How to Meet the Housing Situation

I

IN most of the large cities and towns of this country to-day there is an acute shortage of houses, and the subject of relief of the shortage is one of general discussion, bringing forth large numbers of divergent views, with almost as many proposed measures of relief. The United States Housing Corporation encountered and studied all these problems, and the lessons it learned should at least be a guide in analyzing the situation and solving the problem so far as possible.

The building of housing accommodations by private enterprise was practically stopped by the war, and has not been resumed to any extent compared with the normal amount built annually before the war; so that the shortage exists, without any doubt. People are not necessarily homeless, but they are living in more crowded quarters than formerly, and they cannot get, as easily as before, the housing accommodations they desire at the prices they are willing to pay. Many have moved or are moving into smaller quarters or less desirable neighborhoods, in order to avoid paying increased rents; and others are striving to prevent the increase of rents by legislative or municipal regulation.

The result, is a growing demand for more and better housing accommodations, accompanied by a surprising lack of understanding as to why the demand is not being met. In several states the situation is considered by many to constitute an emergency justifying the use of public funds for building, either directly or by subsidy, and the radical regulation of rents, involving the police powers and the power of eminent domain. The housing problem, however, still remains unsolved, because the fundamental factors are not known to, or understood by, even many professional real-estate men.

Before the war, new houses were always being built fast enough to meet the demand; obsolete and dilapidated houses were steadily replaced by new; and, as a rule, the supply was so great that the actual net returns of landlords were very small. Builders made fair profits; but the profits of those who bought for investment generally came from the increasing values resulting from the growth of the communities rather than from high rents. Landlords were obliged to keep their properties in good repair and to keep their rents low in proportion to the value of the properties, because of the unrestricted competition. Nevertheless, even in those days, they were treated by tenants as legitimate objects of abuse, and were obliged to make alterations and repairs that the tenants themselves would not have made if they had owned the houses; and they were usually expected to give free rent for various periods to tenants who met with financial reverses.

All this naturally reacted on the tenants, keeping the cost of housing higher than it otherwise would have been. The majority, however, particularly in cities, preferred to remain tenants rather than to own their own homes, knowing that they could get larger returns on their money from other forms of investment, and being willing to pay the additional cost of maintenance due to their own abuse or that of tenants in general, for the sake of being relieved of the responsibility of caring for the property, and for the privilege of being freer to move from place to place. In many cities, in fact, no attempts were made to make it possible for wage-earners to own their own homes by selling houses to them on easy monthly payments. Competition in building was always free, and the law of supply and demand worked so well, that the only housing problems before the war were those of improving the living conditions of the poorest class, who were unable to pay rentals yielding a reasonable return, and of making building and sanitary regulations to protect the health of the public. These regulations, when reasonable, were met by landlords without opposition; for wise landlords have always known that the best and most lasting results are obtained by keeping real estate in good condition. The housing problem as it exists to-day was inconceivable.

The situation has been completely changed by the war. The demand for new housing accommodations is now car in excess of the supply, it having been estimated that there is a shortage of at least one million dwellings, due to the stopping of the normal annual building. While this shortage has been rapidly growing, the costs of building have increased to from two to two and a half times what they were before the war, and, as the people arc unwilling to pay these increased costs, little progress is being made toward meeting the demand. In other words, the demand is for new houses at the old or only slightly increased prices, and it is impossible to meet it. People still balk at the increased cost of housing. The real trouble is that they have fought and have kept down the increase of rental and market values of improved real estate that legitimately reflect the rising costs of building; and until the factors affecting real-estate values are better understood, and the fair market value of real estate is allowed to draw nearer, in proper proportion, to reproduction costs, they will continue to refuse to pay the increased cost, and the shortage will continue to grow.

One argument that is frequently advanced to justify the fight against increased values and costs is that costs will and must come down, and that even such existing increases in real-estate values as have been allowed are inflated and will fall when costs fall. The increased costs arc due to the increased costs of labor, materials, and money, and to the lack of adequate transportation facilities. There is little prospect that the wages of labor in the building trades will soon come down; but it is expected that the cost of labor will decrease somewhat because the men will be forced to return to their former standards of efficiency. When this occurs, and when transportation facilities are improved, it will be possible to produce materials more cheaply; but at the present time there are not enough finished materials or labor on hand to meet a return to former normal building conditions; and although prices may fall temporarily because of the present inaction, as soon as building does start, they will return to the present level, if not higher. The cost of money for mortgages is probably not coming down to the pre-war level while the housing shortage continues.

