which I should like to submit for the consideration of the committee and for inclusion in the record on the bill.

As you know, H. R. 4009 as introduced does not include a provision dealing with withdrawal of the exemption from Federal income taxes of interest on obligations issued by local public housing agencies for slum-clearance projects and for low-rent public-housing projects assisted under the bill. Such a provision was included in S. 138 but was deleted from that bill by the Senate Committee on Banking and Currency. In my testimony before the Senate Banking and Currency Committee, I submitted an explanatory statement to that commit tee setting forth the reasons why the limited withdrawal of tax exemption originally contained in section 505 of S. 138 seemed desirable.

In order that the record available to members of your committee may be complete on this matter, I am taking the liberty of enclosing herewith a statement similar to that presented to the Senate committee.

Sincerely yours,

RAYMOND M. FOLEY, Administrator.

The present exemption from Federal income taxes of interest on obligations issued by local public agencies, in connection with the federally aided slumclearance program and in connection with the federally aided low-rent publichousing program, means that part of the necessary subsidy cost of such programs cannot be measured. It is a better public policy in necessary subsidy operations to provide that the whole subsidy shall be a direct and measurable subsidy.

Although removal of tax exemption would increase the borrowing costs of the local housing authorities and thus increase Federal expenditures for annual contributions to them to cover their deficits, it would also cause investors in these securities to pay taxes on income which would formerly have been tax exempt and thereby increase Federal revenues.

It is certainly reasonable to assume that most investors would not purchase tax-exempt local housing authority obligations if they did not expect to save more in taxes than they lose in interest by so doing. Removal of this opportunity for tax saving should, therefore, result in a greater increase in tax receipts than in budget expenditures.

Since by reason of the tax exemption, obligations issued by local public agencies in connection with these programs can be sold at a lower rate of interest than the rate of interest borne by direct obligations of the Federal Government, the interest on which is not exempt from Federal income taxes, it is apparent that such obligations of local public agencies are more attractive as investments to relatively high income-tax bracket investors.

An investor with a 50 percent marginal income-tax rate, for example, would get twice as high a net yield after taxes from local housing authority obligations as from Federal Government securities bearing the same rate of interest.

While yields on such securities, therefore, tend to fall well below yields on comparable Federal taxable issues, no purchasers will knowingly buy such obligations if their interest loss exceeds their tax saving, and investors with the highest incomes will save substantially more in taxes than they lose in interest. The larger the volume of tax-exempt securities, the less the reduction in yield, and hence the greater the benefit obtained by high-tax bracket investors.

Under the provisions of H. R. 4009 relating to the manner in which Federal assistance for these programs may be extended, the obligations issued by local public agencies are, to all practical intents and purposes, the equivalent, in terms of security for repayment, of Federal obligations. They are generally so regarded by the financial community. Since in terms of security for repayment such obligations are the equivalent of direct obligations of the Federal Government, the basic security being Federal credit, not local credit, except for the fact that technically they are obligations of local political subdivisions, it would seem entirely proper to provide for a withdrawal of the tax exemption from this type of obligation.

The volume of obligations of this character which would be placed upon the market within the next few years, as a result of a program authorized by H. R. 4009, would be quite substantial. It might amount to as much as 50 percent of the outstanding obligations, both long and short term, issued by States and political subdivisions thereof for all purposes.

Taking into consideration the fact that over the next several years the States and the political subdivisions thereof will be issuing substantial amounts of taxexempt obligations, backed by their own local credit and in no sense the equivalent of direct Federal obligations, as are the obligations issued by local public agencies

in connection with the slum-clearance and low-rent public-housing programs, it would certainly appear that a substantial number of lower-tax-bracket investors will have to be relied upon to supply the necessary market for forthcoming State and local issues.

In order to attract a large enough total investment, the yield on tax-exempt issues would have to rise enough to attract investors whose incomes are not as high as those who benefit from the present levels of yield. Obviously, the larger the supply of tax-exempt securities, the larger the share of benefit received by high-tax-bracket investors and the smaller the share received by the States and their political subdivisions.

