RENTS IN THE DISTRICT OF COLUMBIA
The hearing of June 17, 1932, which appears below, was held prior to the approval by the Senate of Senate Resolution 248, directing an inquiry into the rental situation in the District of Columbia. The record of the following hearing is included herein, however, because of its close relationship to subsequent proceedings under the resolution.
FRIDAY, JUNE 17, 1932 UNITED STATEs SENATE, CoMMITTEE on THE DISTRICT of Columbia, Washington, D. C.
Mr. BRINKMAN. In a case where a building is mortgaged for $200,000 and the interest is 6 percent, if that interest rate were lowered to 5 percent and some of the excessive commissions charged for renewals every three years on these loans were eliminated, you would have a saving in interest charges and commissions of $2,500 on that loan. The usual rental of a building of that type is about $33,000. You could give the tenants of that building a 7 percent reduction in their rent, without diminishing the return to the owners at all, simply by lowering the interest rate 1 percent.
Mr. BowTE. Do you mean a building that you would loan $200,000 on would only produce $30,000 a year?
Mr. WHITEFORD. That is the worst loan I ever heard tell of.
Mr. BRINKMAN. $33,000. Mr. Bowie. Nine times.
Mr. WHITEFORD. You talk about vicious loans. I am surprised at how little you know after all your study about this.
Mr. BRINKMAN. Thank you for the insult.
The Rust firm took in the ‘Clifton Terrace Apartments at $750,000. The income from that property is sufficient to produce a net return of about 13 percent on the investment.
Senator Copeland. Are you familiar with the apartment-house game at all?
Mr. GoRDON. Fairly well. I know they are all broke.
Senator Copeland. Well, is your business comparable to theirs? Are they better or worse off than you are?
Mr. GoRDON. Well, I would say—I can not swear to this—more than half of the apartment houses in Washington have been foreclosed through the inability of the people to carry them. Either the Second or first trusts have been foreclosed and the people lost them. I think that is the best proof that they do not pay.
Senator CAPPER. Well, were not the most of them financed for a great deal more than they had in them?
Mr. GoRDON. Some of them, although a few firms here, which you probably know about, did some very wildcat financing, but we don’t account that. That was the exception. Most of our lenders here lend on an apartment house about 60 percent to 65 percent of the actual cash cost of the building and ground. That isn’t bad. Then, this man will have a second trust above that, maybe of 20 percent, and then when a smash comes, he gets squashed.
Senator CAPPER. The second trust is where the high financing took place?
Mr. GoRDON. Not necessarily.
Senator Copeland. Your idea and contention is that even though there has been a foreclosure and new owners have taken possession, that with the amount of the investment they have to make, it goes up to the original cost?
Mr. GoRDON. Well, maybe not that. He takes it over at $150,000. Maybe he will have to spend $15,000 to fix it up, but he may lose that much in vacancies before it is filled up again. Sometimes you have to take these houses and fumigate them with poison to get the bedbugs out.
Senator KING. What do you allow for deterioration in buildings here per year?
Mr. GoRDoN. Well, 2 percent or 3 percent.
Senator KING. In 10 years a building costing $200,000 would deteriorate 20 percent?
Mr. GoRDON. It may go further than that; and if the neighbourhood goes back, you get hit awful hard. It is a very risky business.
Senator Copeland. Well, the present investment in an apartment house, according to your figures, is at least 25 percent less than the investment made by the original builder?
Mr. GoRDON. I would say so, yes; but he hasn’t got a new building and is not getting the same rents, either. Keep your mind fixed on this: One-half of the apartment-house owners have lost their buildings because they would not pay. That is a fact. Look at the Star every evening and you will see big foreclosures all the time.
Senator CAPPER. Do not the loan companies—the loan companies. are companies—the loan companies who are doing the financing—make the clean-up? They get the money.
Senator KING. Has there been a reduction in the value of the real estate in Washington during the past few years?
Mr. GoRDoN. You can build houses now, the actual cost bein about 30 per cent less than you could four or five years ago. Ground has held its own. I am surprised it has, really. In many places vacant ground has gone up a little bit.
Senator CAPPER. Are conditions in Washington in that respect better than probably any other city in the country?
Mr. GoRDON, I consider Washington the safest city in the world.
Senator CAPPER. Is it not due largely to the fact that there is a steady payroll here out of the Government Treasury?
Mr. GoRDoN. Yes, sir.
Senator Copeland. And no industrial life.
