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JOHNS -MANVILLE CORPORATION TWENTY-TWO EAST FORTIETH STREET N E W Y O R K 16, N. Y. LEWIS H. BROWN CHAIRMAN OB THE BOAHD ^ ApPl X O) I" 4 ' Hon. Marriner S. Eccles, Chairman The Board of Governors Federal Reserve System Washington, D. G. Dear Mr. Eccles: As you undoubtedly know, the housing shortage in some of the areas where my Company has plants was so acute that I took steps to encourage substantial housing developments for veterans in these areas. These are not company developments of the usual type, since we are not in favor of the so-called "industrial villages." They have been developments of a normal character to ?/hich we have made certain contributions of land. The buyers of the homes have not been limited to our own employees, Fifty-seven homes in the first of these developments have been completed and have been purchased. Some of our people recently gave me a study of the incomes of the purchasers, and related these to the cost of the homes which they have bought• From my kno?*ledge of what is going on throughout the country, I am sure this study represents a very typical situation. It points up a problem which the administration is going to face as soon as we have an economic recession, and it seems to me it is one of sufficient magnitude to start thinking nov* about how it might best be handled. While this study does not go into details, I am sure you will recognize the implications. Lncerely, April 17, 1947- Mr* Lewis H. Brown Chairman of the Board Johns-Manville Corporation 22 East 40th Street New York 16, New York, Dear Mr. Brown: I read with great interest the ^Economic otudy of First 57 Purchasers of Single Family Homes" which you sent with your lette^4f April 8. After reading it I asked Mr. wood of the Board's Research Division, who handles such matters, to comment on the study, i am enclosing a copy of the memorandum which he sent me, with the feeling that you will be interested in his comments and conclusions. I appreciate your sending me the study, which is concrete evidence of a situation which is of grave concern to me. Sincerely yours, M. 5. ftccles, Chairman. ECONOMIC STUDY OF PIKST 57 PURCHASES OF SIBGL1 FAUIL1 HOMES AID TIF1CAI* IVDT3&TBX&L This is a study of the relationship of income level of the house buyers and the purchase price of their homes classified toy various occupationst The assumption is giade that a wage earner can safely obligate himself to the extant of 2-1/2 times his annual income to purchase a home# Some conservative bankers hold this to 2 times* others use 2-1/4* tout some* especially in the Middle iest* are willing to extend this to 2-1/2 times* Since all these purchasers are veterans* they are eligible for a 90^ loan guaranteed by the F« H. A,* &nd the remaining 10> can be secured through a feter&ns idministrmtion guaranteed loan. Few of these purchasers are making any down payment, Hine m®n have been e»luded whose family income is over #4*000 per annuffi* These men obviously can well afford to purchase the houses and are not in the income level of factory labor* In some cases there may be two wage earners in the family. Also eliminated is one widow of a veteran whose income is given as #2*265 per year* but her job and future earning capacities are not known* The average income of the remaining group of 47 is |2,9?5 per year and of the icnown factory workers it is |2*76$ per year, so that these people are actually the class of workers we have been trying to mid in housing • Of these 47* 23 are classed as having a reasonably secure income* not likely to be reduced appreciably in case of a return to a normal* 40~hour week or a moderate recession in industry • The jobs incite machine designer, chemist* clerks* accountants* a policeman* a garage mechanic* cooks* etc# Thirteen of these 23 have obligated themselves for less than times their income* and are presumably safe risks* fen have beyond this limit, four by |500 to $1*000* and six by #1*000 |l,500» These last six may be considered in the ^dangerous11 as regards risk* They are shown in fable I. 2-1/2 gone to class The second group of purchasers consists of 24 ^en whose income is somewhat HIStable• They are skilled and semi-skilled labor whose income is quickly affected by ups and downs of industrial production* On the basis of present annual income* eleven of these mmi are in the safe category* having obligated themselves for less than 2-1/2 times tfaedr earnings* and thirteen have gone beyond* Three of these have gone above 2-1/2 times for small amounts under $500* six between |500 and |l*G00* and four are in the ndangerouslr group over tl*QOG* These are shown in Table II* Let us assize that a minor recession occurs and hours are reduced to forty a week and overtime is lost* To be conservative, the earnings TABLE I Stable Income Position Income 2-1/2 X Income House Price 9,000 8,580 6,640 5,100 7,600 9,450 6,650 7,500 7,250 8,450 8,600 9,625 8,950 9,000 7,035 6,000 6,615 5,720 5,850 7,370 8,450 8,320 8,165 8,250 8,350 6,525 7,450 8,350 8,250 7,475 8,350 8,350 7,450 7,500 6,700 7,350 7,475 8,350 7,350 7,475 7,475 7*475 6,225 8,250 7,475 7,475 Over 2-1/2 X * * lachine Designer Chemist Clerk Jr« Accountant Clerk Aecoimtant Structural Draftsman Bas Driver Clerk Garage Owner Laboratory Technician P\ar chasing Agent Shipping Clerk Jr. Cost Accountant Psychiatrist Aid Policeman Research Assistant Secretary (Female) Garage Meenwaic Warehouse Man Cook Cook Utility Man * 1. 