The Year That the Building Stopped

President Ford's WIN buttons are likely to find few wearers among U.S. homebuilders and buyers. So far, their only role in the Administration's war against inflation has been to lose, and lose disastrously. Hammered by both out-of-control costs and the tight-money policies that the Administration counts on to curb them, the housing industry has staggered into its deepest slump since the 1930s. That collapse has deep social as well as economic implications; it is crimping the vaunted mobility of U.S. life by forcing millions of families to stay put in their present quarters. The more spacious houses or apartments that they had hoped to move into either have been priced beyond their reach or are not being built at all.

Bruised Knuckles. The Administration recognizes that the housing industry needs special help if it is to survive the crunch, and last week the White House began providing some. Ford signed into law the Brooke-Cranston bill, a measure that will pump $7.75 billion of federal funds into the sere U.S. residential mortgage market over the next twelve months. Earlier, the President had urged Congress to make available only $3 billion to federal agencies that in effect lend the money to home buyers at below-market interest rates. Some builders have talked themselves into believing that once the elections are over, the Administration will move to clamp controls on construction wages and the prices of building materials, despite the President's oft-stated opposition to wage-price controls of any kind.

The moves now in prospect seem unlikely to do much more than keep the housing slump from getting still worse --if they accomplish even that. Fundamentally, the industry is caught in a terrible dilemma. It is peculiarly vulnerable to inflation; housing is the pressure point at which soaring costs of land, labor, materials and maintenance all converge. But housing is even more vulnerable to federal efforts to fight inflation by restricting the supply of credit, because both home builders and buyers rely so heavily on borrowed money. And a continuing squeeze on credit by the Federal Reserve Board--though a slightly less brutal one than was in effect during the summer--remains central to the Administration's whole anti-inflation strategy. "In this fight against inflation, we end up being the fist," says a Chicago contractor, "and let me tell you, there are a lot of bruised knuckles around." Adds Atlanta Builder Charles Sheron: "The country is in a recession; the housing industry is in a depression."

That is not much of an exaggeration. Housing has always been a boom-and-bust business; builders tend to put up too many homes when money is available, operating not on careful demand estimates but on blind faith that there will always be buyers. This year there are not, and 1974 could almost be called the year the building stopped. In January 1973, housing starts ran at an annual rate of almost 2.5 million, a high point in a succession of three unusually fat years for the industry. Since then, starts have plummeted to an annual rate of about 1.1 million, the lowest level in almost five years. The current collapse already is more than twice as bad as the industry's last bust--in 1969, when home building dropped off 25% in 12 months while the new Nixon Administration fought to get the Viet Nam inflation under control--and is worse than the 37% slide that followed the outbreak of the Korean War in 1950.

Vacant Lots. The shores of California and southern Florida are stippled with unsold condominium apartments --almost 18,000 in the Miami-Fort Lauderdale area alone. Demand for rental housing is at an alltime high, but construction has virtually ceased. Many cities are packed with vast, vacant building sites like the one cleared two years ago in the Chicago suburb of Oak Park for its still-unbuilt 39-story "Twin Oaks" residential complex. Some 900 construction firms went bankrupt from January through July. Many of them were small local outfits, but the failures also include a dozen publicly held firms that do business on a national scale.

Unemployment among the nation's 4.3 million construction workers in September hit 12.9%, more than double the national average. In some hard-hit areas like Chicago, as many as 3 out of 4 may be idle. The downturn in home building will cause other layoffs over the winter as its effects begin to show up in fewer orders for stone and clay, lumber, wiring and electrical equipment, steel and furniture. General Electric, Pittsburgh Plate Glass and Carrier Corp. have already furloughed some 1,500 employees as a result of the housing slump.

Some large architectural firms have slashed their staffs by 70%. Says Atlanta Architect John Portman: "I think there are more architects out of work now than at any other time since the Depression." That goes for real estate brokers too. Complains James Williams, head of a Virginia construction company's sales staff: "The customers do not even come around to look any more."