The longer the resumption of building is delayed, the greater will be the demand for labor and materials and money when the boom begins, and this will naturally mean greater costs. Since any substantial sustained reduction in building costs or in real-estate values cannot therefore be expected — unless temporarily, as a result of a period of general depression or a panic — until the present housing shortage is largely eliminated, which cannot be for many years, some other solution than the reduction of costs must be found. The solution lies in a better knowledge of the elements entering into the fair market value of real estate, and in allowing values to rise so far that the cost of new building will no longer be the controlling element.

II

There are so many elements entering into an estimate of real-estate values, and they are so interwoven, that they must all be considered together. The main general items are neighborhood, cost, style or condition of building, and demand. For a perfect job from the practical builder’s point of view, they must all be in proper proportion and relation. For instance, as a general broad rule the value of land and utilities should be about twenty per cent of the total value of a house and lot. A wide variation from that would probably mean that the building was either too good or too poor for the neighborhood. One cannot build a residence in the centre of a business block in a large city, and sell the property for much more than the value of the land; nor can one expect to recover the cost of an expensive residence built on a small, cheap lot in an inaccessible or undesirable neighborhood.

The land value of residential property depends almost entirely on neighborhood : the nature of the neighboring buildings, the classes of people living or working in them, and the accessibility of points of interest, such as business centres, factories, churches, schools, and places of amusement. In a city or town in which public utilities have been installed, the value of these utilities usually merges with the value of the land, and no distinction is made; but in considering the value of land that has not been improved by utilities, the accessibility to such utilities and the cost of extending them to the premises are very material considerations.

The greatest loss that the United States Housing Corporation sustained was where it had built a ‘model town’ outside the limits of the neighboring city. It could have built houses inside those limits, where utilities wore already installed, much more quickly and more cheaply; for the cost of improved vacant lots in the city was less than that of the improved acreage plus the great cost of utilities. The attractiveness of the finished new town was not enough to offset the disadvantage of a long carride and to pay the increased cost of utilities. This is a point which deserves special consideration to-day in undertaking any new housing scheme. Taking advantage of the utilities already installed at pre-war cost will often mean a large saving in building cost.

Some of the other experiments that the Housing Corporation found expensive were —failing to recognize wellestablished local customs as to foundations, based on experience; building row-houses in communities accustomed only to single houses; building brick houses in a city where only cheap frame houses existed; and building two-story houses where one-story houses are more popular. Again, elaborate parks and planting were not always appreciated by the class of persons for whom the houses were built, and they caused in some places a heavy loss from a financial point of view. In short, with general costs so high, the appraisals showed that any deviation from the simplest, most straightforward and economical architecture, or from the demands and customs of the place or neighborhood, affected the market values and helped to bring them down below cost. This does not mean that the essential standards of light, space, and sanitation should not be maintained, in any case. The one factor, however, that forced the Corporation to sell all its houses at a loss, in addition to the above losses, was that the real-estate values in the neighborhood had not risen in proportion to costs; and, as its building costs were less than they would be to-day, it was proved that homes cannot be built and sold to any large extent without loss, until values of old existing properties advance nearer to cost than they now are in most cities and towns.

The same considerations affect old properties and new alike, regardless of their cost. A house which, when it was built, might have been sold at a loss because not in proper proportion to the land value, may now be worth much more than cost because of changes in neighborhood, growth of the community, and improved utilities; or a house which, when built, was worth more than it cost on account of the demand, may now be worth much less than cost, even after due discount for depreciation, because of undesirable changes in neighborhood, the community having grown perhaps in a different direction. The old house also may be of little value because of lack of proper care, or need of substantial repairs, or depreciation; or even if maintained in good condition, it may be obsolete in type. Where bathrooms were once unknown, they are now necessities; and where one bathroom was once a luxury, two or more are now necessities. Electric lights, hard-wood floors, steam and hot-water heat, and vacuum cleaners are all moderately new requisites of residential properties, and their presence or absence may be large factors in determining the market value of houses, depending largely on the class of people who want them.

