Speculating in Homes


MANY and loud have been the protests, not only against the rents which American families have to pay to-day, but against the quality of the homes supplied. In spite of the phenomenal activity in the building industry since the war, we are most of us still haunted by the spectre of high rents. A few of us, by stretching a point, ran afford to live in the new houses, but the family whose income averages no more than $2500 a year faces a predicament. It has been variously contended that this group, admittedly the largest in the country, represents anywhere from 40 per cent to 70 per cent of the population. The homes which are being built to-day simply do not come within the range of this $2500 group. For if a family in these circumstances is to be even reasonably fed and clothed, and to enjoy only the simplest forms of recreation, it cannot safely apply much more than one fifth of the budget, to rent. This means very little over $40 a month, or $10 per room (including heating) for a four-room house or apartment. Four rooms are cramped quarters for a family of five; yet there are no apartments available at this price except in the very oldest buildings. No wonder these families seize every possible opportunity to escape to the street, and that investigators of the causes of delinquency and crime mention, in case after case, the ’lack of a suitable home environment.’

A few individuals, inspired by what has beon done in Europe, have declared that, since private enterprise has failed to rid our cities of the plague spots of rickety shanties and dark tenements, the time has come for the State to step in and replace these blighted areas with low-rental housing in which the lowerpaid group of workers can afford to live. But this is an admission that industry cannot afford to house its workers in decency, and a challenge not alone to our industrial system but to democratic government itself. Surely it is time to investigate conditions as they exist and to see whether some less extreme solution cannot be found.


One would naturally suppose that, with building costs as high as they are, practically all of each dollar expended for ‘housing’ would go to pay for construction. Such, however, is not the case. The cost of the construction alone accounts for only about half of it, ranging as high as 64 cents to as low as 41 cents out of each dollar of the cost of the finished product. With the rest of the dollar the land must be paid for, the streets must be paid for, the sewer, water, gas, electricity, grading, and other improvements must be paid for; lawyers must be paid; in addition, the privilege of using money must be bought and paid for, and the cost of selling the finished product must be included.

Of course conditions vary amazingly in different parts of the United States, but, to take an average, of each dollar spent for the finished home product the division is approximately as follows: —

To labor at the job $0.26 1/2
For materials delivered at the job 25
To promoters and financiers 27
For land and its improvement 21 1/2

To most of us these figures are surprising. Few of us have tried to analyze housing costs. We instinctively think in terms of brick, lumber, steel, and other materials, and of the labor required to put them in place. It seems incomprehensible to us that the cost of promotion should run higher than the cost of all the complicated materials which we see delivered to the job. And we have been so used to blaming labor for high costs that we refuse to believe that the cost of promotion usually amounts to more than the total cost of all labor at the job. Yet it is a fact that, for the average brick structure, out of each dollar of the total cost only 26½ cents is paid to labor at the job — of which only 8½ cents goes to the grasping carpenters, 5 2/3 cents to the mercenary bricklayers, and 4 1/3 cents to the profiteering plasterers and hod carriers together! Plumbers on an average get no more than 2 cents, surprising as it may seem to the professional wits, and electricians 2/3 of a cent. So much for the arguments of those who would make labor the one and only scapegoat for expensive housing.

When America was a wilderness and the first colonists were constructing their farms and villages on the Atlantic seaboard, the cost of a house consisted almost entirely of the labor of the craftsmen who built it. Stone for the foundation was at hand, and timber was standing near by. To-day what a difference! Although our mechanics receive wages which are unbelievably high when compared to former standards, the percentage of the total cost which the men at the job now receive is infinitely less. The modern workman at the job does not do many of the things his predecessor used to do. He no longer cuts his own timber, he no longer smooths it into beams and planks, he no longer fits much of it together into sash and frames. These things are done in far-away lumber camps, in sawmills, in shops. Some of the heaviest items of cost to-day were unheard of by our forefathers. Transportation and overhead must be paid for as part of the cost before a mantelpiece or a bathtub is delivered at the job to-day. Thus the total charge for materials mounts up to 25 cents in the housing dollar, or virtually as much as the charge for labor at the job.

