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Carla A. Hills Speeches
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The original documents are located in Box 2, folder "11/18/76 - Business Outlook
Conference in Los Angeles" of the Carla A. Hills Speeches at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
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copyright claim, please contact the Gerald R. Ford Presidential Library.
Business Outlosk
Conference
Les angules,
11/18/76
Now that you tell me that I am the first woman to address
you, I should scold you, but I am glad to be here. I have to
confess I have looked forward all week to coming out here, to
returning home, and to being with a group of my friends. I
can see there are a lot of friends who are here today. It is
a special pleasure to have the chance to enjoy a living room
type discussion on issues of mutual interest. Indeed I didn't
have to write a speech which made it even more fun. Your panel
of economists very thoughtfully sent to me 11 questions seeking
my prognosis, which I found extremely flattering in view of the
season. Those 11 questions fall in basicly 4 categories: the
health of our housing industry, affordable homes for middle America,
shelter for our poor and the problems of our cities. Not much
of an agenda for 35 minutes.
You know there have been some changes over the past year
in the housing market which make prognosis difficult at best.
And there have been some changes outside of the housing market,
one of which occurred just two weeks ago. But I am pleased to
share with you my views.
With respect to the health of the housing industry your
panel asked (I'll paraphrase a little for brevity): The housing
sector activity has been a major disappointment of the present
recovery. How do you explain this? What kind of stimulus, if
any, will be needed over the next year to boost the multi-family
construction? And what is your estimate of housing starts for 77?
GERALO R. FORD LIBHARTS
Digitized from Box 2 of the Carla A. Hills Speeches at the Gerald R. Ford Presidential Library
-2-
First, let me take issue with the opening premise. '75
was a terrible year. The worst year for housing in 3 decades.
But '76 is an entirely different story. We have climbed out of
the trough of the recession which we hit in December of '74
and the beginning of 75. Starts are up 93% overall. Starts
are at an annualized rate of 1.8 million, which any economist
would say is healthy. This recovery is much faster than in any
of the prior 3 housing cycles. The single-family market is
very, very strong. Indeed, we're headed for the third best
year in this nation's history for single-family starts just
behind 59 and 72.
The multi-family market has been much slower in large
measure because of the overproduction that occurred during the
early '70s. Notwithstanding, I would not recommend additional
stimulation for the multi-family sector and I have three reasons.
First of all we do have a recovery on the way. Starts jumped up
the multi-fam 1y sector 48% in August, another 46% in September.
The starts figures out on Tuesday of this week went down multi-
family a little bit from that high plateau, but they are still
30% over the August figures, and they're 38% over a year ago.
So I think we've got to let our free market work. Now there's
another factor why I would not encourage stimulation at this
time. We preceive a change in demographic patterns. Those born
-3-
in the post-war baby boom are aging. The are now reaching 30
and getting into the 30, 31, 32, 33 age brackets. There is a
much greater demand after 30 for homeownership than there is for
rental tenure. So, we anticipate during the latter part of this
decade and into the 1980s, a much greater dema: for single-family
homes than for apartment dwellings. And that's what we're
perceiving right now. During the early 70s the ratio was about
55 to 45 in favor of the single-family market, and we anticipate
that ratio will change to something like 70 to 30 at the end of
this decade and into the beginning of next decade, which really
parallels what we saw in the '40s where the demand divided two-
thirds/one-third in favor of single-family homes. My prognosis
for 76 is for a pretty healthy year: very, very, very good single-
family starts; slower and weaker for multi-family starts with
overall starts figure of about 1.5 to 1.55 million which would
make this year the 5th best in a decade and the 12th best since
we've kept records. So 1976 is not a star year, but it is by no
means what you would call a depressed year for housing.
My prognosis for '77 is better, but it rests upon a couple
of assumptions. Assumption one is that we will continue to have
the rate of growth that we had in the third quarter and anticipate
for the fourth quarter of this year which is about a 4% real
growth rate, and assumption two is that we will have a continued
decline in the inflationary rate. If we can make those assumptions,
and I don't know that we can because I don't know what the economic
R.
GERALD
SHOM
-4-
programs will be for next year, we would estimate starts in the
range of 1.6 to 1.8 million, which would include single-family
starts of 1.2 to 1.3 million, multi-family starts of 400,000 to
500,000, and of course not in the overall start rate are in
addition shipments of mobile homes which we estimate at 300,000
to 400,000.
With respect to affordable homes for middle America your
economists have written: What specific policies would you
recommend for dealing with the problem of skyrocketing prices
that threaten to prevent young middle-income families from buying
a home? How extensive will subsidized housing be in the next few
years, and specifically what programs are on the drawing boards
so that more families can afford the still rising home prices?
