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Implications for Governmental Policy
In view of the Increasing shortage in bousing, of the large amount
of construction necessary in the next five years, end of the Sanger of I
t
housing boom ana collapse* It appears desirable for the Gorenmient to do
what it can to stimulate construction now*

In this way the danger of en

excessive concentration of building activity and excessively high prices
some years hence may he lessened*

The longer It takes to attain an annual

output of e w e 800*000 units, the greater m i l be the accuaaxlated shortage,
and the more difficult It will he to achieve stability In building and in
general business activity*
The chief obstacles to a considerably higher rate of building activity
in the next year or so are the rise in the price of building materials
on the one hand, and a shortage of skilled labor on the other* Wholesale
prises of building materials have risen 8 # S percent in the past few months
to a level only 4 percent under 1929*

A continuation of this rise would

be a matter of grave concern*
The shortage of skilled labor is a consequence of the lon^contlnned
sltmtp in building*

The seriousness of the shortage is Indicated by the

nrcnerous complaints ontillsscore that arose last year when the output
Of new housing units was only between 250*000 and 300,000*
This shortage makes for higher prices, an inadequate volume of building*
and less opportunity for the employment of unskilled building workers*
The shortage might be lessened by governmental actiOB in two ways*

In the

first place* the Government could lend its Influence against any shortening
of the work week In the building trades* The average hours worked per
we*k in private building ware 52 for the first ten months of 1956 while the
highest average for a single month was 54* Secondly* the Government could



In various ways provide for or encourage technical training In order to
relieve the XBQB%

pressing shortages.

When the output of housing units etteins a volume of some 800,000
annually it may he desirable to attempt to restrain & further expansion*
If this could be done building activity might be stretched over a longer
period with beneficial eff&ota on both building employment and general employ*
nent*




February 5t 1937
SOm&ABT OF THE SBCOHP MWR&sffiM OH SHE FScOSPECTS FOE TBS
EPBAELK GOODS IfflPSTRIES
by
George Terborgh
HOUSIHG
Importance of housing
There can be no question that we have 1b housing 6ns of the most
important of all durable goods.

Expenditures for new construction and

repairs in this field averaged over S billion dollars annually during
the residential building boos of 1923-1928, a figure which represents
roughly 55 per cent of the total for consumers* durable goods, end 15 per
cent of the total for all durable goods* in the same period.
She significance of residential construction from the standpoint of
business fluctuations is greater than these relative magnitudes suggest,
since It is subject to swings in activity more extreme than those which
characterize the output of durable goods as a whole*

During the low year

of the depression* house building and repair operations were only 15 per
cent of the previous high, as contrasted with 45 per cent for the output
of all other durable goods*
!Ptmlng of movements
A review of housing construction since 1919 shows a movement with
turning points differing quite widely from those recorded by most types of
durable goods production, and by business activity in general* Thus residential building turned down in the middle of 1919* a year ahead of the
break in business, and began rising early in 1921, several months ahead of




-2-

the general recovery*

Its next dovmturn came late In 1925, four years

ahead of general recession* and the succeeding upturn appeared about
the beginning of 1935, almost two years after the business revival set
in*

It is apparent that hotising construction has been in an exceptional

degree a law unto itself.
This is due not only to the fact that the demand for new housing
isoves in cycles differing from those which characterize most goods, but
also to the fact that readjustments of supply to demand in this field
proceed so slowly, and with such inertia, that they are likely to overcompensatef and to give rise to swings in production that are at times
out of phase with the swings of business In general*
Bousing during the depressjonf
The most important effect of the depression on housing was to suspend
for several years the growth in occupancy on which, as we have seen, aost
of the demand for new construction depends*

Because of the migration of

population from urban co&ssunlties to f ariast the cessation of net iismigration from abroad, the curtailment in the number of marriages, and the
doubling u > of families on account of reduced Incomes, the total of non~
j
faim occupancy actually declined during the worst part of the depression
and remained until 1934 below the 19S9 figure*

Even now it exceeds 1929

by only 1,500*000 to 1,600,000 dwelling units, as compared with a gain of
at least 3,000,000 units to be expected except for the depression*
This increase in the present occupancy over 1929 has been accoano~
dated in part by a growth in the housing supply In the interval, which,




despite the drastic curtailment of building, has maounted to 800t000
to 900t000 dwelling units*

In part it has been accomodated by an

absorption of sonxe of the large supply of vacancies existing at the
beginning of the period*

Although the number of vacant units increased

from 1929 to 1953 by something like 700*000, the reduction since then
has been approximately twice as graarU

At the present tine the supply

is about 400,000 to 500,000 dwelling units below the level indicated by
b long-term average vacancy ratio,
The decrease in vacancies which began in 1933 was followed early in
1934 by an upturn in rental rates on new leases. It was at least a year
later, however, before there was any significant advance in the average
of rents on outstanding leases or in property values*
did not begin to revive before 1935*