The numerous and complex processes represented by this charge for materials are not always as efficiently done as they might be. There are often waste and lost motion. Who has not seen plasterers idly waiting for carpenters to get out of the way, while the carpenters in turn are waiting for the arrival of the kitchen window frames that were promised last week by express? But even if such inefficiency were eliminated the saving would not amount to more than a few cents on every dollar of housing cost. We must accomplish this and more too. We must look further for the answer to our problem.

The most significant factor in the high cost of housing is the great increase in the proportionate amount spent for things other than construction. This amount used to be negligible; now it has grown to over half of the production cost. Without diminishing our efforts to reduce the present waste in labor and materials, we should realize that we are paying even more dearly for the use of land and for the use of money. Why are these items in the housing bill so large?

Out of each dollar that the average owner spends for his house, he pays 27 cents to promoters and financiers. Naturally, we admit, the builder requires capital to pay his men and to purchase materials; we expect him to have to pay interest upon it and to pass along the charge to the future owner. But 27 cents looks on the face of it like a payment of something more than the market rate for the use of capital. Furthermore, this figure represents the average; the promotion charge often runs much higher. For example, in the type of small frame bungalows in South Brooklyn which are being extensively sold for from $5600 to $5800 apiece, as much as 43 cents out of each dollar goes for promotion. In the case of this class of house in this particular neighborhood the cost of promotion frequently exceeds the total cost of construction itself, including both labor and materials. Promotion obviously includes some extraordinary costs over and above the prevailing interest rate usually paid for the use of investment capital. To promotion may be assigned (besides the interest and carrying charges) discounts, bonuses, profits, overhead, sales costs, advertising, and other expenses incident to the use of money. As we examine the figures more closely we begin to see where the trouble lies. The charges for funds used in housing are to a great extent upon a speculative basis rather than an investment basis.

It is difficult to say why the finance of housing is so different from ordinary commercial finance. It is usual to think of certain merchants or manufacturers as good credit risks and others as poor risks. Men with high credit ratings can borrow on easy terms, while those with undesirable ratings will find that credit is not so easy to obtain except at high cost. In housing, on the other hand, the method of extending credit is very different. It is assumed that the first half of any housing enterprise is a good risk and that the last half is a speculation. Money is loaned accordingly. The situation is almost analogous to what it would be in the grocery business if one half of the capital needed to do business were loaned to anyone who desired to enter the grocery field, while the rest of the necessary capital were left to the speculators to supply at exorbitant rates. Such a policy assists the fly-by-night operator at the expense of the conservative business man. It provokes ruthless and disastrous competition instead of healthy competition.

But the housing industry differs from all others except farming in that it cannot exist without the use of land, and land is of all things in the world the greatest temptation to speculation. Twenty-one and one-half cents out of each dollar of final cost goes, on an average, to pay for land; the range is from 35 cents for the land on which the tall fireproof apartment is built down to 11 cents for the sliver of ground on which the Philadelphia row house stands.

Now there are certain plain facts about the economics of land which we must understand if we are to realize why land prices behave as they do. Land depends for its value principally upon the fact that it is all owned already, and that a growing community cannot acquire land for necessary new uses without buying it. When land is sold it is, therefore, usually sold at a profit. The new owner has to pay the old owner for his original costs and also for the various expenses he may have had in carrying the land. If, in addition, the old owner has been enjoying an income from the land, the new owner will also have to offer enough money to make it worth while for him to part with it. And finally, if the old owner realizes that the land is increasing in value and that it would be worth his while to keep possession of it, but decides to sell on the principle that a bird in the hand is worth two in the bush, he may include in his price a fat sum representing the possible future profits that he is handing over with it. One deduces from this that the price of land is made up of two factors, the first representing the capitalized value of its past costs, the second the capitalized value of its possible future earning power. This is equivalent to saying that land usually sells at a premium. Each succeeding purchaser is left with the task of making good whatever guess he may have made as to its value.

