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with establishment of the AFL-CIO Mortgage Investment Trust. This enables union pension funds to be invested in the trust, which in turn buys mortgages, thus relieving individual unions of the problems of servicing mortgages or of the need for a mortgage banker.
Mr. Chairman, I would ask that a recent article describing the entire AFL-CIO Mortgage Trust operations, be included in the record as part of my testimony.
Whatever the outcome on interest rates, there will be continual attempts to blame American labor for the scandalous cost of housing. I trust I have sufficiently proven that it is not labor that is to blame.
I have included with my testimony, Mr. Goldfinger's article “The Myth of Housing Costs." American construction unions have pioneered in the prefab housing field and have pioneered in the use of new building products and methods. They will continue to do so. The attempts to run roughshod over the contract practices and rights of construction workers are generally not motivated by a desire to pass along to the home buyer or the consumer a less costly package, but rather to weaken the unions and to absorb any savings in profits.
The culprit in the housing crisis is clearly high interest rates. Any steps that can bring the cost of money to a more reasonable level will be met with deep gratitude by millions of hardworking low- and middle-income Americans, who desperately need housing. And lower money, costs will also be welcomed by additional tens of thousands of workers who cut the timber, finish the lumber, make the materials, the appliances, and myriad other items used in homebuilding. As workers and consumers, the AFL-CIO has a great stake in homebuilding. We can no longer watch as decent housing is sacrificed on the altar of tight money and sky-high interest rates.
The CHAIRMAN. Those will be printed in the record along with your proposal or paper.
(The documents follow:)
STATEMENT OF JOHN EVANS, DIRECTOR DEPARTMENT URBAN AFFAIRS, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS
Mr. Chairman and members of the Committee, my name is John Evans. I am Director of the Department of Urban Affairs, American Federation of Labor and Congress of Industrial Organizations.
I appreciate this opportunity to appear before your committee and present the views of the AFL-CIO.
It has been said that the present state of the national economy may soon feature continued inflation in a period of recession. Incongruous as it sounds, it is a distinct possibility. And when we look at the low- and middle-income housing industry, there is more fact than fiction to the incongruity. Housing costs have been soaring, while housing starts are in a tailspin. The average price for a new home in the nation is over $20,500 in the current market, and the typical wage and salary earner is already priced out of it.
Buyers can't buy; builders can't build; suppliers can't supply; and private lenders can't and won't lend money for housing—not for low- and middle-income housing anyway.
Our concern is not only the absence of shelter at prices we can afford to pay. It is also the loss of jobs which is accompanying the worst housing crunch in 20 years. We are all aware of the plight of the housing industry and are familiar with its low statistical profile in terms of construction activity and its phenomenally high cost profile.
So let me get directly to the problem and analyze it as we in the trade union movement see it.
If there is to be any reversal of the downward spiral in home building, it must first be founded on a borrowing rate that is at a sane level. No matter what arguments are put before this committee in an attempt to blame labor costs or materials costs or a combination of these, as the cause of the housing crisis, the fact remains that skyrocketing mortgage interest rates, coupled with a severe across-the-board tight money policy, are the root causes of the problem.
First, let me address the myth that labor costs are responsible for the crisis in housing. Dr. Michael Sumichrast, chief economist of the National Association of Home Builders, recently compiled figures that showed that between 1949 and 1969, on-site labor costs fell from 33 percent of the price of a home to 18 percent, an indication that there has been a considerable shift to pre-fab factory operations and a rise in on-site productivity, as well as sharp increases in other costs. At the same time, the cost of materials increased only from 36 percent of a home to 38 percent.
In that 20-year period, the cost of the structure fell from 70 percent of the price to 56 percent of the price. At the same time, the price of the land and the financing rose from a combination of 16 percent to 31 percent of the cost of a home. Financing itself rose 100 percent, from 5 to 10 percent of the cost of a dwelling. The sharp increase in interest rates since these figures were released has made even these dramatic contrasts obsolete.
The Kaiser Committee on Urban Housing reported that a 20 percent cut in construction workers' wagesor a 20 percent increase in productivity through so-called “breakthrough" programs—would reduce the monthly occupancy cost to the homeowner or renter by only about 2 percent. And that would include the cost of the interest payments on the on-site labor cost. Thus, the monthly saving on labor would be about $2.00 per $100 payment.