Hew construction

The tendency for building to give

a delayed reaction to vacancy situations has been evidenced again in this
movement*

The housing shortage, as Jseasurec by the supply of vacancies,

was more acute in 1936 than in 1925, when J900t000 dwelling units were
produced, yet the 1936 output has been less than a third of that amount*
Realignments In rents and values have clearly not proceeded fast enough
to keep building in step with the growth of occupancy*

Just as in the

Twenties we passed from a shortage to a surplus of housing because of the
delayed response of building to the underlying supply and deaa&nd situation,
we have already passed in the Thirties from a surplus to a shortage, and
for the same reason*




Building prospects during; the next five years*
Without going here into questions of method and procedure {which
are discussed in the full memorandum) I shall merely muxiiaariso the
results of an analysis of the probable housing market during the next
five years*

The estimates are based on the assuapMon that the

period will be prosperous:
Components of the Five-Year Housing Market
1*

2*
3*

Increase in households
(a) Prom currently accruing natural increase
(b) From reduction of the depression marriage
backlog
(c) Prori undoubling of families
(d) Kroia net reduction in farm households
Total increase in households
(
Replacement of dwelling units demolished during
the period
Elimination of present housing shortage

,

- :
2,400,000
500t000
500,000
200,000
3,200,000
400,000
500,000

Total housing market in
dwelling units

4,100,000

Average market per year

820,000

The prospect may be summarized a little more fully in three propositions*

{1} If building averages 800,000 units a year for the next five

years, the period should close with a reasonably comfortable housing
situation*

{2} If construction averages 700,000 units annually the period

should close with a shortage comparable in magnitude with the present
shortage,

(3) If the average is 600,000 units, the shortage at the end

of the period promises to be very acute, comparable, let us say, witjt the
worst period after the World War*
In view of the fact that the five years start at a relatively low
level of construction (250,000-300,000 units in 1956} the attainment of a



rate of 600,000 units a year cannot be expected until we are well into
the period, and the achievement of that rate as an average for the period
as a whole would call, therefore, for an output of at least a million
units a yoar in its later stages*

While this is not impossible (it is only

10 per cent higher than the i9£5 peak)

it seems to me doubtful that it

will come soon enough, if it coses at all, to produce an average of 800,000
for the five years. The inference is, therefore, that there will be soiae
housing shortage remaining at the end of the period*
One reason for this doubt is the danger that as construction activity
increases there will develop shortages of skilled labor, and of certain
classes of building materials, that will retard further expansion*

Such a

limitation of the output of new housing, if it becomes effective, will be
reflected partly in higher labor and material costs and partly in higher
unit profit margins for contractors and developers, but in any event the
final cost of the product to buyers will tend to rise sufficiently to equate
demand with the limited supply being produced. It seens likely that it will
require prices for new housing materially higher than those no* prevailing
to mobilise enough productive activity to offset demolitions and occupancy
expansion during the next few years, to say nothing of eliminating the
shortage now existing*

I em inclined to believe that barring unexpected

developments in pre-fabrication, government subsidies, or other alleviativea
of the situation, supply and demand will be equated during the next five
years by a volume of construction which averages between 600,000 and 800,000
dwelling units a year, with 700,000 as likely a guess as any*

This would

represent an average expenditure at pre-depression building cost levels




(including repair activity) of 4.5 to 5 billions of dollars annually*
Higher cost levels would of course increase this figure*
Kiere seems no doubt, in any event, that the current housing
shortage will become considerably worse before it begins to be
generally alleviated*

Even with the most rapid pick-up in construction

for which we have any reason to hope, the prospect is for a worsening
of the situation for at least a yeari and the probabilities appear to
favor a period nearer tv*o years than one. The shortage seems destined
to become decidely acute in many places during this stage.

The attain-

ment of reasonably comfortable housing conditions is, of course, much
more remote than the beginning of improvement, since progress *?ill at
first be slow.
More renxote prospects.
For the next few years the housing market will experience an exceptional concentration of demand.

Superimposed on th^ regular demand

arising from the currently accruing natural increase in households and
the replacement of structures currently demolished will be a special
and temporary demand attributable to the after-effects of the depression*
This special demand appears to total something like 1,300,000 dwelling
units, as follows*
Accumulated housing shortage at the end
of 1936
Delayed marriages likely to be contracted
in the future
Probable undoubling of families still
doubled because of the depression f
Probable net decrease in farm families^/

500,000
500,000
500,000
200,000

There is no satisfactory way of estimating this item* ihe assumption
here is that the net decrease in farm families during the next few
years will be half of the increase attributable to the depression*
This seems a conservative supposition.