Scarce Cement. They do not come to look because they cannot afford to buy. Never has construction and mortgage money been so hard to get or so expensive. The Federal Reserve's money squeeze has driven the interest rates that builders must pay on construction loans to an impossible 18% in some areas. Mortgage interest rates have leaped to an average 9%, about two-thirds higher than the going rates of the mid-1960s, and some home buyers are paying as much as 24% on second mortgages.

Too often, mortgage money cannot be obtained at any price. In the past three months, investors seeking higher returns elsewhere have drawn more than $5 billion out of savings banks and savings and loan associations, which normally make nearly 60% of the nation's residential mortgage loans. There are some signs that the heavy outflow is now stopping, but mortgage money is still hard to find anywhere. The situation is worst in large cities and, thanks to the crazy-quilt patterns of state mortgage laws, the populous Northeast. Because almost all states in this area have usury laws limiting mortgage interest rates generally to less than 10%, housing capital generated by savings in the Northeast flows to home buyers in states that do not have interest ceilings.

One permanent casualty of the credit crunch everywhere is the 10% down payment that was standard in the 1960s. Most bankers now want home buyers to put at least 30% down. Chicago's big First Federal Savings and Loan Association nowadays deals only with regular customers, from whom it demands 50% down for a 25-year mortgage with a maximum value of $35,000 and an effective interest rate of 11 3/4%. Concedes Senior Vice President James Fitzmaurice: "It's pretty bleak."

So is every other aspect of housing costs. Suburban land values are soaring as more and more communities try to freeze out developers through restrictive zoning, and other "no growth" strate gies. While the construction trades are poised to push for yet another round of hefty pay increases, material costs are already marching ahead briskly. A roll of steel reinforcing mesh that cost $22 last year now carries a $60 price tag. Cement is scarce and costly because manufacturers closed down many cement plants rather than install the costly anti-pollution equipment required by new environment-protection laws.

Frequent Moves. These pressures have combined to raise the roof on housing prices. Since January 1972, the average price of a new house in the U.S. has jumped from $24,700 to $37,100; the prices of existing houses have risen com parably. The $16,000 house that the re turning G.I. bought after World War II now costs $40,000 -- and even more in the land-short Northeast. The under-$30,000 house is just about extinct.

The extreme difficulty of financing a new home is especially painful to Americans, because so many of them have made frequent moves a way of life. Some 40 million Americans change their address every year; during his lifetime the average American moves about 14 times. No one has been able to measure the precise impact of the present situation on American mobility, but it has probably been substantial, though highly selective.

Upper-income home owners have not been severely affected by the col lapse of the mortgage market. The wealthy still trade $100,000 houses and co-op apartments among themselves -- though sellers sometimes have to ac cept paper payment in the form of private mortgages from buyers who cannot get bank financing. Large corporations ease the financial pains of executives who are transferred from one part of the country to another. When Olin Corp. moved Sales Representative Geoffrey Belanger and his family from Old Bridge, N.J., to Boston recently, it gave him an interest-free loan of $13,000, representing his equity in his old house plus estimated appreciation, so that he could meet the down payment on a new one.

The company also assumed payment of interest and taxes on the Old Bridge house until Belanger could sell it, and promised to make up the difference if he had to let it go for less than its appraised worth of $42,000.

Feeling Trapped. But the housing squeeze has pressed heavily on the young and on middle-class families without corporate connections. In the Boston area, college students who could once afford to live off-campus are retreating to their dormitories. In Northern California, rural areas are dotted with prefab domes and A-frames put up by young families who cannot afford suburban housing. Two young couples who are neighbors in an apartment building in a Chicago suburb are trying to stretch their combined income of some $30,000 by going in together on a town house. Having set aside enough money to make a 30% down payment, they are searching for a mortgage to cover the rest of their new pad's $69,000 purchase price.