On the other hand, the increase in interest between June, 1968, and August 1969 on a $25,000 house with a 25-year mortgage was about 12 percent or an additional $17.16 per month every month for the 25-year duration of the mortgage. The subsequent rise in interest rates has made even this figure obsolete and caused an even greater gap in comparison with labor costs.
I have attached to this statement a complete article on this subject, “The Myth of Housing Costs” by the AFL-CIO Director of Research, Nathaniel Goldfinger.
Obviously, the price of money-interest rates—are the major source of infiated housing costs ; not labor costs.
In its recent report, the President's Council of Economic Advisers stated : “In fact interest rates did soar in 1969. By the end of 1969, most interest rates had climbed around 4 percentage points above their 1965 level. One must consult records for the Civil War and earlier to find comparable interest rates. And the steepness of the advance, on long-term as well as short-term securities, may well have been unprecedented.”
Between 1965 and the end of 1969, interest rates skyrocketed. The greatest price increase of any commodity came in interest rates, when they soared more than 50 percent. They fed inflated mortgage money rates. For example, FHA new home mortgages soared from 5.46 percent to 8.48 percent.
The tornado-like rise of the price of money has benefited one sector of the industry: it has boosted bank profits. The Commercial and Financial Chronical of Jan. 15, 1970, reported “It is estimated that of the 25 major commercial banks, earnings were up approximately 1212 percent in 1969."
Some banks did even better: First Chicago Corp., owner of the First National Bank of Chicago, had an increase of 44.5 percent in profits over 1968. Franklin National Bank of Mineola, New York, up 27.5 percent; National Bank of Detroit, up 25 percent and Cleveland Trust Company up 22 percent.
The most recent rise in the interest rate ceiling on FHA and VA mortgages from 742 percent to 842 frosted the bankers' cake at least for the moment. On a 30-year, $20,000 mortgage, the workingman who buys such a house will pay an additional $5,000 for the percentage point boost in interest. The interest boost of 1 percentage point (which is a 13.3% increase in money) cost him more than the entire on-site labor costs, the total wages and fringe benefits of all the workers who built the house.
At the moment there is no indication that the vise gripping the housing market will be relaxed. Even more serious the housing shortage is being built up, inner city areas continue to decay, and the time bomb of unmet needs sputters ominously. And the demand pressures in housing already have the tight market bursting at its inflated seams. Consider, if you will, that this current tight money policy comes at a time when America will need more homes in the next 30 years than have been built since the birth of the nation !
Meanwhile, the Administration speaks and acts in opposite directions. The talk is for a vast increase in home building, but the action is a severe monetary squeeze that throws home building into a recession and causes a boost in housing costs and prices.
Is this severe restriction being felt across the board by all segments of U.S. life? We do not think so. In fact, it is this total freedom-and encouragement-to other sectors which aggravates the problem. At its recent quarterly meeting, the AFL-CIO Executive Council declared :
"The severely restrictive policy, with the highest interest rates in 100 years or more, has had little effect, thus far, on the activities of most big corporationswith their huge profits and depreciation allowances, as well as their lines of credit at the banks. So business investment in new plants and machines continues to rise rapidly-the only major source of inflationary demand-pressure in the past year and one-half-while other sectors of the economy are hit. The Administration's blunderbuss policy can finally affect the activities of the big corporations by pulling down the house-by so depressing the incomes of workers, farmers and smaller businesses that the sales and profits of the big corporations are finally affected.
“A decisive change in national economic policy is needed, without delay. The squeeze on the economy must be eased. Selective measures, aimed at restraining the specific causes of inflationary pressures, should be adopted. Homebuildingparticularly low- and middle-income housing—should be provided with immediate federal assistance."
In the real situation, we are failing, even, to meet the national needs of 26 million new units in 10 years. The number of private and public housing units started in 1969 was only 1,496,600—51,000 fewer than the year before. Instead of rising steadily toward the two million units needed in 1970, the trend is down. This trend in the residential construction sector of the economy has been going on for the better part of 20 years.
Twenty years ago, in 1950, 1,951,900 new private and public non-farm housing units were started. Almost the two million units that is our yearly goal today. But between that 1950 peak and 1969, that figure was never reached again and in only two years did the figure exceed 1.6 million units.
