VETERANS' HOMEBUILDING

It Lags Because of Tight Money

THE roof has fallen in on the American building industry," said William Levitt, one of the nation's largest builders, as he surveyed the plight of the U.S. homebuilding industry last week. Though his pessimism was exaggerated, Levitt and his fellow builders had some reason for concern. The U.S. Department of Labor announced that housing starts in February fell to a seasonally adjusted annual rate of 910,000 units, the lowest point in five years. Housing and Home Finance Administrator Albert M. Cole held to his prediction that at least 1,100,000 new housing starts will be made in 1957, but builders and mortgage brokers were less optimistic; they foresaw 1957 starts ranging from 900,000 all the way down to 750,000.

The size of the drop depends on what happens to the Veterans' housing program, which currently accounts for a full quarter of all U.S. homebuilding starts. The program is rapidly being choked off, a victim of the tight-money policy which has made mortgage money unavailable for VA houses at the low (4 1/2% maximum) rate permitted. The volume of appraisal requests to the VA is 57% below two years ago--even though the demand is still huge. In its twelve years of mortgage operation, the VA has guaranteed building loans for more than 5,000,000 veterans of World War II and the Korean war, and there are still 15 million veterans who have not made use of VA loans. "There hasn't been any drop in basic demand for new houses," says George C. Smith, vice president of the F. W. Dodge Corp. "There is evidence that the reverse is true."

The quickest remedy would be for Congress to increase the VA interest rate to 5%, thus making it more competitive on the open market. The American Legion backs the increase, but many veterans and veterans' groups such as the Amvets, the Disabled American Veterans, bitterly oppose the move because it would mean higher mortgage costs. With an ear to such complaining veterans back home, Congress has blocked all moves to approve the increase.

What many veterans do not know is that they are already paying at least the equivalent of 5% interest. Most moneylenders who accept VA loans do so only at considerable discount in order to offset the 4 1/2% rate. Builders pass on this hidden charge to veterans by inflating the cost of the house. And by preventing the veteran from building earlier, the VA's low rate has actually cost him extra money. Industry sources, for example, expect house prices to average about 3% higher this spring than last.

No one believes that simply raising the rate to 5% will solve the veterans' problems. For one thing, such a move would not create any additional capital in the tight-money market. But unless the VA program is brought into line with interest rates in the open market, vets may find themselves without any help at all. Warns VA Chief Benefits Director Ralph H. Stone: "If this 4 1/2% rate is maintained without providing some alternative support to the veterans' housing market, the unavoidable consequence will be the phasing out of the VA program."

Most of the alternative supports being talked about in Washington are even more controversial--and far more expensive--than the interest boost. One measure, backed by the House Committee on Veterans Affairs, would increase the VA's direct home-loan program by $200 million. Such a bill is not apt to find favor: last week the House Appropriations Committee slashed total VA funds in the budget by $206,657,700. Other proposals would establish a flexible interest rate that would be determined by veteran and lender, or that would be pegged to prevailing geographical rates. But these proposals stand little chance because the administrative difficulties are too great.

If Congress adamantly refuses to raise the VA interest rate, the Administration hopes to help the veteran nonetheless with a bill making it easier to get mortgage loans under the Federal Housing Administration that in December raised its interest rate to 5% (congressional approval was not required). Under this plan, Administrator Cole would be allowed to lower the FHA's down-payment requirements at his discretion. If tight money continues, he would probably do so before the World War II housing program expires in July 1958. Veterans would thus find FHA-backed loans more attractive, and the VA would in effect be allowed to wither on the vine, except in the few parts of the country where a 4 1/2% interest is still acceptable.

The best and quickest solution to the problem is a rise in the VA interest rate. Both Congress and the veteran should face up to the fact that veterans must pay more for loans if they want new houses in times of tight credit. Says the VA's Stone: "Automobiles have gone up, everything has gone up, so why shouldn't money go up?"

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