The present reproduction costsshould then be considered. The value of existing buildings should rise in proportion to the rise in cost of reproduction, allowance being made for all the items affecting values mentioned in the foregoing paragraph. Until the market values thus rise, no practical builder or investor can expect, to sell a new house for enough above cost to yield him a fair profit; and, therefore, he will not build.

In trying to arrive at, or to test, a fair market value of either old or new property, it is often hard to determine the true extent of the demand, and a study of neighboring rental values may help. There may have been very few sales in recent times in the neighborhood, or sales may have been made under circumstances that would reflect, neither the true sale-value nor the real demand. Rental values depend upon almost the same factors as sale-values; but where most of the houses in a neighborhood are rented, the rental values are often easier to ascertain.

III

When buying or selling real estate for investment, it is most important to know what the class of people in the neighborhood can and will pay as rent. Formerly it was customary for wageearners to pay fifteen to twenty per cent, or more, of their income for rent; and if they had continued to pay the same percentage as their wages increased during the war, the present housing shortage would probably be of less consequence. Owing to former cornpetition in building, and to the possible profit from increasing land values flue to growth of the community, the gross annual rental has often been less than ten per cent of the value, yielding to the owner less than four per cent net. It is assumed now that an owner of real estate should be entitled to a net return of at least six per cent on his investment; and in order to obtain such a net return on residential property, it has been found that, generally speaking, the annual gross rental should be from twelve to thirteen per cent of the value of the property. Such annual gross rental covers the following items:—

These items vary largely according to local conditions and the quality of construction of the buildings; but it is very rarely possible to reduce the gross rental to loss than twelve per cent of the value in order to give a net return of six per cent on the investment. Very often a gross rental of fifteen per cent would be perfectly reasonable. These percentages were confirmed as being generally applicable, by a study, made through questionnaires sent to realtors ¹ all over the country by the United States Housing Corporation, as to actual returns being received. The same study showed that apartment houses should yield a gross rental of fifteen to twenty per cent or more on their value in order to yield the owner six per cent net on his investment, the amounts of the different items varying more largely on account of t he differing services rendered, such as elevators, janitor service, heat, water, and so forth. These percentages seem high to the average tenant, and they are the cause of much of the abuse of landlords; but the proof that they are not too high lies in the fact that a large majority of tenants who could afford to buy houses still remain tenants.

If a tenant is renting a house for twelve or thirteen per cent of its fair market value, and is not receiving more than six per cent on his investments, it is cheaper for him to buy than to rent, if he wishes a house for his own occupancy; for, as owner, he can save at least two per cent, by reducing the cost of maintenance as estimated above, through bettor personal care of the property, and by eliminating the allowances for vacancies, administration, and bad debts. On the other hand, if a tenant is renting a house for much less than ten per cent of cost, it is cheaper to rent than to buy. Rental values and their fair proportion to sale-values are, therefore, important matters to be considered by tenants who could buy, as well as by investors and builders. Residential property is more free than any other necessary of life from control by a monopoly or by market manipulation; and any person with a comparatively small capital can buy instead of rent, if he believes that rents are higher than they should be, in proportion to values.

IV

Speculation has always been the life of business development; and although we have always heard disparaging remarks against the ‘speculative builder,’ this country is indebted to him for the majority of the houses it has, and is largely dependent on him for more houses. When he has built cheap houses, it has been because people were unwilling to pay the price of better ones, He is entitled to profit by his foresight, industry, and skill, as well as is the manufacturer or banker. In the past, his profit, as a rule, has been due to his ability to tell just how, when, and where to build in order to get the best return, and to sell to the best advantage, and it has always been to his advantage to improve housing conditions. Much of the profit that has been made in real estate has been made in growing cities and towns where, owing to the growth in population, values increase more rapidly than costs. Likewise, vast sums of money have been lost by ‘guessing’ wrong as to how a city or town is going to develop, or by causing it to develop in an opposite direction by erecting the wrong kind of buildings. The demand was always great, enough to assure the wise practical builder a fair profit. Now, however, the speculative builder is idle; for not only can he not be assured a fair profit on new houses, but the public has rebelled against the owners of real estate reaping further profits on the sale or rental of present, houses, and is quick to denounce owners as ‘profiteers,’ and to demand legislation to prevent increases of rent and to deprive owners of real estate of the right to a fair profit accorded to owners of other investments, on the ground that housing is a matter of public welfare and a necessity of life.

