National Housing Act of 1934

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NATIONAL HOUSING ACT OF 1934

The enactment of the National Housing Act on June 27, 1934, began the modern involvement of the federal government in the American housing market. It represented the early New Deal's most important attempt at short-term pump priming of the economy, but it also had long-term significance as a shaping influence on the development of urban America.

The main rationale for the legislation was to revive the ailing construction industry, which accounted for about a third of the total unemployed, and whose recovery would have important consequences for supply industries like wood, cement, and electrical appliances. New housing starts, which averaged 900,000 a year in the 1920s, had plummeted as a result of the Great Depression to 90,000 in 1933. Testifying in support of the legislation before the House Banking and Currency Committee, Federal Emergency Relief administrator Harry Hopkins confirmed that "a fundamental purpose of this bill is an effort to get people back to work."

The legislation was devised by a task force headed by Utah banker Marriner Eccles, a special assistant to Secretary of the Treasury Henry Morgenthau on credit and monetary matters. From the framers' perspective, the best way to revive construction was not through a mass program of public housing but through the use of federal insurance programs to encourage private ventures. This was also the solution preferred by President Franklin D. Roosevelt. The National Housing Act created two important federal housing agencies. The Federal Savings and Loan Insurance Corporation spent $275 million to insure the mortgages that federally chartered savings and loan associations made. Under the law's provisions these associations were mandated to institute an important reform of housing finance by inaugurating the long-term amortized loan, which eliminated the daunting balloon payment that was hitherto due at the end of the loan period. The other agency created by the legislation, the Federal Housing Administration (FHA), was the New Deal's most direct intervention in the housing market. It aimed to encourage mortgage lending by banks and other bodies through extending low-premium federal insurance against default by borrowers.

The steady growth of annual housing starts to 800,000 by 1940 indicated that the National Housing Act had helped substantially in reviving the construction industry. Nevertheless, the problematic consequences of its long-term effects were also becoming evident by then. While never intended as a social reform to improve the quality of low-income inner-city housing, the legislation arguably made things worse for slum dwellers by hastening suburban development and white flight from the cities. Under conservative leadership drawn from the business and banking industries, the FHA discriminated against inner-city districts, especially those settled by African Americans, through the institution of a red-lining regime that prohibited insurance on housing in neighborhoods that lacked social and economic stability. It was the white suburbs that benefited primarily from the $119 billion in mortgage insurance that the FHA issued in the first four decades of its existence. The consequences of the New Deal's neglect of the inner cities would become evident in the 1960s.