The result would, therefore, be that not only would the interest costs in connection with the federally aided programs of slum clearance and low-rent publichousing authorized by H. R. 4009 be increased, but the cost to the States and political subdivisions of obtaining funds for necessary public purposes by the issuance of their own obligations backed by their own local credit would be increased. In short, the tax exemption in connection with obligations issued by local public agencies for these slum-clearance and low-rent public-housing programs will not only cost the Federal Government more money, but it will also cost the cities more money. As indicated above, such tax-exempt securities are attractive investments principally to high income-tax bracket investors. Accordingly, these federally aided slum-clearance and public-housing programs will furnish to such investors a sizable and most attractive outlet for their funds, for not only are such obligations exempt from Federal-income taxes, but they are relatively' riskless investments. Yet it is the very investors who find these securities attractive as tax-exempt riskless investments who are best able to supply the venture capital needed by business enterprise. Thus it makes it more difficult for new or expanding business enterprises to obtain necessary venture capital.

Mr. RAINS. Mr. Foley, I am delighted to see in this bill, even though you say you are not an expert on farm policy, some effort to relieve the farm situation.

When I was on the Joint Housing Committee and toured a lot of the South and a lot of the sections of the West, I was frankly impressed with the need for farm housing as much, if not more than, in cities because those people are living in shacks.

My colleague, Mr. Jones, introduced that section of the bill. It has to do with farm housing, so I appreciate your cooperation in it, because it is a great and vital problem to the whole Nation and especially to those of us who represent rural areas. I hope we will have the opportunity, Mr. Chairman, to hear the Secretary of Agriculture. You think it should be administered by the Department of Agriculture; is that correct?

Mr. FOLEY. I think so, Congressman, because of the peculiar relationship of farm housing to the farm economy, the fact it is integrated so closely to the producing plant, producing the livelihood. It is a different situation from urban housing.

Mr. RAINS. I think you are correct. Thank you very much.

Mr. FOLEY. I have finished my prepared statement, Mr. Chairman. I thank you very much and would be glad to answer any question. (The following is the prepared statement referred to by Mr. Foley at p. 23:)

STATEMENT OF RAYMOND M. FOLEY, HOUSING AND HOME FINANCE ADMINISTRATOR, BEFORE THE HOUSE COMMITTEE ON BANKING AND CURRENCY ON H. R. 4009, APRIL 7, 1949

As the members of this committee know, legislation which would provide the foundation for a broad attack on the Nation's deep-seated and pressing housing problems has been an important issue before the Congress and before the country for more than 4 years. This attention stems from the long persistence of bad housing conditions for great numbers of American families, the impact of which

on human values has been particularly harsh during the continuing and acute postwar housing shortage.

It was my privilege to appear before this committee less than a year ago in behalf of such legislation. I am grateful for the opportunity to testify again in support of the unenacted portions of those broad legislative proposals which are contained in H. R. 4009.

Before commenting on the specific provisions of this bill, I believe it may be worth while to consider the nature of the housing situation which is causing so much concern, to get some idea of its causes and effects and to estimate, on a quantitative basis, what needs to be done to effect its solution. Such a background, I believe, will be helpful in evaluating the provisions of this bill.

THE CURRENT HOUSING SITUATION

The housing problem is not a new one. It has been with us for a long time and results primarily from our inability over the years to produce a sufficient volume of housing at prices which a large proportion of the American people can afford. In consequence, far too many of our American families are obliged to live in slums or other inadequate or overcrowded housing. Such a situation is completely out of keeping in a Nation which has generally achieved such a high standard of living.

We have slums and blighted areas in cities and towns, large and small, across the length and breadth of the land. On the basis of Bureau of the Census figures, there were, in April 1947, some 6,160,000 nonfarm houses which did not meet generally accepted minimum standards for adequate housing. In addition, there were many thousands of families who were involuntarily doubled up or living in furnished rooms, trailers, or other makeshift accommodations because they could not find housing within their means.

Statistics alone cannot measure the impact of such housing conditions in terms of human beings, in terms of increased crime, disease, juvenile delinquency, broken homes and in terms of the effect upon the children whose attitudes and moral standards for the future are being formed in the homes of today. We know that the problem reflects itself in disproportionate expenditures for fire and police protection, in excessive costs for courts and health service and in progressive deterioration of real property values in our cities and towns.

On the farms also a distressingly large proportion of the housing fails to measure up to minimum standards for health and decency. Some of our worst overcrowding occurs in farm housing. Some of our most dilapidated housing is to be found in rural communities. In April 1947, the Census showed that in farm areas 1,400,000 or roughly one-fifth of all farm dwellings, were in need of major repairs. More than two-thirds of the units in good condition, moreover, did not have running water, bathtubs or inside toilets.

