of that hearing, demonstrate that we fully recognize the seriousness of the problems that we face, the basic causes of those problems, and the actions necessary to overcome them.

Operation Breakthrough is only a part of this Department's overall effort to improve the entire process by which housing is produced and provided to all of our people. The House and Home article does not discuss the program as it is, and its goals. The program is not directed at any one economic level, nor does it focus solely on production methods. It aims, rather, by using concepts suitable

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 members of the committee, I appreciate this opportunity to discuss the very serious situation in housing and, more particularly, the problem of housing finance.

CURRENT SITUATION

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 $17-2 billion in the last half of 1968 to $15-2 billion in the first half of 1969, and then further to an annual rate of $8-2 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 22 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 this 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, 82% 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 medianpriced 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 52% 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.

ACTIONS TAKEN SO FAR

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 office

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

THE RESULTS

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 1-4 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 142% 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 volume 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.

LONG-RANGE ACTIONS TO BE TAKEN

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.