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Single-family house vacancies in 37 cities, including comparison with situations:
of a year ago or nearest date to a year ago, if data are available
[Data compiled Dec. 1, 1931)
City and State
Dates of surveys
3. 6 1.8 4. 4 2.1
Sept. ---, 1930
Compiled by Division of Building and Housing.
THE PRESIDENT'S CONFERENCE ON HOME BUILDING AND HOME OWNERSHIP
TENTATIVE REPORT OF THE COMMITTEE ON FINANCE, SUBMITTED FOR DISCUSSION OF THE CONFERENCE ON DECEMBER 4, 1931
Frederick H. Ecker, chairman; president Metropolitan Life Insurance Co., New York, N. Y.
Morgan Adams, president Mortgage Guarantee Co., Los Angeles, Calif.
William E. Best, president United States Building and Loan League, Pittsburgh, Pa.
Alexander M. Bing, president City Housing Corporation, New York, N. Y.
Leonard E. Fackner, comptroller Metropolitan Life Insurance Co., New York, N. Y.
William A. Johnston, owner and engineer of Industrial Developments, Akron, Ohio.
Harry A. Kahler, chairman of the board, New York Title & Mortgage Co., New York, N. Y.
William H. Kingsley, vice president Penn Mutual Life Insurance Co., Philadelphia, Pa.
Harry S. Kissell, president National Association of Real Estate Boards, Springfield, Ohio.
James L. Madden, third vice president Metropolitan Life Insurance Co., New York, N. Y.
L. A. McLean, president Southern Trust Co., Louisville, Ky.
Paul P. O'Brian, secretary American Loan and Savings Association, Dayton, Ohio.
Samuel N. Reep, president Home Building and Loan Association, Minneapolis, Minn.
Henry R. Robins, president Commonwealth Title Co. of Philadelphia, Pa.
A. C. Robinson, president savings bank division, American Bankers Association, Pittsburgh, Pa.
H. C. Robinson, senior vice president the Guardian Trust Co., Cleveland, Ohio. A. A. Zinn, vice president Commerce Trust Co., Kansas City, Mo.
James S. Taylor, secretary; chief, division of building and housing, Bureau of Standards, United States Department of Commerce, Washington, D. C.
Arthur J. Mertzke, research assistant; division of building and housing, Bureau of Standards, United States Department of Commerce, Washington, D. C.
THE SALE AND SOUND HOME OWNERSHIP
The happiness of the buyer of a home is related directly to the soundness of the sale. While too much can not be said about the value of stimulating home ownership because of its effect upon good citizenship and the strengthening of family ties, likewise too much emphasis can not be placed upon the importance of the sales transactions to the accomplishment of these objects.
Too often home buyers fail to realize that the satisfactory completion of sales contracts depends upon what might happen to the property and to themselves. If they understood the purchase of a home is a business transaction, undoubtedly more consideration would have been given to this point. The property itself is subject to fluctuations in value due to various factors, such as depressions, change in neighborhood, and depreciation. Their own net income may vary for many causes, such as unemployment and sickness. Before a sales contract is made for the purchase of a home, the potential buyer should understand these possibilities to the end that when estimating how much he can afford to pay monthly or annually for the enjoyment of his home, he will make proper provision for reserves in the form of saving to take care of any unforeseeable contingencies. Certainly many of the foreclosures and the consequent distress in homes to-day would have been avoided if such a prudent step had been taken.
The full significance of home ownership often is not appreciated by prospective buyers. As a result they frequently enter into sales contracts under impressions which are almost certain to lead to weak .ownership in many cases. For example, there are those who undertake contractual obligations upon the assumption they can buy their homes with the money usually spent for rent, without realizing the amounts which will be necessary to increase continually their equities and to make necessary improvements, as well as the unexpected potential demands arising from special taxes and emergencies. Then too, there are many purchasers of homes who pay the least amount of money possible at the time of acquiring possession and secure and maintain thereafter maximum mortgages. The motives underlying this type of home ownership vary-in some cases it is inspired by the possibility of speculative profits through the sale of their properties, in the thought the higher the mortgages, the easier it will be to sell. Unwittingly this class of people assume very real hazards due to the possibility of fluctuation in land values or income reducing or eliminating their small equities. Furthermore, they make their problem of renewing mortgages more difficult because in times of depression and consequent deflation in land values, they can not expect mortgage lending agencies to renew their mortgages without a cash payment approximating the amount of depreciation in value. It would seem that every American who so desires and whose income permits should aspire to own his own home ultimately in fee simple, after considering home ownership from an investment as well as sentimental aspect, and the terms of the sales contract should be predicated upon this basis.
Lessons from foreclosures.-A study of foreclosures is enlightening to home owners in that it indicates from actual experience pitfalls which they should be prepared to face. The three most important personal reasons for foreclosures were found to be due to unemployment, the financial circumstannog of the bor. rower did not warrant the purchase of a home, and the inability to pay special assessments and increase in taxation. The three leading external causes which contributed to these results were the general decline in home property values, the loan was too large a percentage of the value, and the change in the character of the neighborhood. More than 85 per cent of the lenders found that the personal causes of default had more to do with the foreclosures than the contributing external difficulties.