The public is convinced that land is getting scarcer all the time, and is apparently willing to buy anything that can be called land. One can scarcely blame the subdividers for keeping at their job. The public pays the bill. Less than a year ago one of the most reputable of the subdividers operating in Chicago made the statement that at that time sufficient land had already been subdivided to take care of the estimated growth of Chicago for twenty years to come, but that notwithstanding this fact the process of subdivision was not diminishing and that the public was taking the new lots off the promoters’ hands. The same thing is going on in and about New York: for example, in the Long Island section between Patchogue and the city limits enough land has already been divided into lots to accommodate the entire present population of the five boroughs of New York. Around the city of Detroit there extends a belt of land from three to six miles wide already divided into lots and waiting for the building boom to catch up with it, and meanwhile piling up carrying charges. Here again the speculative nature of building adds to the expense which the ultimate owner will have to bear.

The figures I have given represent only averages. Depending upon local conditions and different types of housing, there are great variations in the proportions of the dollar which go to pay for the factors of labor, materials, promotion, and land. It is reasonable, however, to say that for new work roughly a quarter of the dollar is required for each. When a home is sold for a profit after its completion, however, the effect is to change this fourfold division of the dollar. The profit is added to the financing costs, and very frequently additional discounts increase still further the proportion that goes to promoters and financiers. As time goes on, the original cost of producing the house is lost sight of completely. What remains is the market price of the land and the costs of financing.


Not so long ago an eminent tax assessor was questioned by one of his city-hall chiefs as to why he had raised all the assessments in one of the poorer sections of his city, where the people owned their own homes. ‘That’s the very reason,’ he replied. ‘Those people like high assessments. It helps them prove the damn little boxes have some value when they want to sell them.’ The politician was still puzzled and ventured a remark about the people not being able to keep their homes. But the assessor said, ‘Don’t be a ninny! Don’t you realize that most people don’t want a home? They want a speculation!’

So it is with all those who put money into real estate. They want a speculation. They desire to put in as little money as possible and get it out as soon as possible. If a house originally worth $10,000 can be sold for $11,000, it is only an increase of ten per cent in the price, but the operator who has been clever enough to buy the house with only $1000 in cash and the rest in mortgages makes 100 per cent on his cash payment. It is an attractive gambling game, the buying and selling of real estate, and there are enough trying their hand at it to keep the price of apartments and homes steadily advancing even while the buildings themselves depreciate.

Is not the anomaly in the situation clear? Here is a whole industry operating upon a speculative basis — to such an extent that a share in the earning power of real property is practically unmarketable. Yet the supply of homes and shelter is one of the stable needs of the community. Nearly a sixth of the national income goes to pay for shelter. What an extraordinary thing that the satisfaction of this great human need does not yet offer one of the greatest and most conservative fields, not for speculation, but for investment!

The reason is simple. It is because with buildings the equity behind the stock represents little except the right to ‘manipulate’ the property.

During the period when steel mills and railroads were manipulated, when they were bought and sold for a profit, their securities were not sought after as an investment. It was only when corporations were formed large enough to buy up and hold chains of mills and railroads for the sole purpose of operating them efficiently and profitably that the outstanding bonds and stocks of these companies began to have a very considerable investment value. Building and real estate stand to-day where the railroads stood in the period of frenzied speculation and expansion following the Civil War. The railroads and industry in general have passed through the stage in their development where great fortunes were made overnight by manipulation. To-day the public may invest in the bonds or the stock of seasoned railroads, industrials, or utilities with reasonable certainty that these are steady income-producing investments. The preferred stock of the United States Steel Corporation, for example, which pays 7 per cent and no more, is so sought after that the price of the stock ranges from $120 to $135 a share. Who ever heard of anyone paying a premium to buy the preferred stock in any building?