The question then arises, ‘ What is profiteering in real estate?’ Gaining excessive profits on luxuries, or by the purchase and sale of stocks and bonds, is apparently accepted as perfectly legitimate; whereas gaining large profits in the sale of food and clothing is often now considered a crime. In the latter case, however, there is usually an element of fraud involved, or a withholding from the market to increase demand. Food and clothing can be stored and kept out of use, and false markets can thus be created. It is very doubtful if it would be considered criminal to raise commodity prices so that large profits would be reaped, if all stocks were put on the market and well distributed over the country and offered for sale at prices at which they were all readily salable. It would really stimulate greater production, which would cause lower prices.

A careful analysis will show real estate to be in this last category, in that all that is held for investment purposes is on the market for sale or for rent at prices that can usually be obtained, and it is well distributed over the country. It cannot be moved from place to place for the sake of getting the highest possible prices. Probably not more than a fraction of one per cent of habitable residential property is vacant or being withheld from use for the purpose of trying to reap excessive profits, either from rent or from sale. If the mere reaping of large profits due to increased values, without collusion or fraud, is criminal, or morally reprehensible, where can one draw the line between legitimate and illegitimate profits? Building costs having more than doubled in the last five years, would a man be guilty of profiteering if he sold a house for two or two and one-half times what it cost him to build five years ago, less perhaps ten to twentyfive per cent for depreciation, or if he raised the rent one hundred to one hundred and fifty per cent on the basis of the increased reproduction cost? Judging from the newspapers, recent legislation in different states, and general public opinion, he would be subject to severe criticism, if not legal restraint, and possibly to criminal prosecution, for an increase of more than twenty-five per cent a year even if it was the only increase in five years; and doubtless he would be condemned by many persons for a much smaller increase than that. His critics have not hesitated to sell their services or labor for all the increases they could get; and labor is as much of a necessity as housing; but they are tenants, and, as such, see but one side of the housing question. They perhaps do not consider that the landlords may have been getting very low returns on their investments for many years, and often losing money; and that the large increases now might result in only a fair average of profit over a long term; and further, that the landlord docs not profit to the full extent of the increases, since his taxes and costs of repairs have also increased very radically.

Nor do they consider that, by preventing the increase of sale and rental prices in proportion to the increased true market values, the building of new houses will be stopped, except by a few individuals to whom the cost of new houses may not be so material as it is to most people. Nor are individuals going to build many houses, when old houses in good condition can be bought for less than fifty per cent of the cost of new, or when the gross rentals of such old houses are only five or six per cent, or less, of the cost of new houses.

There is no doubt that radical rent legislation, such as that recently passed in New York, has directly caused a decrease in house-building. Until the salevalues of old houses have increased so as to make the extra cost of new houses so low that people will prefer to buy new houses at a cost allowing a small profit rather than to buy the old ones; and until rentals have increased so as to make it possible to rent new ones, in competition at rates allowing fair returns on investments as shown above, new houses will not be built to any extent by private enterprise. While this process of increase is going on, there may be some owners who charge rentals yielding even more than a fair return based on present, real values; and they may be held guilty of profiteering, and may properly be curbed; but the surest curb in the end would be the act ion of the law of supply and demand, if given free rein as in past years.

