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STATEMENT OF CHAIRMAN ECCLES ON HOUSING FINANCES BEFORE IB? JOINT COMMITTEE ON THE ECONOMIC REPORT NOVEMBER 2?, 1947 One o f t h e most i n f l a t i o n a r y f a c t o r s —- perhaps the most i n f l a t i o n a r y s i n g l e f a c t o r - - i n the present s i t u a t i o n i s excessively easy mortgage c r e d i t f o r housing* During the past two years the amount of such mortgage debt has increased by more than 9 b i l l i o n d o l l a r s and the r a t e o f c u r r e n t mortgage l e n d i n g has r i s e n from about 550 m i l l i o n d o l l a r s per month t o about 1 b i l l i o n d o l l a r s per month. Teras of l e n d i n g have eased s u b s t a n t i a l l y as compared w i t h prewar. A l a r g e p r o p o r t i o n of recent loans has been made on an i n s t a l m e n t b a s i s a t U per cent i n t e r e s t on the unpaid balance f o r a p e r i o d of between 20 and 25 y e a r s . Most of these loans have been made f o r a very h i g h percentage of c u r r e n t s a l e p r i c e which i s g r e a t l y i n f l a t e d . More t h a n h a l f of t h e c u r r e n t unprecedented volume of mortgage l e n d i n g i s sponsored by t h e Federal Government under l e g i s l a t i o n enacted by Congress. The Government must t h e r e f o r e assume much of the r e s p o n s i b i l i t y f o r any adverse e f f e c t s of t h i s type of l e n d i n g . P r i c e s of houses have advanced from 25 t o 35 per cent d u r i n g t h e past two y e a r s . A l a r g e number of f a m i l i e s of moderate and low income have been encouraged t o assume mortgage debt vfliich w i l l be beyond t h e i r means when t h e present i n f l a t i o n a r y p e r i o d i s o v e r , and i s becoming i n c r e a s i n g l y burdensome as the c o s t of l i v i n g goes up. S e l l e r s and b u i l d e r s of houses have been enabled t o make e x o r b i t a n t profits. The Government has assumed and continues t o assume c o n t i n g e n t l i a b i l i t i e s of g r e a t p r o p o r t i o n s . I t i s e n t i r e l y i n c o n s i s t e n t t o r e s t r i c t c r e d i t terms on automobiles and o t h e r consumer durable goods, p a r t l y t o reduce the i n f l a t i o n a r y pressures, and p a r t l y t o p r o t e c t t h e buying p u b l i c , and a t t h e same t i m e t o make housing c r e d i t terms so easy as t o s t i m u l a t e i n f l a t i o n and encourage people t o go too deeply i n debt. Any a n t i - i n f l a t i o n a r y program o f t h e Government w i l l lose much of i t s e f f e c t i v e n e s s so long as the Government sponsors the present i n f l a t i o n a r y housing c r e d i t program. Easy c r e d i t has g r e a t l y increased t h e e f f e c t i v e demand f o r both o l d and new housing f a r beyond the supply and t h i s has g r e a t l y i n f l a t e d p r i c e s . I n an e f f o r t t o meet t h e demand and take advantage of t h i s p r o f i t a b l e market, b u i l d e r s have undertaken t o c o n s t r u c t a l a r g e r volume of housing than t h e r e are resources r e a d i l y a v a i l a b l e t o f i n i s h . As a r e s u l t , p u b l i s h e d p r i c e s of m a t e r i a l s have advanced and, i n a d d i t i o n , a gray o r premium market has developed f o r many b u i l d i n g m a t e r i a l s . I n t h i s c o m p e t i t i v e market, t h e services of l a b o r are a l s o b e i n g a c t i v e l y b i d f o r and bonuses and o t h e r e x t r a s have become common. The predominant f e e l i n g i n the b u i l d i n g i n d u s t r y i s t h a t o n l y by b u i l d i n g a t c u r r e n t rates o r even h i g h e r can t h e housing shortage be met and only by keeping demand h i g h can the c u r r e n t l e v e l s of p r o d u c t i o n be maintained. The p r i c e s t h a t are being e s t a b l i s h e d now, however, are too h i g h f o r longs u s t a i n e d b u i l d i n g . A t i n f l a t e 4 p r i c e s of m a t e r i a l s and l a b o r and i n f l a t e d p r o f i t s f o r b u i l d e r s a few more houses may be produced than would be t h e case i f p r i c e s and p r o f i t s were lower, b u t t h a t c o n d i t i o n makes i t less l i k e l y t h a t t h e market n e x t y e a r , and t h e year a f t e r t h a t , w i l l be able t o pay the p r i c e s necessary t o keep b u i l d i n g going a t the r a t e needed t o overcome t h e housing shortage and s t a b i l i z e t h i s segment o f the economy. An i n c r e a s i n g number pf f a m i l i e s are being p r i c e d out of the