Any discussion of emergency needs always brings forth instant concepts and instant solutions. The current trend toward moving Americans into house trailers is an example. The vacation home on wheels has been upgraded to a permanent dwelling. It has been given FHA financing and it is now proudly referred to by HUD in glowing statistics as “new dwelling units.” The boast by HUD that it expects 450,000 mobile home shipments of "new dwelling units" in 1970, only really demonstrates how badly we have failed to meet the shelter needs of so many American families. The trailer home except for that small percentage of workers whose jobs are transient-is a fall-back, utilized only because adequate housing is not available. The trailer home, like the trailer park it sits in, is no solution at all, but only a quickie concept packaged as an instant solution.
Now let me turn to the specific measures before this Committee.
We in the AFL-CIO wish to register our strongest possible opposition to the proposal for a dual interest rate system for FHA and VA assisted mortgages as proposed in S. 3442. We believe that the federal government must refuse to surrender to the never-ending pleadings of the bankers and the mortgage lenders, that a rise in interest rates is the only possible way to spur homebuilding. Now, to respond to their call that a "free market” condition be allowed for all FHA and VA mortgages, provided no points are charged, is to accept the final demise of government attempts to restrain the skyrocketing cost of mortgage funds. The choice of a free market without points or the FHA-VA ceiling with points, can be compared to allowing an execution victim his choice of weapons. Either way, he's dead!
We were shocked by these proposals when they were first advanced in the Report of the Commission on Mortgage Interest Rates in August of 1969. Our alarm has not diminished in the least. If legislation is enacted that removes the last restraint on interest rates, where the federal government has the power to act, the outrageous profits, which have been extracted and will be extracted from a nation desperate for adequate shelter, will become legitimatized. FHA and VA loan guarantees carry with them the right of U.S. participation and influence, small though that effect may be, in the general competition for funds. To surrender that right and that restraint would be a great tragedy and would not produce a single additional dwelling for the millions of low and moderate income families who need homes.
We do support any action that would bring down the settlement costs to mortgage holders. If procedures can be achieved that would wring-out the excessive costs, millions of home owners would be eternally grateful. Of the entire procedure of buying a home, the ritual of the closing with vague, and often questionable charges, such as the one for the title search, is a most disturbing ordeal. It is bewildering to the young, first-time home buyer and infuriating to those who have gone through the closing wringer a number of times.
Finally, on S. 3442, we feel some concern about the proposal for a Special Advisory Commission on Housing. It's recommendations could have great weight, and it would, by law, have the proper members of Congress among its membership. That portion of the committee has our fullest confidence, but based on the experience of the most recent commission in housing, that on Mortgage Interest Rates, we fear for the representation of those most deeply affected by the housing crisis, i.e., the home-buying public and the housing consumer. It is unfortunate that the public was not represented on the Mortgage Interest Rate Commission. As a consequence, it had the overwhelming weight of those directly benefitted by the rise in the price of money. We note with some relief, that the proposal for the Special Advisory Commission specifically calls for at least four members to represent consumers. Perhaps this inclusion would overcome the earlier shortcomings and make for more beneficial and valid recommendations, if a broad spectrum of the American Consumer were represented on the commission.
As to S. 3503, the Middle Income Mortgage Credit Act, here is truly a realization of the long-standing belief by many of us that the housing market must be sheltered. This specific method for providing mortgage funds through the Federal Reserve to the Federal Home Loan Bank System for homebuyers earning less than $10,000 yearly at a maximum of 642% is a long overdue concept. It shelters the $3 billion for specific housing use and it funnels that money directly to those families that are hardest hit by the present housing crisis.
We give this proposal our wholehearted endorsement and urge that the committee give it its prompt blessing so that these funds can be released as soon as possible and be fed into the system. The availability of 150,000 homes costing less than $25,000 in 1970 or 1971 would provide an urgently needed boost to this particular market, which has almost totally disappeared in many areas of the nation.
While we in the AFL-CIO have supported the 235 and 236 subsidy programs, they are, we must admit, based on a no-limit interest rate concept. The federal government subsidizes all that is charged above 1 percent. The argument is that direct loans are too great a Treasury drain and the subsidy provides the answer. Now, an interest rate subsidy is rearing its head again, this time as a legislative proposal that the interest rates of the Home Loan Bank System be supported by a subsidy. Once again, we are being told that banks are sacrosanct, that there can be no ceiling on them, that now the federal government must furnish a floor. Such a subsidy would insure that high interest rates would remain with no inclination on the art of the banks to reduce them. This isn't the way the free enterprise system is supposed to work.