It is a matter of grave concern how soon self-interest will compel operators in real estate to follow the example of other industries and combine to secure the regular profit due to efficient operation. With speculation in housing rampant as it is to-day, it is small wonder that money is expensive to get. High rates of interest and exorbitant discounts are to be expected. We have seen that the expense of original financing and promoting runs as high as 27 cents on each dollar. The burden of financing costs is felt most keenly, however, in the annual financing charges. For the usual operation annual charges average between 9 and 11 per cent. On some of the subordinate mortgages the charges for interest and amortization run as high as 35 to 40 per cent annually. A reduction of two points in the average interest has more effect upon rents than a reduction of 10 per cent in construction costs.

The American home owner suffers financially in more ways than one from being the unwitt ing victim of a speculative industry. Ultimately the cash to pay for the risks of speculative building and of speculative real-estate operation comes out of his pocket. Are we to be surprised that he protests at the amount called for?


Within the past few years there has been a slow awakening to the significance of the cost of speculative housing. There has accordingly been a change in the nature of the legislation aimed to protect the public. It has become less mandatory and more constructive. Instead of attempting to limit by law what the landlord may and may not do, the recent New York law has been framed with the hope of attracting lowinterest money into the field of housing. The idea has just begun to germinate that investments in housing may be made safe, if through no other means, by putting them under the supervision of the State.

It was a curious situation which brought this idea home to many of us. Under the New York law the power of condemnation was brought to the assistance of the housing companies for the purpose of assembling entire city blocks for large-scale operation. Such powers were so subject to abuse that they could not be granted without proper regulation and supervision. A State Board of Housing was therefore created, with powers of supervision, regulation, investigation, and research. The nation has been watching the New York experiment, but the pot has not yet come to a boil. A year after the legislation was passed we have the spectacle of a State Board set up to supervise the operation of the investment housing companies with no more than one company of the type having come into existence to be regulated.

Happily the Board has been free meanwhile to exercise its powers of research and investigation. The paradox is none the less apparent. The conservative type of investment housing companies, when they begin operation, are to be regulated by the State. All others who wish to operate in the field of housing are free to speculate, manipulate, skimp on construction, or do anything within the law that will bring the quickest return.

Yet it is with these others who at present dominate the field of housing that the investment companies must compete for their capital. For all capital comes from the same money market. Generally speaking, there are two kinds available: capital for investment, to be had in large quantities and at low rates of interest; and capital for speculation, to be had in smaller amounts for the highest return obtainable. The speculator in housing is at present tapping both of these reservoirs of capital. He gets as much investment capital at low interest as possible, and for this he gives a first mortgage. For the balance he draws upon speculative funds, giving subordinate mortgages for which he pays heavy discounts, but keeping control of the equity for a short period himself until he can ‘get his money out,’ as the saying goes. What matters it to him whether the thing he builds is uneconomic, wasteful, or short-lived, so long as he can ‘unload’ it for a profit upon someone else?

The money that goes into housing runs the risk of this sort of manipulation and mismanagement. Is there small wonder that housing stands discredited from an investment point of view? Is it at all likely that investment housing companies can at once win the public confidence in the face of such a situation ?

If ever governmental regulation is justly called for it will be to curb financial manipulation in housing and real estate. It will be quite logical if the same pressure of public opinion which set up such an agency as the New York State Board of Housing to regulate the investment housing corporations compels the extension of the regulatory powers of the Board to include the supervision of all housing finance. It is as certain that this step must be taken in New York and elsewhere within the next decade as it was certain twenty years ago that a governmental agency was needed capable of curbing the type of unchecked financial manipulation which caused the panic of 1907. If those who produce the best product in an essential industry are to be protected from the unscrupulous, and the industry itself fails to give the protection or to curb manipulation and speculation, then the Government must be called upon. The Federal Reserve Act brought the Government into the banking field in the interest of high standards of banking and the proper uses of credit. It assured the even flow of investment funds for the needs of the nation’s business and prevented speculation from seriously draining upon those funds. What the national Government has done in the regulation of banking can and should be done by the individual states to regulate an industry so essential to the well-being of their citizens as the provision of proper shelter.


