Builders call for interest ease-up
Interest rates must come down and come down soon! That's the blunt warning of the 1,700-member board of directors of the National Association of Home Builders (NAHB), which held its fall board meeting here last week.
Housing starts fell in August to a seasonally adjusted annual rate of 937,000 units, the lowest monthly rate since February 1975, when the rate was 904,000, and 40 percent below the level of 1977-78. The dismal August showing was the third-lowest postwar rate since October 1966, when the rate was 843,000.
If interest rates do not fall soon, the home builders' group will "try to do something about it," warns Herman J. Smith, a Fort Worth, Texas, builder and president of the 135,000-member organization. Mr. Smith reminds the Congress that while there is still almost 3 1/2 years left in President Reagan's term, there are congressional elections next year.
"The small-business men in this country certainly cannot survive 20 and 21 percent prime interest rates," the Texas builder asserts. Small-business pay on average 2 to 2 1/2 percent above prime to borrow money, and many home builders are being forced over the bankruptcy cliff.
Echoing the NAHB alert was Sen. Lloyd Bentsen (D) of Texas, who told the board members that high interest rates threaten to destroy "everything we've done this year to correct long-term problems in the economy.
"High interest rates are killing the economy; they're crippling the housing industry; they're hitting hardest at the small business man who can't pass them on," he said.
The Texas senator, who was chairman of the Joint Economic Committee in the 96 th Congress, added: "I want to make the point that the people aren't going to stand for it much longer. They're demanding actions and policies that will bring interest rates back down to earth. If they don't get it from the administration they may well get it from Congress, because we've been out there for the past month.
"We know what's happening to the hopes and dreams of millions of Americans."
Because of the huge number of unsold homes now on the market, builders are paying some $3.5 billion a year to carry $16.5 billion worth of inventory.
"This is breaking the small-business man and, at the same time, prevents many buyers from qualifying for a loan," the home bulders' chief says. "It's a no-win situation," he says, pointing to the split between the Reagan administration and the financial community. "The small-business people of the nation are caught in the middle.
"We think it is necessary for the administration and the lenders to be on the same wavelength."
As part of its response to the housing crisis, the NAHB, along with other groups such as the National Association of Realtors and the National Automobile dealers Association, has launched an "unlock the economy" program in which it plans to tighten the screws on Congress, the Federal Reserve Board (FRB), the administration, and others by pointing out the critical issues now facing small-business men across the United States because of unprecedened interest rates and a lagging economy.
Too, the NAHB members plan a march on Washington sometime soon.
Among others things, the home builders want to know the reason for the wide difference between the rate of inflation and the lending rates.
For the first six months of this year, for example, inflation ran at an annual rate of about 8.4 percent, while the prime was up to 20 percent or higher.
"We've been accustomed to an average 3 percent spread between the prime and inflation rates," Smith notes.
"Our question to the FRB, the Persident, and others is: 'What happened to that 3 percent spread?' Based on that, we should be looking at about a 12 or 12 1/2 percent prime, but instead we're looking at 20 percent."
If inflation is coming down, as the administration says it is, the builders ask: "Why aren't interest rates coming down commensurately?"
Because of the sharp decline in activity, construction bankruptcies are soaring and many builders, some of whom have been in business for 20 years or longer, cannot survive. Small-business failures are up about 40 percent over a year ago and, says Smith, "this cuts across many lines."
The housing slump, like that in the automobile industry, is in its 34th month -- longest on record.
Cost to the economy is nearly $30 billion, charges Smith.
"The housing slump has cost the economy more than 1.3 million man-years of employment -- $22.9 billion in wages -- and $7 billion in total tax revenues," he declares.
Meanwhile, the demand for housing is backing up.
Why are more buyers unable to qualify for a mortgage? A modest $60,000 mortgage these days, at 9 percent interest, carries a monthly payment for amortization and interest of $483 a month. At 17 percent, however, the monthly outlay is $855.
To help reduce rates, the home builders are demanding a further cut in the federal budget for 1982 so that the projected deficit does not exceed $42 billion. By 1984, the NAHB calls for a balanced budget, as already pledged by President Reagan.
Where to cut out more fat?
NAHB's Smith replies: "I would take a hard look at $1.6 trillion worth of defense spending over the next five or six years, realizing that our association is very concerned about a strong defense, but we are also concerned about a reasonably strong economy in this country.
"Our questions are, have we moved too fast and too far into heavy, heavy spending on the defense side? Could we not move more moderately into these programs and still be efficient? Are we getting a dollar's worth for every dollar spent?"
The NAHB supported the administration's first round of budget cuts, Smith would remind President Reagan. "We took our share of cuts," he says, pointing out that the budget for the Department of Housing and Urban Development was slashed 38 percent.
"The second round of cuts must include cuts in defense spending," he says. "Politically, that's the only way we will be able to keep a lid on this deficit."
Looking at the Reagan administraion's economic policies, Smith concludes: "We will like his policies if they work, but we will dislike them if they do not work.
"The simple fact is, they are not yet working."