Construction and building new houses had become 30% cheaper.
During the financial crisis, it is safer to live in non-industrial cities.
Senator Copeland. And, as a matter of fact, the present value of the property is probably not half that?
Mr. GoRdon. No; I would not say that. I would say the building is 30 percent off and the ground has held its own. I think that is it. The ground has held its own.
Senator Copeland. Then, your judgment is that the average apartment house, thoroughly modern, is worth about 30 percent less?
Mr. GoRDON. The building; yes. The ground at the same value. The ground has held up very nicely.
Buildings had lost about 30% in value!!!
However, what is really interesting is that the land price remained the same… Investments in lad are much safer.
Senator Copeland. What about land values?
Mr. Do YLE. They are off in the majority of cases. There are instances where surrounding improvements naturally are holding or maintaining values, and in some places, they are going up, depending on the use of the particular property.
Senator Copeland. Has there been anything abnormal in that?
Mr. Do YLE. Just a general lack of demand caused by general conditions.
Mr. BRINKMAN. If a building is worth given amount to-day, and if it would cost to reproduce that building 25 percent less than it cost to put it up originally, ought not rents to come down proportionately assuming the building was on a fair rental basis before? You would have a building worth less and you could not sell it on the market for the same price as when it was constructed. Should there not be a reduction of rentals?
Mr. Doyle. There is no arbitrary situation where the landlord can dictate what he will get out of his property. He has to take what his tenant will pay. That is regulated by supply and demand.
Mr. BRINKMAN. How much of a reduction should occur?
Mr. Do YLE. It is not dependent on what costs have gone down, because we have in mind normal conditions and not abnormal conditions.
Mr. BRINKMAN. You had a good many vacancies at 3901 Connecti cut Avenue, had you not?
Mr. Do YLE. Yes. Mr. BRINKMAN. You reduced rents substantially, did you not?
Mr. Doyle. They have been reduced.
Mr. BRINKMAN. Did you rent a great many of the apartments?
Mr. Do YLE. When we first took it over we did not reduce them as much. Vacancies occurred to some extent afterward. Rents were reduced in the last two months quite materially, and old tenants were given a month’s rent.
Mr. BRINKMAN. And you were able to rent some of those empty apartments?
Mr. Doy LE. It has been, through very careful and good management, rented up, and I think it is practically 100 percent rented. They are very reasonable rents, but it pays no return on its cost.
Mr. BRINKMAN. How much have apartment building construction costs come down approximately in the last few years?
Mr. Doyle. Approximately 25 percent.
Mr. BRINKMAN. Twenty-five or 30 percent, would you say?
Mr. Do YLE. I said 25. Of course, I am testifying.
The cost of construction reduced by 25%.
It got much cheaper to build, hence it made sense to buy deteriorated houses just for the value of its land. Demolish -> Build a new house.
However, if you wanted to build an apartment house and had to have a first-trust loan of $300,000 or $400,000, I do not think it would be humanly possible to get it. Build for cash?
Mr. WHITEFORD. I would not put a dollar in any building enterprise, and I do not think any other sagacious businessman would.
Senator Copeland. I know you can now build property very much less than you could two or three years ago. I built a building three years ago and another this past summer. My cost on the second building was about one-third less than on the first one. There is not any question about that.
Mr. WHITEFORD. … we hear these complaints of distress that can not pay any rent. I know of people who are living in houses, in apartments, where they are not paying rent. They can not pay it. There are homeowners who can not keep homes. A man came in my office yesterday and asked me to loan him $200 to pay the little installment of interest due to his home, and it is a nice, great big home worth $20,000 odd. That man is suffering. He is in danger of losing his home for a few hundred dollars, but you can not do it by wishing you could. These property owners are in a jam. They are in difficulties and have their properties on valuations and purchase prices that go back for several years. Many of them are losing them now. Their security is jeopardized, for a lot of these properties are not worth the trust.
A drop of 2.5 percent in rents in Washington between June 1929 and June 1932.
The CHAIRMAN. In looking over Mr. Brinkman’s report I see that the reductions are very small.
Mr. BRINKMAN. That is correct.
Senator KING. You mean it is to the personal advantage of an owner to take charge of the rental of his own property?
Mr. BRINKMAN. If I were the owner of the property I would not put it in the hands of a real estate agent, because I would have to pay them 5 percent commission, have to let him manage the property, buy supplies for it; pay in some cases 8 to 10 percent discount on purchases for the property, let them fix the scale of rates, and if a tenant is already a tenant of another member of the Real state Board, they will not accept him as a tenant. I will say it is a disadvantage in many respects for an owner of a property to turn it over to real-estate agents.