Let us not, however, pin too much hope upon governmental regulation of housing finance. It is inevitable in the end, but should it come too soon, and should it be applied without understanding, it might cause a reaction which would delay relief for many years more. What can be done hi the meantime?

To begin with, we need to recognize two important facts. The first is that it is not necessary for the mass of mankind to live in rickety hovels and sunless cells. If intelligence is applied, the same amount of money that at present is going into the construction of these makeshift dwellings may be used to produce homes which will have permanent sunlight and ample recreation space, and in which it will be a joy to live. The second fact is that homes of this type will not depreciate as rapidly as those which we now build, and that they may therefore be financed far more cheaply, entirely from investment and not from speculative funds. As a result the public will be able to live in homes far better than they have yet known for less money than they now pay.

But how shall we persuade the skeptical business world that these are indeed facts? No mere assertion will convince them. We must rely on demonstration. Somebody must come forward with a well-devised plan for conservatively financed housing, — somebody who combines technical information and experience with a knowledge of just how much can be accomplished, — and make a bold experiment. He must procure capital without paying heavy discounts for it in advance of the demonstration. He must seek this capital from investment, not from philanthropic sources. Up to date much harm has been done by talk about philanthropy and semiphilanthropy. Then he must prove by the successful accomplishment of his experiment that housing can be made conservatively profitable for the men who control investment as distinguished from speculative money, and who at the present moment have no conception whatever that housing has investment possibilities.

Surely it should not be difficult to persuade these men, once an experimental project has been successfully launched. All over the country business on an investment basis is to-day more stable than it has ever been before. In spite of the fact that wages have steadily risen, we find that the prices of manufactured commodities, disturbed by the war, have begun an appreciable decline. Housing is practically the single exception. So far as new construction is concerned, every year we are offering smaller quarters for more money. This cannot be kept up indefinitely. The building industry has very much to learn from industry in general, but most of all to learn from the automobile manufacturers. Twenty-five years ago no one would have believed it possible that the automobile would come into broad popular use and that the man of small means would find it within his means to ride about in his own little car. Henry Ford has achieved one of the marvels of the age — the broadening of the market for an article which he produced. He achieved this by standardizing and stabilizing production and introducing the most efficient methods possible. It was done by cutting down production cost and taking a small profit on a great quantity of cars produced. Large-scale production on a similar basis will be the salvation of the housing problem.

It must be preceded by large-scale conception. Those who would undertake large housing projects on the new basis must develop a new technique of planning and of management. They must not subdivide land faster than it can be used economically. They must reduce the number and expense of streets with service and transportation lines so that the cost of building and maintaining them will not be more than the houses which front on them can afford to carry. They must learn that units of housing must be selfcontained; that they must not be dependent upon undeveloped adjoining property for light and outlook. They must concentrate the open spaces, providing a few big ones rather than a lot of little ones, so as to secure recreation areas large enough for all but the older children. They must avoid wasteful planning, do away with narrow dark courtyards and unlighted rooms, and avoid unnecessary repetition and duplication of stairs, hallways, and other service features. They must learn to standardize both materials and methods of construction for the sake of economy, and, with the coöperation of labor, to turn the funct ional subdivision of various trades (often so productive of disastrous waste on a small job) into an asset for increasing the efficiency of labor on large-scale work. If they do all these things, we may be confident not only that they will produce houses and apartments which will be economical and comfortable and attractive to purchasers and tenants, but also that they will, with proper efficiency of operation, make a steady profit sufficient to attract low-interest money.

Slowly as the world moves forward, it must move toward the realization of such a programme. Civilization means nothing more than the organization of mankind to control its destiny. The spectre of the High Cost of Living has, after all, the same single purpose as has any ordinary spectre or ‘bogie man.’ They all exist to frighten us. Let us hope that this spectre may frighten us into action, so that we may come into a better understanding of how to satisfy the fundamental human need for shelter.