THE HOUSING SLUMP: The Housing Slump

How Much Should the Government Help?

IN THE current credit pinch, the loudest howls are from the U.S. homebuilding industry. Construction of new houses dropped from a near-record 1,300,000 new homes in 1955 to an estimated 1,100,000 this year. The chief reason is that the lending market for low-interest Veterans Administration and FHA-insured mortgages has dried up. Housing starts with VA and FHA mortgages have plummeted 30% to 467,400 units v. only a 1% drop for homes without Government-guaranteed mortgages. Last week the big argument was over the U.S. Government's newest move to help builders by hiking the interest rate on FHA-insured mortgages by ½% to a maximum of 5% (TIME, Dec. 10).

Few builders—and fewer economists —look for much improvement from the new FHA rates. "The FHA move is a drop in the bucket," wired Levittown Builder William Levitt to President Eisenhower, adding politely, "but when your bucket is dry, even a drop tastes good." Low-interest VA and FHA mortgages simply cannot compete in the tight-money market where businessmen are paying interest rates of 5½% to 6% without a murmur. Even in the mortgage market itself, conventional, non-Government insured loans currently bring as much as 6% in many areas, are far more attractive to banks, life insurance companies and savings and loan associations.

In Los Angeles, for example, only the Bank of America still handles FHA loan packages in any quantity. Chicago's Merchants National Bank, which once had as much as 75% of its mortgage portfolio in VA and FHA homes, has cut them out entirely. As for life insurance firms, says President Maynard Harris of Boston's Franklin Savings Bank, "they are not going to invest in FHA when they can buy bonds yielding as much and buy conventional mortgages yielding more." Neither will savings and loan associations, which currently guarantee a 4% interest payment to depositors in some areas, thus must ask 6% to stay in business. Furthermore, the new rate may do as much harm as good. Instead of siphoning money away from businessmen, it may simply dry up completely the market for VA loans, which are still limited to 4½%. The Administration may ask Congress next month for permission to boost VA rates to 5%, but congressional approval is still in doubt.

Actually the Federal Reserve's decision last week to permit commercial banks to pay 3% interest on savings accounts may prove a greater help to housing. By paying higher interest, banks will encourage saving, and thus increase the flow of lendable funds available to builders.

In any event, many builders feel that the Government's entire mortgage program should be overhauled. Among the ideas proposed: 1) a central mortgage bank created by the Government, which would operate much as the Federal Reserve does for commercial banking by making rediscount loans to regulate the fluctuating supply of credit; 2) a boost in the buying power of Fannie Mae, the Government's secondary mortgage-buying agency, from the current $1.1 billion to $4.5 billion; 3) more direct loans from VA to home buyers.