And what do you recommend to supply single-family housing for
young, middle-income families?
The problem of housing costs in my view must be put in a
framework. Skyrocketing costs of homes have been accompanied by
skyrocketing sales of homes, new and existing. For the past 16
months we have had 16 consecutive months of records in the sale
of existing homes. Indeed in the last 4 months, 3 have been
records not only the best October for an October, but the best
3 months of existing homes sales that we have had in the history
of this nation. And we've had records with respect to the sales
of new family homes.
R.
GERALD
FORD
AMERICA
-5-
What we see nationwide, acknowledging that there are pockets
of differences which is what is interesting about the housing
industry and why mandates from Washington have worked SO poorly,
is a tremendous growth of homeownership in this country. Among
families homeownership is the highest it has been in history:
75% of the husband and wife families own their own homes. And
if we take our entire population, singles included, 65% of all
Americans own their own homes. And why is that? It is because
basically the incomes have risen at the same rate as the costs,
both have increased about 59% since 1968. And the relationship
between the median price of a new home -- and keep in mind the
median price simply means that the homebuilder is building half
above that price and half below -- but the relationship between
that median priced new home and the median income has been stable
since World War II on a national analysis. For example, in 1965
the median family income was about $7,000 and the median priced
home was about $22,500. Today, 1976, the median family income
is about $14,000 and the median priced home is about $44,500.
So that the ratio is about 2.8 to 1, and has been at that steady
ratio since the War.
The biggest barrier in my view to homebuyership is inflation.
That is the difference to a buyer in 1965 and 1976 and more
clearly so between 1974. When we had double digit inflation we
saw the interest rate, which in the mid-60s was about 6%, jump up
to 10%. By cutting of that double digit inflation over the past
-6-
16 months we've seen the FHA-VA interest rate decline to 83 and
conventional rates edge downward. With that same cut in the
inflationary pressures we've had urban revenues increase 11%
this year, which reduces upward pressures on property taxes.
And with home maintenance costs, as with the costs of everything
that has escalated during an inflationary period, you get relief
where you get control over inflation.
Thus a principal concern of mine with respect to housing
has been not to urge a remedy which is in fact counterproductive.
When you talk about subsidies you can be counterproductive, and
you can be so very, very rapidly. Because when you try to buy
out the base of all middle-income people, say all those with
$15,000 in income who would like to enter homebuyership, you look
upon a tremendous sea of faces. That subsidy program costs the
Treasury a great deal, and when the Treasury goes out and borrows
it drives up the interest rates. We figure that about a 1%
increase in the mortgage interest rate creates a barrier for
about 7% of the potential homebuyers who would come into the
market. So, it's like pushing down on a sofa here and having it
pop up there. What you're creating with your right hand in
producing 450,000 units of subsidy, you may with your left be
taking back from the private enterprise system by precluding
people from entering homebuyership because the interest rate is
too high. Thus you may have a substitution effect which nets you
little but costs you alot.
-7-
Apart from the need to control the inflation, I think that
we can have a number of innovative measures that assist home-
buyership by reflecting the economy as it is today rather than
the economy as it was in the 30s. We definitely have an inflationary
climate. That fact accounts for our support of the graduated
payment mortgage, an innovative debt instrument, which would permit
young, first-time buyers to convert their future earning power into
present purchasing power. For example, on a $35,000 mortgage if
they opt for a fully amortized debt instrument they'd be paying
$270 a month; if they opt for a graduated payment plan, they could
choose to pay $225 in year 1; go up in 3% incrementals or approxi-
mately $7 dollars in each of the succeeding years, so their payments
would go from $225, $232, $239, et cetera, til they reached $300
and then they would level off at year 11 through the 30th year at
$300. We have done some actuarial studies on this proposal, and
we think it is sound. Many of you may recall that in the '30s
and the '40s the typical mortgage in this country was 5 years with
a 50% downpayment. We think that by providing a Federal guarantee
to a graduated payment mortgage establish that this debt instrument
is not unduly risky and thereby open up homebuyership to young,
first-time buyers who are assured in today's economy, whether they
be blue-collar or white-collar that their seniority is going to
pull down more dollars over the span of their work period. We also
have proposed a cut in the FHA downpayment simultaneous with an
expansion of FHA coverage. By legislation we cannot insure more
than a $45,000 mortgage, we are urging that that limitation increase
-8-
to $60,000 which would permit FHA to be an option for 87% of
the sales that occur in this country. At the same time we
propose to reduce the FHA downpayment above $25,000 to 5%.
