II. LONG-TERM NATURE OF LIFE INSURANCE COMMITMENTS The decline in the interest rate is not a mere temporary and passing phenomenon of immediate significance without future implications. Life companies' contracts extend far into the future-in many cases for more than three-quarters of a century—and the reserves held against them remain equally as long. These commitments made in the past will continue for a long time to represent the major portion of the life companies' obligations. Because of the fact that beneficiaries under existing policies usually have the right to take the proceeds in: the form of an annuity, or to leave funds on deposit at guaranteed rates of interest, these obligations will extend well into the twenty-first century. Life companies, accordingly, make long-term investments on which prevailing low rates will be projected forward for a protracted period of time. In the company of which I am president, there will still be funds requiring interest in the year 2000, resulting from insurance in force outstanding at the present time. Chart No. 9 (exhibit IX, p. 13) clearly reveals this. One more word on interest as it affects a life insurance company. It is important to understand that there is a wide difference between the gross rate and the net rate after investment expenses. If net rates are considered, the figure for net investment return on all assets has fallen from about 5.10 percent in the early 1920's to about 3.10 percent at the present time. If you will turn back to chart No. 3 you will observe the wide difference between net rate and gross rate. American families penalized The further reduction in interest rates effected through certain provisions of the bill you are now considering, it seems to me, will be adding arbitrarily penalty upon penalty to a group of about 27,000,000 American families, by increasing still further the cost of family security to them. I hope these graphic representations have revealed the truth of this conclusion 'and the vital significance of the interest rate to the extraordinarily large part of the American population that has obtained, through life insurance, security for their older years and financial support for their family. The question I lay before you is whether, as an offset to the serious consequences already having been caused by the reduction in the interest rate for this predominant part of the American population-and in view of the more serious consequences that the future holds for them-there will be made any contribution of significance to the objective of providing good quality housing at reasonable prices by the further reduction of the interest rate which this bill contemplates. The housing problem consists of two parts. There is the immediate one of the next year or two, when housing shortages in many areas, suitable or appropriate to the income of various groups, must be diminished. The demand is very great, the supply is now very short. New housing construction is the only answer to this part of the problem. Building supplies, labor in the factories that produce building supplies and, of much less importance, construction organizations and site labor, are the factors which limit our ability to increase the supply of suitable housing facilities. There are no other limiting factors. There is an ample supply of credit-indeed, there is an ample supply of everything else that affects housing. The reduction in the rate of interest is much more likely to add a further restricting factor than it is to add encouragement to housing. The same is true about increasing the coverage of mortgages and extending the period of amortization. Security, housing costs higher These financial devices-i. e., lower interest rates and extended periods of amortization-will produce two results, and I shall be surprised if you wish to accomplish either one. The first is to damage further the personal security in the United States by making life insurance more expensive and putting further and serious pressure on the institutions which provide it. Secondly, it will make housing more expensive for the returning veterans and American people generally and cause their financial burdens to increase. This latter results because, through making credit easier, the bidding for limited supply of housing is made more spirited. Prices of houses and rentals, already at a high level, will thus be driven higher. Against these pressures, price controls, while they may provide some relief, are not likely to be able to hold the line. They will not provide homes. But beyond this, these financial devices will impose a larger financial burden and a greater risk of loss to the purchasers when supplies become less tight. These are the two results that I believe will be achieved by the finacial devices which the bill contemplates. EXHIBIT IX.-Funds which must be invested at interest (existing business-one life insurance company). The conclusion seems to me to be inescapable that financial devices alone will not add one shingle to a roof, not one board to a floor, not one room to an existing structure, not one house on a vacant lot. The problem is a different sort of a problem. !限 The second part of the housing problem carries forward into the distant future. I have already indicated how important to our future, in terms of health, of crime, of civic responsibility, in terms of industrial activity and employment, housing can be during the ensuing decade or even quarter of a century. But it can play its role fully only if the auspices are appropriate. It can be strangled and throttled by inappropriate auspices. This leads me to what appears to be the guts of the problem, and that is the cost of land and materials and the unit cost of labor. The National Housing Agency has completed a study which I have graphically represented on chart 10 (exhibit X, p. 13). This chart shows that a reduction of 20 percent in the interest on a mortgage will reduce the cost by only 4.3 percent. It shows that extending the maturity of the mortgage 20 percent will increase the cost of a house by 61⁄2 percent, through an extension of the period in which interest is due and thus through increasing the total amount of interest payable. Accordingly, the financial devices suggested in the bill will increase the cost to the home owner. How to obtain a 25 percent reduction On the other hand, a réduction in taxes of 20 percent has the effect of decreas ing the cost by 5.6 percent. A similar reduction in maintenance results in a decline in cost of 4.4 percent. And a 20 percent reduction in the cost of materials for the house, land, and unit labor cost-and this is the significant part of the study-produces a reduction in cost of 15.4 percent. If the cost of taxes, main tenance, supplies, land, and unit labor costs could