In order to reduce operational costs, owners will start managing properties on their own. Not the best time to be in the property management business.
Increase in rents by colored people
Mr. J. C. OLDEN. I represent the Better Citizens Bureau. I have made some further investigations with reference to the reduction of rent during the last week or so. I was to bring that further testimony to Mr. Brinkman, but they said they had closed reports on that matter. I can give the facts to this committee; as far as I have been able to find out in the apartment houses and houses that are rented by colored people there has been an increase in rents in the last three years and in some cases no reduction at all, possibly $2.50 or $3 reduction in an apartment.
Senator Copeland. Does this cover a good many houses?
Mr. OLDEN. Practically all the apartment houses rented by the colored in Washington.
Senator KING. Are any of those apartment houses owned by colored people, to which you refer?
Mr. OLDEN. No; they are owned by white people. Some have white agents and some have colored agents.
Might not be the case in the modern world. I suspect there was much more racism back in the 30th.
Mr. BRINKMAN. Properties are not worth the assessments?
Mr. WHITEFord. Not to-day, they are not.
Senator Copeland. I do not know any reason in the world why the landlords of Washington expect they are going to make money when nobody else in the world is doing it.
Mr. WHITEFoRD. Most of them are not.
Property owners and landlords, in particular, are losing money.
If you had $500,000 you would not buy a piece of property and pay for it in cash. All large rental properties have trusts or mortgages on them made by an insurance company or trust company. There is no way in heavens world that they can escape paying 5 or 6 percent interest on their trusts and that interest rate was incurred several years ago. When you figure these properties have got to go on and pay that interest if they do not they will lose them.
Cash is King. Save cash, leverage.
Mr. WHITEFORd. The landlord gets to it every six months when he pays his interest. Sixty percent of the assessed value represents a fair mortgage, which is a fair way to approximate it.
Senator Copeland… What percentage?
Mr. WHITEFORD. Sixty percent of the assessed value. If that be true, then our figures show the property owner is getting less than 3 percent on his equity.
Mr. WHITEFORD. Yes; and as Mr. Lusk says, it is less than savings bank interest; it is less than Liberty bond returns.
Senator Copeland. Do you not think he would be lucky if he got enough to pay carrying charges?
Mr. WHITEFORd. That is true. When you reduce the rent, you will have people that can not do it which will result in a series of foreclosures in the community.
Only sixty percent of the houses’ value is backed up by mortgage.
It seems to me that the owner and the agents overlook the great opportunity to increase the number of their tenants, and increase their income by reducing the rent.
Senator Copeland. I will tell you about my experience. I just came from Michigan where I went to see my father. My sister and I own some modest little homes and I asked her how she was getting along with the tenants. She said she cut the rent in two, in each instance, because by doing that she kept the tenant. They could not pay more than that, and if they had moved out because of the rental they had been paying, certainly she could not have rented the property to anybody else, because nobody else would pay it, but by making those reductions houses are occupied. As the chairman said, it seems to me in view of this great crisis, as it is going to be worse after this Congress adjourns, we have got to do something to take care of these people, and the landlords have just got to face the situation. If they do not cooperate they are go ing to lose anyhow, because these people can not the rent. They will have to reduce them or they will move out.
Mr. WHITEFord. We are reducing them. We have shown a lot of reductions, and experience shows it every day. Many of them are losing their property under foreclosure, anyhow, whether they reduce them or not.
Senator KEAN. In the city of Elizabeth, where I come from, there is a row of apartment houses that used to rent for from $55 to $60 a month. They had been getting it right along, but now they are down to $27.
Mr. WHITEFORD. If they have any trusts on the property they can not carry them.
Increase the number of their tenants, and increase their income by reducing the rent. How many tenants can you put under one roof? Now there are a lot of regulations that will restrict that.
United States. Congress. Senate. Committee on the District of Columbia. Subcommittee on Rental Investigation. (1932). Rents in D.C.: hearings before the United States Senate Committee on the District of Columbia, Subcommittee on Rental Investigation, Seventy-Second Congress, second session, on June 17, July 28, Sept. 9, Nov. 10, 30, Dec. 1, 2, 17, 20, 21, 23, 27, 29, 1932. Washington: U.S. G.P.O..