When the rental and the sale-prices of real estate have been allowed to rise to a point more nearly approximating their true values, as above suggested, the services of various experts will be needed, to relieve the housing shortage as quickly as possible. The realtor, the engineer, the builder, and the architect are trained to watch the market, and to know just what kind of houses which can be built for what the people will pay, are most want ed, and where, when, and how they can best be built with the greatest, economy, and with due regard for sanitation and for the best interests of the community. They should work together for the best and most economical result; for the least mistake in judgment will cause a loss, under existing conditions. Builder and realtor alike apI preciate the mat erial advantage of building houses that are pleasing architecturally and of having the surrounding grounds attractive; but one of the greatest dangers from a practical standpoint is that of spending more for artistic effect, both on buildings and grounds, t ban the people for whom the houses are built are willing to pay. The town-planner and landscape architect have large fields for service; but such service, at present, when applied to relieving the existing housing shortage, should be directed toward the best practical result with the least expense, rather than toward idealistic attempts to establish aesthetic improvements not appreciated by those for whom houses are built, and which cannot be turned to profitable account. The realtor and the speculative builder are the best judges of real-estate values and of what the people want, and their opinions should be given the controlling weight in solving the housing problems, the architects and town-planners acting in advisory capacities. If the people will put their confidence in the experts best qualified to help them solve the problems of the existing housing shortage, they may have to pay more rent, but they will get the new and better housing accommodations that they desire, in the most economical and the quickest way.

V

Chief among the many methods of obtaining relief, which have been proposed as short cuts to beating the law of supply and demand, is government or municipal aid, either in the form of building, giving subsidies, lending money, or in various forms of tax-exemption and coöperative building. No government or municipality can build any cheaper, better, or quicker, than private interests; and if conditions do not warrant building by private interests, government or municipal building would have to be done at the cost, of the taxpayers. This is justifiable only in case of a great emergency, such as war, or a sudden disaster, causing people to be absolutely without shelter. The present housing shortage, which is a gradual growth of years, can hardly be called an emergency in the true sense of the word, since people are not without shelter.

It is a condition that should be remedied, but it is not such as to justify giving a comparatively small proportion of the population new houses at less than cost, the loss being borne by the tax-payers in general. Subsidies might cause less loss to the tax-payers, but they also would establish a policy of giving a limited number of individuals, who are not paupers, material advantages at the expense of the public; and they cannot be supported on any economical or just grounds. Governmental aid, either by building and selling at a loss or by giving subsidies, savors of poor-relief and tends to demoralize character under existing conditions. The cost of the new houses has got to be met, and it should be met by those who can and will pay for them; and efforts should be made to encourage the return of capital to real-estate investments.

It has been repeatedly said that one cause of the failure to build to-day is the impossibility of getting money to finance the operation. It would be more correct to say that the public is not willing to pay the present cost of money. To be sure, the savings banks have not yet shown a willingness to recognize fully the increased values due to increased costs, and they still prefer to appraise properties and lend money on the basis of pre-war values. This makes it necessary to get larger second mortgages, for which the rates are very high; but the money can be secured by those willing to pay the price. Secondmortgage rates are high because of the risks involved and the great care that must be exercised in watching the investment. If the government should start to lend money on second mortgages, it should charge the current rates of interest ; and as the overhead charges of government administration of such a business, conducted over the whole country, would be enormous, the public would gain nothing through such governmental aid.

The saving from the relief afforded by exemption of mortgages from federal taxation would be but a drop in the bucket. When conditions get a little better than they are now, it might accelerate building to a slight extent; but it could not possibly solve the present shortage problem, and it would be a very unsettling influence and a bad precedent so long as Federal income taxes are necessary. The value of the exempt ion of mortgages from local state taxation depends largely upon local tax laws,and the questionof the advisability of such exemption cannot, be answered in general. In Massachusetts the income from mortgages on local real estate is already exempt from taxation. This seems a wise provision; it docs not, however, seem to be stimulating building.

Exemption of new houses from local real-estate taxation is a much more serious matter, and is just as bad as governmental subsidies. The result is the same, for taxes are raised for services rendered to the community, as fire and police protection, care of the streets, and so forth, and every additional building increases the cost of such services; and if some houses are exempt from taxation, they are cared for at the expense of the others. The United States Housing Corporation’s experience so strongly proved the unfairness of such a proposition that, when it could, it contracted with cities where it had houses exempt from taxation, to pay certain sums in lieu of taxes, and it arranged to transfer to the cities the title to real estate, on very small initial payments, so as to make the property subject to taxation at the earliest possible date. Government or municipal financial aid, in any form, will cost the public more in the end than meeting the proposition in a business way, and having the costs paid directly by those benefited.