Housing has seriously affected the lives of our people also because of its important role in the national economy. The inability of the housing industry to meet the needs of a large segment of our people has led to violent cyclical fluctuations in home building. Instead of being one of the important stabilizing elements in our economy, home building has actually fluctuated more violently than any other major segment of economic activity and has contributed significantly to the instability of our economy as a whole.

Since 1920, production of housing in nonfarm areas has ranged all the way from a peak of 937,000 units in 1925 to a low of only 93,000 units in 1933 and back to about 930,000 units in 1948. During the same period, dollar expenditures ranged from $4,500,000,000 in 1925 to a low of $278,000,000 in 1933, and, with today's high prices, to a new all-time peak of nearly $7,000,000,000 in 1948. The instability in home building is further demonstrated by the fluctuation in construction employment. During the decade between 1930 and 1939, for example, employment in on-site residential construction ranged from a high of 668,000 to a low of 150,000. The depression low was more than 77 percent below the peak of the decade. In contrast, during the same period, total nonagricultural employment fluctuated within a range of about 25 percent.

If we permit such an important segment of our economy as residential construction to fluctuate as widely in the future as it has in the past, our hopes for achieving general economic stability will be endangered.

The opportunities for achieving a sustained high level of new home production are illustrated by the large dimensions of the housing needs which should be met over the next 11 years. Figures obtained from the Bureau of the Census as to the size and character of our supply of housing in 1947 and the rate of

anticipated family formation in the years ahead afford some indication of the magnitude of those needs.

I should like to refer to three tables giving our estimates of needs. Let us first look at the present stock of housing. According to the Bureau of the Census, we had as of April 1947, an effective nonfarm housing supply of 32,729,000 units. Since that time, we estimate that some 2,100,000 new and converted units have been added to our housing stock. As a result we began 1949 with an effective supply of about 34,829,000 units.

Looking ahead to 1960, the population experts of the Bureau of the Census estimate that we will have approximately 39,500,000 nonfarm families which will require separate housing. When allowance is made for a sufficient number of vacancies to provide for reasonable freedom of choice in the selection of the size and type of home desired, this means we need an effective housing supply of approximately 41,100,000 nonfarm dwellings in 1960. Just to keep up with the increase in the rate of family formation, therefore, we need to add 6,300,000 nonfarm units to our inventory between now and 1960.

If we do nothing more than this, however, the housing situation in terms of acceptable quality will be worse in 1960 than it is today. Nothing would have been done about the 6,100,000 nonfarm units which were below adequate minimum standards for family living in 1947. No substantial relief would have been afforded the millions of families who are living in slums. Nor would anything have been done about those currently adequate units which will deteriorate during the years ahead.

A reasonable, although rough, measure of the number of presently substandard units which need to be replaced or rehabilitated is the number of nonfarm units which the Census Bureau data identifies as being in need of major repair, together with those units in urban areas which, while in adequate condition, had no inside private bath and flush toilet. The total number of units in those two categories in 1947 approximated 5,600,000 units.

This 5,600,000 figure does not, however, include the units in the densely populated suburban areas which surround most of our large cities, but which are not included in the census figures for urban places. Another factor which has to be taken into account is the loss through complete deterioration. On the evidence available, an allowance of 2,000,000 units would appear necessary to cover these two factors.

Allowance also must be made for the replacement of units lost through disaster or other causes, including the removal of temporary war and veterans housing units. The replacement of these units, together with the rehabilitation and replacement of substandard housing, totals nearly 8,500,000 units. Added to the 6,300,000 additional dwellings needed to keep up with net family formation, a total of some 14,750,000 units would be required for nonfarm areas by 1960. This is an average of slightly more than 1,300,000 nonfarm units a year. To this must be added the 2 to 3 million farm houses which should be built or rehabilitated between now and 1960. The total job would therefore involve between 17 and 18 million units.