An effort was made to secure reasonably exact figures of the amount of foreclosures upon homes. The information available does not indicate a foreclosure situation by any means as bad as many believe. For example, replies from one type of lending agency with over $1.250,000,000 of mortgages on homes report the percentages of mortgages in process of foreclosure in comparison with the total outstanding mortgages on homes was 0.780 and the percentage of home properties reported as owned by these companies as a result of foreclosure proceedings compared with the total amount outstanding mortgages on homes was 0.738. The incompleteness of foreclosure information generally definitely shows a weakness in our realty structure. It should be possible to secure from various localities a factual picture of not only home foreclosures, but other trends which would be helpful in guiding the sound economic development of the various communities along realty lines. Such a current statistical control may be of assistance in avoiding situations like the one which exists in a mid-west city where five times as many lots were subdivided and placed in the market in a year as would be required for sites for new dwellings, or the continued construction of dwellings even though there was a substantial percentage of vacancies. It would seem that interested business men in the various communities would be willing to set up the necessary local machinery to prevent as much as possible unsound building and the consequent detrimental effect upon the equities of home owners. Accordingly the following resolution was adopted by the committee:
“To insure greater stability in home property values, and to help correct overbuilt or underbuilt conditions where they exist, the establishment of a permanent fact-finding bureau within the Department of Commerce is recommended to cooperate with local units of national organizations through the tabulation and distribution periodically, by districts, of dependable information regarding occupancy surveys, mortgages and trust deeds recorded, real estate transfers, new subdivisions opened, new construction, construction costs, rental trends, land value trends, interest rates, and foreclosures."
A review of foreclosures emphasizes the necessity of the home owner understanding the real significance of home ownership and its responsibilities, as well as the importance of sound personal financial planning. The experience of the Finance Committee, which was verified by others, indicates that prospective home owners should be able to pay about twenty-five per cent of the purchase price of the home at the time they take possession and approximately the same percentage of their annual income for the maintenance of the dwelling and reduction of the mortgage thereafter. The problem of maintenance is dependent upon the ability to save and those who have not demonstrated to themselves that they have acquired the habit of saving may be assuming risks which will lead to unhappiness.
To facilitate sound financial planning, the committee adopted the following recommendations:
“ Countless home purchasers are doomed to failure from the start owing to insufficient equity and lack of sound advice to the prospective home purchaser regarding the financial obligations of his undertaking, and the committee believes that a down payment of about twenty-five per cent of the purchase price should be established as the basis of a sound home purchase transaction. Further, that realtors, builders, and mortgage bankers should join in a concerted effort to assist prospective home buyers in analyzing their financial ability to consummate the proposed purchase.
“ To safeguard the home buyer's ability to meet his payments of principal and interest, exclusive of annual taxes and insurance premiums, the committee recommends that 25 per cent of the buyer's assured income be the maximum allotment for these payments. Where the principal and interest installments are payable quarterly or semiannually, a monthly sinking fund deposit in a separate account covering one-twelfth of the annual principal, interest, taxes, special assessments, and fire insurance premiums, is strongly advocated. Where the principal and interest installments are payable monthly, the deposit each month in a separate account of one-twelfth of the annual taxes, special assessments, and fire insurance premiums, is highly recommended. As a protection against temporary reverses such as illness and unemployment, home buyers are urged to maintain a special home protection reserve fund, for emergency use in meeting the payments on their home purchase.”
Need of neutral appraisal service.--Assuming a proper understanding of home ownership, every prospective home buyer is confronted with the question—is the house overpriced? Seldom is the home buyer able to determine the answer to this question with reasonable accuracy because he lacks the necessary training and experience to weigh intelligently the various factors entering into the answer. Yet there is scarcely a transaction which the average home buyer under takes which involves such a large sum of money and the possibilities of loss.
There are facts which indicate that individuals or small institutions, which in the aggregate must place at the disposal of home owners a large sum of money for mortgages, have not had at times the benefit of good appraisals. Certainly it is in the interest of both the home owners and these mortgagees to know just what is the real value of properties. In the course of considering this problem, the committee found an organized effort in Philadelphia to render a neutral appraisal service which has much pro se. The principle underlying this service is that only sound building and sound values make for a solid growth of the community and this agency will contribute toward this end. Accordingly the committee recommends : “The establishment of central appraisal bureaus in the various cities for the purpose of stimulating home ownership through sound appraisals."
Nothing discourages building as much as the results of unsound sales, because they dampen the enthusiasm of families for the attainment of what should be the birthright of every American who has the ambition to own a home commensurate with his income. Those associated with the building industry can help the home owner to attain this end through cooperative efforts which will enable the prospective buyer to more intelligently select a home, to understand the full significance of home ownership, and to negotiate the financial aspects of the sale on a basis which will insure strong ownership. The first fundamental factor in successful home ownership is therefore a sound and equitable sale.