be reduced by 20 percent, the cost of housing would be made lower by 25 percent to all those who buy homes Much the same results apply to almost any type of housing. The NHA ha itself prepared a chart, which I have here (chart No. 11, exhibit XI, p. 15) and which confirms everything I have said as to the significance and importanc of the cost of materials, land, and so forth. This is the heart, the bone, and the sinew of the problem, and I doubt tha housing will play the part that you would like to see it play-and indeed tha every well-intentioned person would like to see it play-unless the problem costs is adequately, appropriately, and wisely solved. This bill, I am confiden not only fails to solve it; I think it almost completely ignores it. May I make one final observation. I was one of those who, as a member the administration in the early thirties, was deeply concerned about organizati of the mortgage market as an instrument of recovery and as an aid to housin and in an unimportant and modest way played a part in advising on the provisio of the housing legislation that led to the FHA. Therefore, I can speak as o who is a friend and has been a friend of housing in many forms. Housing bill inadequate In that setting may I say my final say. The question I would like to ra with you is whether a housing bill whole principal provisions, other than 1 administrative ones, have to do with financial devices will actually encourage construction of housing in adequate amounts and of suitable quality, app priately located and within the income reach of a large part of the populati either for the immediate emergency or throughout the years that stretch ahead I am not now raising the question whether housing, under the provisions this bill, can be adequately provided, as the bill contemplates, under the auspi of private enterprise. I think they cannot be. I am raising the broader quest as to whether adequate housing facilities within the income reach of a la part of the population of the United States can be provided economically any instrumentality or agency, public or private, under the terms of this bill. The CHAIRMAN. We shall be glad to hear you. STATEMENT OF GEORGE GOVE, VICE PRESIDENT, METROPOLIT LIFE INSURANCE CO. Mr. GOVE. The Metropolitan Life Insurance Co. has been, I wo say, something of a pioneer in the low-rental-housing field in United States, and our experience goes back a quarter of a century In that time we have built housing accommodations for appr mately 31,500 families, or a population of over 100,000, and we The second part of the housing problem carries forward into the distant future I have already indicated how important to our future, in terms of health, d crime, of civic responsibility, in terms of industrial activity and employment. housing can be during the ensuing decade or even quarter of a century. But can play its role fully only if the auspices are appropriate. It can be strangle and throttled by inappropriate auspices. This leads me to what appears to be the guts of the problem, and that is the cost of land and materials and the unit cost of labor. The National Housing Agency has completed a study which I have graphically represented on chart 10 (exhibit X, p. 13). This chart shows that a reduction of 20 percent in the interest on a mortgage will reduce the cost by only 4.3 per cent. It shows that extending the maturity of the mortgage 20 percent will increase the cost of a house by 61⁄2 percent, through an extension of the period it? which interest is due and thus through increasing the total amount of interest payable. Accordingly, the financial devices suggested in the bill will increase the cost to the home owner. How to obtain a 25 percent reduction On the other hand, a reduction in taxes of 20 percent has the effect of decreas ing the cost by 5.6 percent. A similar reduction in maintenance results in a decline in cost of 4.4 percent. And a 20 percent reduction in the cost of materials for the house, land, and unit labor cost-and this is the significant part of the study-produces a reduction in cost of 15.4 percent. If the cost of taxes, maintenance, supplies, land, and unit labor costs could be reduced by 20 percent, the cost of housing would be made lower by 25 percent to all those who buy homes. Much the same results apply to almost any type of housing. The NHA has itself prepared a chart, which I have here (chart No. 11, exhibit XI, p. 15). and which confirms everything I have said as to the significance and importance of the cost of materials, land, and so forth. This is the heart, the bone, and the sinew of the problem, and I doubt that housing will play the part that you would like to see it play-and indeed that every well-intentioned person would like to see it play-unless the problem of costs is adequately, appropriately, and wisely solved. This bill, I am confident, not only fails to solve it; I think it almost completely ignores it. May I make one final observation. I was one of those who, as a member of the administration in the early thirties, was deeply concerned about organization of the mortgage market as an instrument of recovery and as an aid to housing and in an unimportant and modest way played a part in advising on the provision: of the housing legislation that led to the FHA. Therefore, I can speak as one who is a friend and has been a friend of housing in many forms. Housing bill inadequate In that setting may I say my final say. The question I would like to raise with you is whether a housing bill whole principal provisions, other than the administrative ones, have to do with financial devices will actually encourage the construction of housing in adequate amounts and of suitable quality, appropriately located and within the income reach of a large part of the population, either for the immediate emergency or throughout the years that stretch ahead. I am not now raising the question whether housing, under the provisions of this bill, can be adequately provided, as the bill contemplates, under the auspices of private enterprise. I think they cannot be. I am raising the broader question as to whether adequate housing facilities within the income reach of a large part of the population of the United States can be provided economically by any instrumentality or agency, public or private, under the terms of this bill. The CHAIRMAN. We shall be glad to hear you. STATEMENT OF GEORGE GOVE, VICE PRESIDENT, METROPOLITAN LIFE INSURANCE CO. Mr. GovE. The Metropolitan Life Insurance Co. has been, I would say, something of a pioneer in the low-rental-housing field in the United States, and our experience goes back a quarter of a century. In that time we have built housing accommodations for appro mately 31,500 families, or a population of over 100,000, and we hav |