2. 3» Below Above Above Above 2-1/2 2-1/2 2-1/2 2-1/2 3,600 3,392 2,656 2,040 2,640 3,780 2,660 3,000 2,900 3,380 3,440 3,850 3,580 3,600 2,818 2,400 2,206 2,238 2,340 2,548 3,380 3,328 3,266 X X X X Annual Annual Annual Annual Income Income Income Income Less than |500 $500 to #1000 $1000 and |l,500 3 2 2 2 3 3 *3 2 3 3 13 0 4 6 JABLE 4,1 Unstable Income Annual Income Position Shipping Checker Inspector Inspector Millwright Packer Carpenter Service Ian Laborer Inspector Jeweler Still Operator Truck Driver App. Carpenter feaver Mechanic Eleetrieian Shipper Still Operator BS Repairman Laborer Operator - Driagl Track Driver Shipper Lift Driver 2-1/2 X Income House Price 8,450 7,550 6,820 8,850 7,020 7,000 7,750 5,850 7,812 8,985 9,100 7,500 8,450 7,750 7,000 7,730 7,150 6,390 6,500 6,610 8,050 7,500 7,562 5,250 8,350 7,350 6*575 7,350 3,380 3,020 2,728 3,540 2,SOS 2,800 3,100 2,340 3,125 3,596 3,640 3,000 3,380 3,100 2,800 3,068 2,860 2,556 2,600 2,644 3,220 ^,000 3,025 2,100 * !• 2* 3* B#loir Aboire Aboira Above 2-1/2 2-1/2 2-1/2 2-1/2 X Annual X Annual X Annual X Annual 7,475 7,350 7,500 6,525 8,350 8,350 8,350 8,250 8,350 8,350 8,350 8,350 8,250 7,500 6,525 7,475 Over 2-1/2 X * 1 1 2 2 2 2 3 2 3 3 1 2 7,350 7,350 7,475 6,525 Income Income -Less than |500 Income -$$00 to $1000 Income -$1000 & $1500 3 - 2 - of these 24 men have bean reduced by 15J& although there aight be a greater recimtioiu ftie picture has now entirely changed * Only one mma in this group Is left who is obligated for less than 2-1/2 times his annual income* while two are now over this limit by small amounts up to #500f and $ix between #500 and |1000» Fifteen of these men are now in the Manger oua11 class* five being obligated for flt0G0 to |lt50Q sore than the limit, seven for |lf500 to |2f000# and three for mare than #2tG0Q* This is shown in fable III, Consolidating the stable income group with the unstable income grotsp* (earnings reduced 15^)# we get the following! Obligation less than 2-1/2 times annual income 14 Above normal obligation, but reasonable hopes of carrying (up to #lf000 excess) 12 Excessive obligation, not likely to be able to carry (|lf000 to |2f5OO excess) 21 fotal 47 IOO5S fhe m s o m d economics of the above is obvious • Ihe individual veteran purchaser is not likely to lose* since he is paying less than rent at the present time and there is probably little likelihood that either the ?eterana Administration or the f»H*JU will attempt to get a deficiency Jtadgment against him if he defaults* If this example is at all typical, the liability of the government in the veterans1 housing program must be enornous# TABLE III His table Income Group -- Income Seduced 15/« lOGJfc Mortgage Income Reduced Position 15% Shipping Checker Inspector Inspector Millwright Packer Carpenter Service Man Laborer Inspector Jeweler Still Operator Track Driver App, Carpenter Weaver Mechanic Electrician Shipper Still Operator RR Repairman Laborer Operator-Drugs Truck Driver Shipper Lift Driver * 1. 2. 3. 4. 5. 2,873 2,567 2,318 3,009 2,387 2,380 2,635 1,989 2,656 3,056 3,094 2,550 2,873 2,635 2,380 2,608 • 2,431 2,172 2,210 2,247 2,737 2,550 2,571 1,785 Below Above Above Above Above Above 2-1/2 2-1/2 2-1/2 2-1/2 2-1/2 2-1/2 X X X X X X 2-1/2 X Income House Price 7,182 6,417 5,795 7,522 5,967 5,950 6,587 4,972 6,640 7,640 7,735 6,375 7,182 6,587 5,950 6,520 6,077 5,430 5,525 5,617 6,842 6,375 6,427 8,350 7,350 6,575 7,350 3 7,475 1 3 2 4,462 6,525 Annual Annual Annual Annual Annual Annual Income Income Income Income Income Incoae 7,350 7,500 6,525 8,350 8,350 8,350 8,350 8,350 8,350 8,350 8,350 8,250 7,500 6,525 7,475 7,350 7,350 7,475 Over 2-1/2 X • 2 2 4 4 2 2 4 3 4 5 4 5 4 3 4 2 1 3 _5 Less than $500 1500 to #1000 $1000 to $1500 #1500 & |2000 12000 & |2500 1 2 6 5 f BOARD DF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date A P ru Chairman Eccles Subject: Study of Vf recent Bsmsay Wood purchasers of new houses The study of Vf purchasers of single-family houses, their incomes, and the prices paid for their houses, sent to you "by Mr. Lewis H. Brown of the Johns-Manville Corporation, shows that these purchasers have committed themselves to obligations greater than they can comfortably carry. This is true even of the group classified in the study as having "stable11 incomes, and is still more clearly true of the group whose incomes are Munstable." Unless the incomes of these workers rise appreciably, or their debts are scaled down in some fashion, it seems likely that many of them will face financial difficulties in the future. Conditions found in the study Table I classifies the purchasers according to the relation of the purchase price of the house to the income of the purchaser. It will be