And we find that there is actuarial strength in these innovative
measures. We will have those proposals before Congress when
it returns on the 3rd of January and from my discussion with
the members of both Houses and their staff, I do not anticipate
a great deal of consternation over either. I think that we can
do something today in the 70s through FHA which reflects some
of the needs of the markets, as we did in the 30s and 40s.
The next category of questions sent to me addresses shelter
for the poor and your economists ask: What is being done to
prevent the creation of public housing that the public refuses
to use? Well, our major program today is a rental subsidy
program whereby we subsidize the difference between 25% of a
poor family's income and the fair market rental of a decent but
modest unit. If the family has zero income we pay the entire
tariff. This program was enacted on August 22, 1974, and enables
us for the first time in history, to deal with the true poverty
strata in a way that I think is effective. This program also
can use existing homes as well as newly constructed homes. This
means in a soft market, and we have plently of them with high
vacancy rates, we can put poor families into units that are
otherwise wasting. This means we can put families into decent
shelter without having them wait 30 months for an apartment or
a public housing project to be built. It means relief in the
-9-
form of additional demand for the landlord that has vacant units.
With the current increase in all costs and property taxes, a
landlord with unrented units is very concerned about his break-even
point and whether he should simply abandon. Abandonment of rental
units is a real problem. In New York City, for example, we have
50,000 abandonments per year, because the costs for carrying the
apartment are so much higher than the stream of income from the
rented units. Our rental subsidy program, which puts poor families
into existing unrented units, retards abandonment and thereby
prevents blight. The city also benefits because not only does it
avoid the potential blight, but the landlords pay taxes.
The program works in a similar fashion with respect to
homebuilders. For the first time by working with the market,
the homebuilders can look at a community and treat people, who
before were simply persons who occupied institutionalized housing
if you will, as part of the demand curve and build to it. And
we are seeing construction.
The rental assistance program has been critized because it
had a slow start-up period. It is difficult, slow, and frustrating
to fill any pipeline whether you're hanging out your shingle to
sell oranges or practice law, there is a hiatus there until you've
got your pipeline filled. And so it is with a new housing program.
I might say parenthically that one of the things we suffer with in
this country is that we are so impatient. In housing we shift
gears so rapidly that we never quite get the bugs worked out of
one program, before we are high-tailing it to another program.
-10-
In the course of this criticism of the rental subsidy
program public housing was lauded as the alternative that we
should return to. I recommended against it, not only for the
reasons that I've said that every segment in the equasion ----
the tenant, the landlord, the homebuilder and the city, benefit
from the rental subsidy -- but it is faster in implementation
and avoids the pockets of overproduction that we have had in
the past where bureaucrats from Washington decide where we shall
put our housing. For example, we can compare the rental subsidy
program with the most popular public housing program, turnkey
public housing. That program was enacted in 1965. Two years
after enactment, turnkey public housing had achieved 4800 starts
as opposed to our rental program which has over 40,000 starts
and 2300 in occupancy as opposed to our program which has over
100,000 in occupancy. I strongly recommend that the rental
program be kept. Now you may be aware that Congress upon returning
from the 4th of July recess, reactivated the public housing program
and mandated the construction of 21,000 units of public housing.
I think we can make use of this public housing, particularly for
large families, the most difficult segment of the market to service.
But I believe it would be a serious mistake to make public housing
the centerpiece of the future housing programs for the poor of this
country.
-11-
I cannot tell you what will in fact occur in 1977, other
than to say that the rental subsidy program is on the books;
I would think that it would at least survive through this budget
period and perhaps be re-assessed in October of 77. If it
continues to produce the high levels of starts and occupancies
I think that it will gain for itself enough real support so that
it can continue as a strong tool to deal with the problems of
providing shelter for our low-income population.
And the last grouping of questions addresses the problems
of the cities. Your panel asked: How can our central cities
be salvaged? And what did Toronto do that we're not doing?
Let me get Toronto out of the way first. Toronto is the largest
English speaking city in Canada, grew up rapidly following the
War, is on the St. Lawrence waterway, is the hub of a major
transportation system, has a very efficient subway system, and
has a very cooperative and dynamic interaction between its
business leaders and its political leaders. On the upside
Toronto has a real cooperative effort working to address such
problems of imaginative zoning, mass transit. It also has a
homogeneous population, relatively few minorities and few
economically disadvantaged. Their problems of late have been
a very high rate of inflation. Their prime interest rate is 12%,
and it doesn't look like it's going down. They have a single-
family inventory that is twice a healthy rate, while their multi-
family market is very very tight, but no one is building because
-12-
of the high interest rate and rent controls. So the things that
I would like us to draw from the Toronto experience is their
fine working relationship between the private and public sectors.