Some part of this job can be accomplished through a better utilization and conservation of our present housing supply. First, some additional housing may be accounted for by the conversion of larger structures into a greater number of smaller dwellings. Second, we may be able to meet part of this need through a better preservation of our present stock of sound and acceptable housing than in the past. Third, we may also be able to take care of some of the requirements through the rehabilitation of those substandard units which can be made into sound and acceptable housing, such as has been accomplished to some extent during recent years. I do not think that we should count too heavily on rehabilitation, however, since it would appear probable that much of the housing which has not been brought up to standard was, by reason of quality, location, and structural characteristics, not worth rehabilitating even during the recent period of unparalleled prosperity and high housing demand.

After taking into account the maximum possibilities of conversion, conservation, and rehabilitation, I think it is apparent that we are going to have to rely primarily on new housing construction-producing at the minimum well over a million units per year, if we are to accomplish the total job of 17,000,000 to 18,000,000 dwellings by 1960.

Measured against the all-time high in new residential construction established in 1925 when 937,000 new nonfarm dwelling units were started and against the difficulties that have beset the home building industry since the war, last year's

production of about 930,000 houses is a commendable achievement. At the same time we should not measure our future potential by our past achievements. Rather, I believe that the time has certainly come when we must begin to measure our present performance by the needs and demands of the future. Certainly this has been the guiding principle in the progress and development of this Nation. After all, since 1925 our population has increased by more than 25 percent; the number of families has increased more than 40 percent; the actual output of goods, as measured by the Federal Reserve Board's Index of Industrial Production, has more than doubled.

We could find more room for encouragement with last year's accomplishment if we had some assurance that it was to be the base on which even better production records for the future were to be achieved. Instead, we have evidence of a reverse trend. From many parts of the country come reports that despite the continuing housing shortage, many new houses are standing idle and builders are curtailing operations. On the basis of these trends, the Bureau of Labor Statistics and the Department of Commerce recently estimated that nonfarm housing construction in 1949 would run in the neighborhood of 875,000 houses and that even this decreased production would not be reached unless the industry succeeds in producing a larger proportion of lower priced units. I have seen private estimates for this year running as low as 750,000 starts.

What has happened is an old story in the history of housing production. Housing prices and costs have outstripped the paying ability of the families most urgently in need of adequate shelter. The declining trend of home production during the closing months of 1948 clearly emphasizes this point since this downtrend occurred without any corresponding decrease in the underlying need for housing. Despite undeniable evidence that the most urgent need, especially among veterans, was for moderate-priced houses the home building industry has not produced in sufficient quantity at prices and rents which the mass market could afford.

Even before the war, housing cost too much for the pocketbooks of too large a segment of the American people. Since VJ-day this disparity has been aggravated. By October 1948, residential construction costs had soared to a new alltime peak. The Boeckh Index of Residential Construction Costs reached a level 120 percent above the 1939 level. More than a third of this increase occurred during 1947 and 1948. As a result, in city after city, prices of new houses reached the point where many home seekers were reluctantly forced to conclude that the down payments and the monthly carrying charges were beyond their means.

We can derive some satisfaction from the fact that the rise in prices and costs now appears to be halted for the time being. There has been some recent evidence of declining costs. But the fact remains that building costs are still near their all-time peak. The Boeckh residential cost index at the end of 1948 stood at 215, just 2 percent below the peak and more than double what it was in 1939. Because of the wide disparity between prices and ability to pay and the threat of curtailed production, the Housing and Home Finance Agency is undertaking a Nation-wide program, with the active participation of builders, realtors, financial institutions, materials producers, and local governments, to encourage economies in construction and improved design that will result in lower cost houses of good quality. This campaign is being conducted through meetings in communities throughout the Nation.

While I am confident that this campaign will produce beneficial results, it cannot alone resolve a housing problem of the magnitude which I have described. It is not to be considered a substitute for any of the measures in this proposed legislation. The solution lies in much more basic remedies-remedies which, I believe, would become available to us in the major problem areas of housing through the enactment of this bill and some other pending legislative proposals. There remains the basic question of whether there will be adequate supplies of materials and labor to carry on the kind of a housing job which I have envisioned here.

On the materials side, I cannot subscribe to the idea that the enterprise and ingenuity of American industry, on the whole, will not be adequate to meet the requirements of a positive program of this magnitude. My confidence is but a reflection of the tremendous progress that has been made in materials production since the war. Production reached an all-time peak during 1948, despite a decline in some items generally in adequate supply, and was 50 percent higher than in the prewar year of 1939. For seven items, production last year was 40 percent higher than it was in 1946 when they were in critically short supply.