With reference to s. 2958, while we share Senator Sparkman's concern in stepping up the flow of funds so acutely needed by every sector of the housing industry, we cannot support at this time an authorization for FNMA to engage in secondary mortgage operations for conventional mortgage programs. We believe FNMA's attention to FHA needs, particularly the efforts for low and mod.erate income housing, should not be diluted by ministering to the needs of the conventional mortgage market with a possible ambiguity in philosophy as to which master to serve.
Now let me discuss briefly our own efforts to ease the housing crunch.
In the AFL-CIO, we believe that tax-advantaged asset pools, including pension programs should invest a portion of their assets in government guaranteed mortgages. We believe that any asset pools that derive a specific tax advantage should be required to invest a portion of its funds in housing mortgages. The question of what specific formula is to be used can be worked out, though it would be our disposition to make the transition evenly and at a steady annual pace rather than an immediate and drastic changeover of funds.
The labor movement has believed in this concept for many years. Already many union pension funds are heavily invested in mortgages. We have gone a step further to encourage investment in mortgages, with establishment of the AFL-CIO Mortgage Investment Trust. This enables union pension funds to be invested in the trust, which in turn buys mortgages, thus relieving individual unions of the problems of servicing mortgages or of the need for a mortgage banker.
Mr. Chairman, I would ask that a recent article which I wrote describing the entire AFL-CIO Mortgage Trust operations, be included in the record as part of my testimony.
Whatever the outcome on interest rates, there will be continual attempts to blame American labor for the scandalous cost of housing. I trust I have sufficiently proven that it is not labor that is to blame. American construction unions have pioneered in the pre-fab housing field and have pioneered in the use of new building products and methods. They will continue to do so. The attempts to run rough-shod over the contract practices and rights of construction workers are generally not motivated by a desire to pass along to the homebuyer or the consumer a less costly package, but rather to weaken the unions and to absorb any savings in profits.
The culprit in the housing crisis is clearly high interest rates. Any steps that can bring the cost of money to a more reasonable level will be met with deep gratitude by millions of hard working low and middle-income Americans, who desperately need housing. And lower money costs will also be welcomed by additional tens of thousands of workers who cut the timber, finish the lumber, make the materials, the appliances and myriad other items used in home building. As workers and as consumers, the AFL-CIO has a great stake in home building. We can no longer watch as decent housing is sacrificed on the alter of tight money and sky-high interest rates.
MIT: A UNION INVESTMENT THAT PAYS OFF, IN MORE WAYS THAN ONE
(By John Evans, Director, AFL-CIO Department of Urban Affairs) The AFL-CIO Mortgage Investment Trust is tackling a share of the nation's housing problem and in the process is providing a practical and secure union and pension fund investment program. It also offers a means to build unionism, create union jobs and aid union contractors caught in the tight money squeeze.
Simply put, the Mortgage Investment Trust (MIT) provides a unique opportunity for unions and pension funds at every level to serve the national interest as well as their own interest. If a union or a pension fund would like to use its money helpfully, creatively, securely and profitably then MIT merits consideration because it puts money into a badly shortchanged sector of America—the money market for housing. At the same time it is providing a better rate of yield on invested union monies and at a higher degree of security than many pension funds now realize.
MIT has been existence for nearly five years, but it was the passage of the 1968 Federal Housing Act that dramatically put the MIT program in focus as an opportunity to serve the nation's low and moderate income families. The Trust is now expanding its operations and has at this writing federally insured construction loans working in five major cities with projects in the planning stage in as many more.
On this basis of wider operations, its board of directors has been greatly ex panded. AFL-CIO Pres. George Meany is chairman of the 11-member board of trustees. The other trustees are: Lane Kirkland, AFL-CIO secretarytreasurer; Joseph A. Beirne, CWA president; Paul Hall, SIU president; Joseph D. Keenan, IBEW secretary; Herman D. Kenin, Musicians president; S. Frank Raftery, Painters president; David Sullivan, Service Employes president; Harry Van Arsdale, Jr., New York City Central Labor Council president; Martin J. Ward, Plumbers & Pipefitters secretary-treasurer; Peter Fosco, Laborers president. None receive remuneration for this work.
To bring the housing difficulties closer to home, if you've tried to buy a low or moderately priced home recently, or if your son or daughter is just getting married and looking for a modest home or apartment to rent, you are undoubtedly aware of the current housing problem. But the elderly—including our members and those who live in the substandard inner city areas could testify that the situation has become a crisis.