Usually when a home has been purchased, the prospective buyer has not the necessary funds to pay for it. There is generally a first mortgage upon the property and usually a second. The buyer assumes both of these, but it is only a question of time when he may have to refinance one or both. In the event he is building his own home, then he must arrange for his own mortgages. In both cases a better understanding of mortgage services and their proper adjustment to his financial status will make for greater happiness.
Type of loans available.--Let us now direct our attention to first mortgages. Competition in this field is very keen, and when this condition prevails, the public profits. Accordingly there are various types of mortgage plans available to the home owner, which may be divided into straight and amortized loans or combinations thereof. A straight loan represents a mortgage for a short period of time, possibly three or five years. Amortized loans usually run for a much longer period, frequently up to fifteen years, within which time the principal of the mortgage has been eliminated or very substantially re duced through systematic payments. With these facilities available, there arises the question as to the type of mortgage service which will best suit the needs of the home owner. He alone, after consultation with local mortgage agencies, can answer this question.
Again the committee wishes to emphasize the necessity of developing a mortgage program which will be in accord with the purchaser's ability to save. Furthermore, it wishes to point out the advantages of long-term loans both from the standpoint of saving renewal fees, as well as the security incident to knowing that the mortgage financing definitely is disposed of until the time when the first mortgage will be cancelled through complete, unencumbered ownership. While there are times when short-term straight mortgages are necessary, too often the motives underlying requests for such mortgages arise from principles which frequently lead to losses ratber than profits. The committee, being mindful of the problems which sometimes arise upon the maturity of short-term straight mortgages
“Recommends to all home buyers the advantages of long-term amortized loans and, where there is a second mortgage, that the principal installment be deferred to the end of the second or third year.”
Pioposal for stimulating building.–The American system of first-mortgage finance has not only enabled our country to build a housing structure upon an unprecedented scale, but we find it even to-ılay during the depression financing new structures for which there is an economic need. Naturally there has been a material slowing down in building which has contributed to our unemployment situation and it is not surprising to find those affected striving to develop ways and means for renewing activity in the home-construction field. As a result, numerous suggestions have been received for encouraging easy credit through new first-mortgage financing methods. While undoubtedly they would for a time provide employment, there can be little question that the price would be a further detlation of the values of existing homes.
During boom times the building industry experienced a tremendous growth. As the real needs of the publie for housing were not only met but excess facilities provided, in many communities there is a normal period of time which must elapse before the sound rule of supply and demand will permit building to be resumed on a broad basis. We must recognize that the increase in population in the continental United States during 1932 is estimated at only 936.000 people. Therefore, until the increase in population or returned prosperity justify the broad building program, it would seem that any such project at this time would not be on a sound economic basis.
There is another viewpoint which is worthy of consideration and that results from the thousands of homes throughout the country which are held by a tenuous thread by their owners or have become owned involuntarily by mortgagees who are striving to sell them to home-minded citizens for acquisition cost or less and on most favorable terms. Furthermore, there are a surprising number of instances where occupants of residences are paying nominal rents, to avoid vacancies with attendant vandalism, and many cases where rentals have been reduced to meet downward income conditions, with the result that little, if any revenue, remains after paying taxes, insurance, and repairs. Certainly the economic status of these home owners must be stabilized before health can be restored to the home-building industry.
The Present Emergency].--Home owners are interested naturally in maintaining the solidity of their local financial institutions because this tends toward their own economic welfare. Various suggestions have been considered which relate to emergency assistance to financial institutions which make mortgage loans on homes. An analysis of certain reports of the Federal reserve system and the Comptroller of the Treasury indicates that national banks, State banks, and loans and trust companies have about 8.41 per cent of their total deposits invested in city mortgages and only 3.99 per cent of their capital, surplus, and undivided profits in real estate, other than bank buildings. These figures, instead of revealing a crisis, should give us added confidence in the stability of our national financial structure. The query promptly arises—why the request for emergency assistance?
In some sections of the United States we find banks with larger percentages of their deposits invested in mortgages than the foregoing averages. For example, these percentages in certain banks in two States are 27.54 and 30.67, while the percentage of real estate owned, other than bank buildings, to capital, surplus, and undivided profits is 6.31 and 4.47. It is evident that these banks do not have enough foreclosed property to cause undue financial embarrassment, and therefore their mortgage loans are in the main sound. The difficulty, then, must arise from the economic situation which has caused a decrease in deposits and a demand for funds from depositors that can not be fully met. Furthermore, on account of the condition of the banks in these areas, the local building and loan societies are unable to borrow as they usually can, and, in addition, they are experiencing heavy demands from depositors.
These particular banks confronted with the unusual local demands for immediate funds must turn to their portfolios of investments, among which are included home mortgages, as a means of securing ready cash. On account of the economic conditions which have affected the markets for securities and the buying power locally, these banks frequently have difficulty in borrowing upon sound collateral. The same situation frequently prevails among the building and loan societies in the areas served by these banks.
From a national standpoint, the foregoing picture does not justify any lack of confidence in our banking or building and loan institutions. In some sec