Social as well as geographic mobility is being crimped. Families that want to move to a bigger house or out to the suburbs find that they are no longer able to trade up. Some examples:

>Clarence Mearson, 44, a supervisor with an electronics firm, wants to move his wife and four children out of the two-bedroom, $14,900 mobile home that they have owned near Dulles Airport in Virginia for just over a year. Mearson has his eye on a handsome, $64,000 town house, and he has even saved enough for a down payment. But now he finds that inflation has driven the monthly carrying costs way beyond the limits of his budget. "I can't afford to pay those interest rates, and you can't sell anything any more," he says, referring to his present abode. "I'm afraid the bottom is dropping out."

>Houston Police Lieutenant Joe Gamino, 37, father of two small children, tried to buy a new house several months ago but could not meet the $34,000 price. After two pay raises and a promotion within six months, Gamino went back to his real estate broker, only to learn that the same house now costs $38,000 and thus is still out of his reach. The Gaminos will stay in the small, cramped house that they already have.

> Ottis Spruill, 34, a construction-company supervisor who lives in a rented house in Woodbridge, Va., is in a bind. Though he moved to Woodbridge some tune ago, he is still unable to sell his old house in Chesapeake, Md. Reason: he has a private mortgage that cannot be assumed by a would-be buyer. Spruill was still ready to go ahead and buy in Woodbridge--until he found that his monthly payments would run to $460. Says Spruill: "I can't afford to buy a house. It's like bacon and steak: we don't have them in our diet any more."

The social damage is greatest for the old and the poor. Retirement-age couples who are unable to sell their homes up North cannot move to the sun and condominiums of southern Florida and California. At the same time, the odds are greater against minority families trying to "earn" their way out of the inner cities and into the better schools and living conditions across town or in the suburbs. Working-class families everywhere, says Urbanologist David Birch, feel deep concern about their inability to change their lives by moving. Birch interviewed 900 families in Boston and Kansas City and reports that many have a "sense of being trapped in a neighborhood. People want their children in better schools; they have an image of the place they want to move to. One of the big things now is that they can't make that move. When they can't get that mortgage, you frustrate their desires for a better life. It's a situation we've never been in before."

What is the solution? Some builders suggest that a recovery might begin with the ouster of James T. Lynn, Secretary of Housing and Urban Development. Wisconsin Senator William Proxmire last week called on Lynn to resign--or at least change his department's initials "from HUD to DUD."

Lynn has opposed some builders' proposals for pulling more funds into home building, including one to exempt from taxes the first thousand dollars of interest paid on S and L savings accounts. The Secretary argues that this would simply spur more interest-rate increases on competing investments like bonds. Lynn advocates granting tax credits that would lure pension funds and other well-heeled newcomers into mortgage lending. But ultimately, he says, the only way to rescue housing is to stop inflation and improve productivity throughout the economy: "Without this, in my judgment, we'll just be chasing our tails."

Basic Change. The potential demand exists to bring about a strong housing revival if mortgage money can be set to flowing freely again. Some 1.6 million new family units enter the U.S. housing market each year. To shelter them and replace dilapidated houses that have been torn down, the U.S. will have to build about 2 million units every year into the 1980s, or nearly twice as many as the current rate is producing.

When and if housing does revive, inflation is likely to cause one basic change in its pattern: concentration on the freestanding, single-family house may well be over. The postwar idea that the average family can live in the style celebrated by Gary Grant in the 1948 movie Mr. Blandings Builds His Dream House "never has been realistic," says Irving Rose, head of Detroit's big Advance Mortgage Corp. "To house America in that roseate dream would require trillions of dollars." Now that inflation has exposed this unreality, the child who grew up in a one-family home in the 1950s and 1960s is likely to raise his children in a garden apartment, a condominium, a leisure-village quadruplex or even a mobile home. "The whole lower end of housing has vanished into mobile homes," says Housing Economist George A. Christie. Last year they represented a third of all single-family "houses" sold. It is a development that Mr. Blandings surely never dreamed of --but then, neither did he ever go through anything like today's inflation and mortgage squeeze.

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