Coöperative building of housing accommodations is perfectly proper, and is far better than any form of governmental or municipal aid; and in many places it. has been, and is, possible to start building sooner in this way than in any other. Those who join in cooperative building plans have the satisfaction of feeling that speculative builders or landlords are not reaping excessive profits at their expense. The fact is, however, that they cannot build any cheaper than anyone else, and their overhead expenses will probably at least, equal the profits of professional builders. They may save by coöperative ownership to the same extent that one can save by owning his own home, as above shown.

Some cities have formed housing companies by popular subscription, for the purpose of building houses and selling them at cost. This is a good way of meeting the problem of the housing shortage if a city is able to form such a company; but here again, such a company cannot build any cheaper than the wise speculative builder; and the chances are that, until the situation is such as to induce him to build, the housing company will lose money.

In addition to doing all that is possible to have the true market and rental values of real estate acknowledged, the most feasible plan to stimulate building is to form companies to lend money on second mortgages, on very easy monthly payments, so as to assist the man with small capital who is willing to build at present costs. A man who can put up twenty, or even ten, per cent of the present cost, to build his own home, and can meet the monthly payments on account of principal and interest, is not apt to lose what he has invested unless he meets with some unforeseen financial reverse.

The chances are that a company organized for this purpose will lose little or nothing by foreclosures, if properly managed, and that, before the problem of foreclosure presents itself, enough will have been paid on account of principal, and values will have risen sufficiently, to protect the company from loss. The losses from second mortgages usually arise from poor judgment as to values and as to the character of the borrower. A company lending money on second mortgages must employ experts in realestate values, and must choose its customers with skill, and be free to reject without prejudice any applicant. The Federal government, or a municipality, would not be so free to exercise sound business judgments in these matters as would a private company, and t heir chances of loss would be much greater. If the citizens of any city to-day are willing to contribute to such a company, by way of investment, in order to help relieve the housing shortage, there is no better way to assist the man with small capital to build than by lending him more money than a savings or cooperative bank will lend him, and by advising him how and where he can build to the best advantage.

An objection that may be raised to the last-mentioned plan is that the men with a little capital can look out for themselves, but that, houses are most badly needed for the wage-earner who is unable to buy. It is true that he is in many places living in poor and crowded quarters, and would be better able to earn his living if more pleasantly housed. The more houses, though, that are built, the more will be available for the wage-earner; and it is better that, the burden of the present cost should first be borne by those best able and most willing to bear it. When real-estate values reach their true level, new houses will be built for the workingmen, and slum conditions can be abolished by public health regulations, as in past years. If, on the other hand, large manufacturers need more labor and are suffering from inadequate housing facilities, it may well pay them to build houses for such of their employees as need them. They cannot probably get an economic rental from them immediately, but they may be as profitable investments for them as additional factory buildings, and the sooner they build them the better, for sooner or later a building boom must come, and they may not be able then to get them built quickly enough.

The real solution of the problem of relieving the housing shortage, therefore, is to give free play again to the old law of supply and demand. This will mean readjusting family budgets, accepting the increased cost of housing, and planning one’s expenses accordingly, possibly eliminating to some extent the additional luxuries one has been buying with one’s increased earnings, and letting rent take its old percentage of one’s income.

The public can stimulate and hasten new building by amending rent-legislation so that rentals and market values may be allowed to rise to their true level and in fairer proportion to the increased reproduction costs, and it can aid the railroads in getting better transportation facilities for building materials. It can improve and modernize its building laws. It can assist by stimulating in legitimate ways the production of raw materials, and can encourage the formation of housing companies and mortgage companies by private enterprise. A National Bureau of Real-Estate Research, to act as a clearing-house of building methods and standards and to advise the public as to the most advanced economical methods of building, might also be a most valuable aid. The one thing that must be done to prevent loss is to find out from those who know best when, where, and how to build, in order to provide what the people want and what they will pay for. No matter who builds, to build and sell houses without loss it must be shown that the prices are fair compared with the prices of neighboring properties, all things affecting values considered; and to sell them for investment purposes, it must be shown that rentals may be obtained that will give a fair return on investments. When that is made possible, the present housing shortage will soon be relieved.