market now, i n s p i t e of t h e extremely easy f i n a n c i n g t e r n s , even though t h e i r need f o r housing i s very g r e a t . I f t h e easy c r e d i t s i t u a t i o n were producing a s u b s t a n t i a l a d d i t i o n a l volume of housing a t supportable values i n the l o n g run, i t would be j u s t i f i e d , b u t because of t h e l i m i t a t i o n s of l a b o r and m a t e r i a l s i t produces, i n s t e a d , a dangerously i n f l a t e d market which cannot be sustained f o r both new and o l d houses. I b e l i e v e t h a t by c u r t a i l m e n t of c r e d i t f o r housing i n c l o s e r r e l a t i o n s h i p t o t h e supply of l a b o r and m a t e r i a l s , the p r i c e t r e n d would be r e * versed and a market f o r houses assured over a long p e r i o d of y e a r s . Good lowcost housing cannot be b u i l t w i t h h i g h - c o s t m a t e r i a l s and h i g h - c o s t l a b o r . N e i t h e r Government n o r p r i v a t e i n d u s t r y can produce t h i s m i r a c l e * For t h e reasons which I have s t a t e d , Congress should reconsider i n t h e longer term i n t e r e s t of t h e c o u n t r y the p r e s e n t p o l i c y and program o f t h e Federal Government i n t h e f i e l d o f housing c r e d i t . J ? h a l l be glad t o be of any assistance I can i n making suggestions f o r changes i n t h e present housing c r e d i t programs. A t t h i s time I am merely i n d i c a t i n g the nature of some of t h e changes t h a t seem d e s i r a b l e . Operations under the N a t i o n a l Housing Act and "The G. I . B i l l o f R i g h t s " a r e c l o s e l y r e l a t e d i n p r a c t i c e b u t n o t i n law o r i n a d m i n i s t r a t i o n . These two programs sponsored by t h e Federal Government should be brought t o gether so t h a t a p p r a i s a l s are made by only one agency. The "100 per cent l o a n s " under the program of the Veterans' Adm i n i s t r a t i o n f o r b o t h o l d and new houses and the nominal 90 per cent loans on new houses under T i t l e VI of the N a t i o n a l Housing Act should be r e v i s e d so as t o reduce t h e demand f o r housing and thus b r i n g p r i c e s down. This means t h a t both buyers and b u i l d e r s should have more e q u i t y i n t h e i r p r o p e r t i e s than under t h e p r e v a i l i n g l e n d i n g p o l i c i e s so long as present i n f l a t i o n a r y p r i c e s cont i n u e f o r housing. t e n d i n g T?y members o f t h e Federal Home Loan Bank System should be s u b j e c t t o g r e a t e r r e s t r a i n t s by the use of a c o n s e r v a t i v e , u n i f o r m a p p r a i s a l system, and by s e l e c t i v e r e s t r i c t i o n on t h e terms o f t h e i r loans. F i n a l l y , from t h e long-range s t a n d p o i n t i t i s v i t a l l y i m p o r t a n t t o prevent i n f l a t i o n i n t h e housing f i e l d from g e t t i n g any worse than i t i s . The g r e a t e r t h e i n f l a t i o n , the more severe w i l l be t h e a f t e r m a t h of d e f a u l t s , f o r e c l o s u r e s , l i q u i d a t i o n s , and bankruptcy. Over the years t h e c o n s t r u c t i o n i n d u s t r y , which i s a major o u t l e t f o r investment and supports a wide v a r i e t y o f r e l a t e d manufacturing, t r a n s p o r t a t i o n and d i s t r i b u t i n g a c t i v i t y , has been c h a r a c t e r i z e d by v i o l e n t upswings and downturns* I f g r e a t e r s t a b i l i t y could be i n t r o d u c e d i n t o t h i s f i e l d , i t would go f a r towards a c h i e v i n g t h e n a t i o n a l o b j e c t i v e of s t a b i l i z i n g p r o d u c t i o n and employment ^ t h i g h l e v e l s . The more t h e backlog o f demand f p r housing i s f i l l e d a t e x o r b i t a n t p r i c e s now, the smaller w i ^ l t h e cushion under the e n t i r e i n d u e t * y when p r i c e s come down , - 3 and, t h e r e f o r e , the more i n t e n s e the d e f l a t i o n i n the i n d u s t r y w i l l be* M a n i f e s t l y , t h i s i s n o t i n the b e s t i n t e r e s t . o f the general econoiqy, and what i s n o t good f o r the country as a whole i s not good f o r any group —» v e t e r a n s , o r otherwise* As has been w e l l s a i d , t h e r e i s no such t h i n g as easy c r e d i t t r u e , i t i s easy t o get i n t o debt but the e a s i e r i t i s t o get i n , the h a r d e r i t i s t o get o u t . That a p p l i e s t o a l l of u s , i n c l u d i n g war veterans•
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