If, as seeiss probable, these special demsnds will become effective
during the first few years of prosperity, the building of housing will
be. stimulated to a level that cannot be maintained once they have been
a&tisfied. She regular demand thereafter, barring

unprecedented

increase in demolitions and replacements, viill probably be around
600t000 dwelling units e year*

If during the period when general and

spdcial demand operate concurrently construction activity is stepped
up to say a isiillioii units a year, a subsequent let-down will be inevitable.
Historical analogies are seldom close, and no one can rightly be
very confident of inferences drawn front earlier situations, but it
seems to me nevertheless that there Is enough similarity between
conditions prevailing at the beginning of tha last building boo© and
those obtaining today to justify a tentative expectation that the
forthcoming boom will repeat, in a general way, the pattern of the
preceding one*
If this expectation is justified, we may look forward to a protracted housing shortage, accompanied by rising rants and values,
with the latter culminating at very high levels when building activity
at last overtakes the current growth In occupancy (plus demolitions).
By that tii&e construction costs will be high, along with lend values
and contractor-developer profit margins, and the momentum of the
building boom will carry it forward despite a decline in the growth
of occupancy and the accumulation of vacancies*
lenders will bo full of confidence*

By that time also,

Tho most liberal loans will be

made at the top of the market, or even during the early stages of the




jtceasion in values. The sale of new housing will he supported against
the growing competition of existing structures by a narrowing of the
wide profit margins previously obtained by contractors and developers,
and by excessive credit.

In the end the process will enter its

critical stage when new housing can be sold only at prices which severely
restrict output and when lenders becoiae disturbed by the adverse trend
of developments*

A fairly abrupt contraction of activity will then ensue*

This pattern of developments is not presented as a definite forecast,
but merely as a basis for orienting our expectations at the moment*

Con-

stant rechecking and revision of these expectations will be necessary as
time goes on*

It is quite possible* that eoxae of the incipient develop-

ments of the currant housing situation., such as pre-fabrication and mass
production, or government leadership in the mortgage market, may later
become sufficiently controlling to alter the pattern, or th*t the course
of business activity in general may provide a background for housing
construction so different from that of the Twenties that a radically
modified pattern results*

Just now, however, I see no reason to reject

the pattern of the preceding housing boom as a tentative guide to the
future*
If governmental authority is to be invoked to prevent the accumulation of a housing surplus and a subsequent reaction some years from now,
it seems to me that control over the supply of ussrtage funds for new
construction is the most promising approach*

This would have to be saieh

more intimate and direct than the blanket and general control over money
rates now within the power of the Beserve Board*



-9-

It is one thing to prevent the development of housing surpluses,
and quite another to stabilize the volume of residential construction*
Even if it were possible to tie construction activity closoly to the
current growth in occupancy {plus current replacements) we would still
hi^ve building boons and depressions*

The growth of occupancy, as

we have seen, is extremely irregular, and promises to regain so £6
long as the economy is stibject to periodic business depressions. The
prevention of a housirig surplus several years hence - which is about
the most that \ e can even hope for from regulatory control - will not
?
prevent a boom and recession in the meantime*
recession prompt* gradual, and orderly*




It can only au&e the

Implications for Govera&sntal Policy
la view of the increasing shortage in housing, of the large amount
of construction necessary in. the next five years, and of the danger of a
housing boom and collapse, it appears desirable for the Govsrment to do
ushst it can to stimulate construction

In this way the danger of an

excessive concentration of building activity and excessively high prices
erne years hence may be lessened*

The longer it takes to attain an annual

output of some 800,000 units, the greater ^ill be the accumulated shortage,
and the more difficult it will be to achieve stability in building and in
general business activity*
chief obstacles to a considerably higher rate of building activity
in the next ye&r or so are the rise in the price of building materials
on the on© hand, and a shortage of skilled labor on the other*

Wholesale

prices of building materials have risen 5*5 percent in th* past few months
to a level only 4 percent under 1989*

A continuation of this rise would

be a matter of grave concern*
The shortage of skilled labor is a consequence of the long^continned
slump in building*

The seriousness of the shortage is indicated by the

numerous complaints on this score that arose last year srhen the output
of new housing units was only between £50,000 and 300,000*
This shortage makes for higher prices, an inadequate volume of building,
and less opportunity for the employment of unskilled building tsorkers*
The shortage might be lessened by governmental action in two ways*

In the

first place, the Government could land its influence against any shortening
of the work week in the building tr&des*

The average hours worked per

week in private building trere 32 for the first ten months of 1936 rhile the
highest average for « single month



54* Secondly, the Government could

in various ways provide for or encourage technical training in order to
relieve the most pressing shortages*
Whan the output of housing units etteine a volume of some 800,000
annually it may be desirable to attempt to restrain a further expansion*
If this could be done building activity might b© stretched over a longer
period with beneficial effects on both building employment and general employment*