But they have many unique qualities that I fear we cannot emulate.
But we can certainly learn from other cities of the world, and
I think that Toronto has much to offer.
With respect to urban problems in this country, I believe
that we have for too long attempted to deal with them by enacting
narrow Federal legislation that address narrow categories of
problems rather than to develop a broad strategy. In my view a
national urban policy must push the decision-making down to the
local level and provide Federal funding within broad Federal goals
to use the method in that locality that best addresses that
Federal goal. For example, we have a national policy that every
American is entitled to a decent home, in a decent living environ-
ment. That is an appropriate Federal goal. What we did to
implement that goal was to pass the Housing Act of 1968, whereby
we mandated the subsidization of 2 million homes a year for a
three year period running and, generated such a burst of over-
production in this country that we are just now working it off.
This overproduction drew urban dwellers out of the city, robbed
the cities of their tax base, left a homogeneous poor at the
core and resulted in a large number of abandorded and boarded up
dwellings. This policy mandated from Washington which was not
based on the condition of particular housing markets, GER but rather
a decision to build. If you're offering a 1% mortgage on a new
-13-
home, you can find a buyer, even in a soft market. In my view
it would be far better to use those same dollars to let the
locality forge its own strategy for housing its poor, and many
of our communities could have -- might have -- utilized their
existing housing stock. The 1968 legislation was well-intentioned,
but wrong, and I would like us not to go back to that.
I have personally reviewed 63 Federal grant programs to our
cities. Only 4 are block grants which means that funding is
provided with very few strings attached to the locally elected
official to address the top priority of that community. I favor
block grant programs over the small categorical programs for
reason of my experience at HUD. Prior to 1974 we had 7 categories
of programs. We had open spaces for parks; model cities; urban
renewal if you wanted to tear down your center city and maybe build
it up someday; water and sewer programs. If a Mayor came in to
see my predecessor to say: You know, the top priority in my
community is to expand the housing stock for my low and moderate
income persons and, I'd like help to develop a rehabilitation loan
and grant program. My predecessor would have had to say: I don't
have funds for that categorical problem. How about a park today?
And the Mayor would say: Well, a park -- that's 19th on my
priorities. My predecessor might have said: Water and sewer pipes?
And the Mayor would have said: That's our 7th priority. I'd like
to address my top priority. You don't have that capacity with
categorical programs.
-14-
In 1974 the Housing and Community Development Act was passed
which gives the Mayors unfettered funds, mandates citizen
participation, relies on a post-program auditing mechanism --
and has distributed over a 3-year period $8.6 billion. It has
been a tremendous success and completely revolutionized the
programs of the past. Regulations were cut from 2600 pages down
to 100 pages; the length of applications from some 1400 pages
down to 50 pages. We are funding twice as many units of Govern-
ment in 45 days instead of the average of the old categorical
programs of 26 months. Straight across the board on any criteria
you use, this is an efficient distribution mechanism.
The President's Urban Development and Neighborhood Revitalization
Committee which I chair supported block grants in its interim
report issued in October as governing principles for future Federal
assistance. One definite advantage of block grants is that by
working with elected officials, State or local, you achieve
accountability and the capacity to coordinate. I would hope that
we don't go back to categorical thinking but that we continue to
develop block grant planning.
I've taken too long. I did want to open this up to questions.
QUESTION inaudible
Secretary Hills, most of our questions
that we have involve the problems in building an affordable house
as well as the cost of living. There is one that the 2.8 ratio
-- change in the tax and social security law -- When in your
opinion will families be able to afford homeownership, at the
-15-
expense of 76% of expendable incomes and the third one says will
there be an overabundance of expensive homes not within the grasp
of the $42,000 a year income?
On the spendable income, I think people are spending more
than the rule of thumb of 25% of their income for housing but
that figure has vacillated over the years. When we look back
statistically we see that people are not doing what the lenders
think they should be doing. My 2.8 to 1 ratio compares the price
of houses and the income of families buying. That ratio has held
constant. But I believe that the biggest barriers to entry into
the homebuyer market are escalating interest rates, property
taxes and home maintenance costs. I can't tell you the exact
percentage of the increase of these items; they vary so much
across the country. But over the years most homebuyers have
found that homeownership is a teriffic investment. It is a
forced investment and there has been an appreciation of their
investment which comports with inflationary pressures in the
economy. Since 75% of American families already own their own
home, that segment of the population do not face the problems
a family seeking to purchase for the first time. For first time
buyers we need to give careful thought to controling inflation
and to utilizing such innovative debt instruments as the graduated
payment mortgage and a lower downpayment where there is demonstrated
credit worthiness.