noted that only one of the workers paid less than twice his annual income, although many students of feMly budgets agree that carrying a house costing more than twice the annual income does not leave enough to be spent for other living expenses, especially in families with children. The extent to which expensive houses reduce the income available for other things may be seen more clearly from Table II which classifies the purchasers by the proportion of income required to carry the debt. The annual cost of the debt has been calculated on the assumption that all of the borrowers made the fullest use possible of the borrowing rights of veterans — that is, that they made no down-payments, and obtained 25-year mortgages at k per cent interest. Before the war, borrowers on mortgages insured by the Federal Housing Administration obligated themselves to pay roughly 12 per cent of their incomes for debt service, compared with between 15 and 20 per cent which seems to be common for the purchasers shown in Table II. Furthermore, before the war, debt service amounted to slightly more than half the cost of carrying a house with an IHA mortgage. Allowing for the fact that taxes, insurance, heating, utilities, repairs and maintenance have not risen as much as real estate prices, it seems likely that these items still amount to three-fourths as much as the debt service. This means that these purchasers are paying from one-third to two-fifths of their incomes for housing, compared with the one-fifth to one-fourth which has generally been considered the maximum desirable. Chairman Secies - #2 General conditions The situation disclosed "by the Johns-Manvill,e study is fairly typical of the situation throughout the country, except that the subjects of this study, "being veterans and buyers of new houses, are probably further over-extended than many other recent buyers of similarly-priced houses. On the other hand, a great many families with similar incomes, particularly in metropolitan areas, have bought houses very much more expensive than the kj in the Johns-Manville study. During 19^6, probably about twice as wax^y houses changed hands as in 1939, and the transfers took place at prices which were from 70 to 100 per cent higher than in 1939* ^ ® great increase in transfers started immediately after Y-J Day and continued through the spring of 19*^6. Since October there has been a decline which is probably greater than seasonal, but the level of activity is .still high compared with any other recent period. The slowing down in real estate transfers — even though activity is still high — undoubtedly reflects in part high real estate prices. Such dats as are available suggest that prices rose rapidly during most of 19^6 and have been relatively stable since early fall. The average size of mortgage recorded followed this pattern and is now about 60 per cent higher than in 1939, &&cL 50 P®** cent higher than at Y-J Day. Government policy has aided these developments in large measure. To the active real estate market which followed the demobilization of the armed forces, the mortgage guarantee features of the Servicemen^ ^Readjustment Act and the Patman Amendment to the National Housing Act added further inflationary pressure. Veterans have been enabled to buy with little or no down-payment on very attractive terms of maturity and interest rates. In recent months, the number of mortgage loans guaranteed to veterans has amounted to one-fourth of all mortgages recorded, and the amount of mortgage debt written with Grovernment insurance or guarantee — ISA and GI — was very close to two-fifths of the total amount of mortgages recorded. These proportions have been rising throughout the past year. In view of these developments, recent purchasers are vulnerable to adverse economic developments, but lenders are protected in large part. The Government has a commitment to make good a sizeable* part of the losses of lenders, but the borrowers are on their own. Attachments TABLE I Number of Purchasers Whose Houses Cost Specified Multiples of Annual Income Relation of house price to annual income All purchasers Purchasers with "stable11 "unstable" incomes incomes under 2 times 1 1 2 - 2-1/4 times 6 5 1 2-1/4 - 2-1/2 times 16 9 2-1/2 - 2-3/4 times 7 7 - 7 10 4 6 7 6 1 23 24 2-3/4 - 3 times Over 3 times All purchasers Source: Data contained in Johns-Manville study recomputed. TABLE II Number of Purchasers Wfctose Mortgage Debt Service Takes Specified Proportions of Income Debt service as per cent of income All Purchasers Purchasers with "stable11 "unstable" incomes incomes 10 - 12-1/2 per cent 1 1 - 12-1/2 - 15 per cent 6 5 1 15 - 17-1/2 per cent 18 7 11 17-1/2 - 20 per cent 13 3 10 20 - 22-1/2 per cent 7 5 2 Over 22-1/2 per cent 2 2 - 23 2k All purchasers kj Source: Data contained in Johns-Manville study. Debt service has been computed assuming no dom-payment, and a mortgage for 25 years at k per cent interest. Mortgage insurance premium on 95-per cent mortgage insured by the Federal Housing Administration has been included.
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