-16-
QUESTION inaudible
There are 2 questions that have to do with
what the Federal government can do
One question says that
roughly 125 different legal documents are required to build a
house
the number be simplified and made less expensive. The
other asks the Federal government
In Maryland I am told it takes 29 permits to build a home,
and the number varies across the nation. I have a committee
working with the National Association of Home Builders to see
whether we can't work together to get localities to eliminate
red-tape, and whether we can't create with respect to the FHA
Minimum Property Standards a substantial equivalency test that
is based upon established local requirements. Essentially
building requirements are local. Localities would very much
resent if the Federal government came in and said from now on
you must put your sewer pipe down SO many inches or you must use
this sort of a connection for plumbing. This has traditionally
been local, because terrains differ. What is good for Little Rock,
Arkansas is not necessarily good for downtown Manhattan and the
home markets vary greatly. We have thousands and thousands of
housing markets across this nation and what works in one simply
doesn't work in another. We need local leadership to address this
problem rather than shunting it off to Washington. Indeed,
-17-
there is a growing awareness in this country that problems are
not automatically solved by shunting them off to Washington,
and there is merit in having the local and State governments
step up to the responsibilities of addressing some of these
concerns. And were we to develop some uniform code provisions
I would certainly rather have them at the State level than at
the Federal level.
With respect to your question about property taxes, the
Federal government has assisted by strongly favoring general
revenue sharing which has alleviated the pressures to raise
property taxes. The 3 categories that revenue sharing have
addressed most generally are transportation, protection against
crime, and quality education. Those items affect quality of
life in the locality and will tap the local coffers without
general revenue sharing. I think this year has been a travesty
in that Congress kept its extension unresolved until a majority
of our communities were already half-way through their fiscal
77. But we're out of the woods on that now. There was some
harm done. But I think revenue sharing is one way to address
those concerns you raise.
QUESTION inaudible
Another question asks: About the plans
of the Carter Administration. Are they considering government-
backed housing loans at very low interest rates -- 5% -- and if
so what is your reaction?
-18-
The only thing I heard during the campaign was that Governor
Carter stated on a couple of occasions that he would subsidize
housing starts to the level of 2-1/2 million a year. And as I
have mentioned here, I'm against such artificial stimulation of
the market. I'm against it because of what it does to the cities
by creating pockets of overproduction and drawing people out from
the city. It builds on the theory that new is better and ignores
renovation, rehabilitation, recycling, reuse and preservation of
our existing housing stock, which is our most valuable asset in
this country and which should be fully used. Frankly, we stand
in an era of relatively scarce resources, and we cannot afford
the luxury of always throwing away that which is slightly tarnished
and always reaching out for the shiny new. I think it is better
to work with the market in line with the programs I have described.
I see a real downside in a subsidy program where the base is so
large that it either is grossly inequitable because you can only
pick the lucky few who are first in line or you buy out the base
and sink the Treasury. There might be other considerations if we
were in a housing slump. This Administration utilized below-market
interest rate mortgages in both the single-family and the multi-
family to stimulate a stagnant housing market. Back in 74 and 75
we released some $15 billion worth of below-market interest rates
for the single-family sector, which translates into assistance for
some 500,000 single-family home mortgages. That was to give the
-19-
single-family market a shot in the arm when it was literally down
and out and when there were no funds in our thrifts to finance
home purchases. We faced both the flight of funds from our private
lending institutions and a housing market that was on its knees.
This year we have released $5 billion worth of below-market mortgages
(7-1/28) in the multi-family which translates into assistance for
about 200,000 units. The majority of that money was released in
January and the remainder in September. We will see the effects of
that stimulation over the next 18 months. Again, we were giving
this retarded sector a shot in the arm. But a permanent subsidy
is in my view counterproductive, and the housing picture today does
not call for a subsidy. It is making a comeback and we ought to
let it do SO. If we are going to step in with subsidies to
artificially stimulate the market, we will borrow forward, and
we will have an exaggerated period of contraction in the next
period. That is exactly what happened in 1968 where we subsidized
for 3 years running 2 million housing starts. We not only created
the abandonment, but we borrowed forward and when we came to the
next period which hit us just about 2 years ago we had an exaggerated
period of contraction -- 4 out of 5 bankruptcies were connected with
construction and the unemployment rate among construction workers
was triple the national average. We brought that condition on
ourselves. I would not want to go back to that.
Thank you.