It's no secret that new homes are going up everywhere and millions of Americans are jumping on the bandwagon to the American Dream. But what about those who want that dream of owning a new home, but find the price tag just keeps moving farther and farther out of reach? What about those willing to start small in price but still prefer new construction? Unfortunately, condominium and townhouse developments have virtually disappeared, leaving those in search of a modestly priced new home in a state of perpetual wishful thinking. Why do builders hesitate to build less expensive housing when the demand is so great?

The answer may be the fear of litigation. A 1996 survey of Southern California builders and developers by the University of Southern California's Lusk Center Research Institute discovered that 79% of the respondents had faced construction defect litigation. Perhaps more importantly, 68% of the respondents no longer build townhomes, and 86% no longer build stacked housing because of factors related to construction defect litigation. Correspondingly, less than half of the national primary commercial insurance carriers were active in California, according to a 1996 study conducted by Anderson and Anderson Insurance Brokers. To make things worse, only five of the insurers operating in California would provide coverage for a developer who was involved in a common interest development within the past ten years, with significantly higher deductibles being applied.

In a bold move to create a forum for builders to once again provide affordable housing in the face of such developments, the Coalition for Quality, Affordable Housing (CQAH) and Assembly member John Dutra have introduced Assembly Bill (AB) 1221, the California Homebuyer Protection and Quality Construction Act of 1999, in the California legislature. This legislation is designed to encourage the development of high quality, affordable housing and protect builders and consumers from the ravages of lengthy, costly construction defect litigation.

"Affordable housing speaks to the heart of the American Dream-owning your own home," said Assemblymember Dutra. "Unless we find ways that make housing more accessible, the gap will widen between the state's rich and poor. The lack of affordable housing in California will ultimately stall the state's economic health."

How will this legislation streamline affordable homebuilding efforts and provide the peace of mind builders and developers need to re-enter this starving market? AB 1221 will authorize qualified homebuilders to offer homebuyers a state-approved warranty at the time of sale that guarantees the prompt repair of construction defects for 10 years following construction. According to Joel Appelbaum, vice president of underwriting in the construction department of CNA Insurance (involved in efforts to create CQAH to sponsor AB1221) the California Home Construction Warranty, administered by the Contractors' State License Board would:

• Provide a mechanism to new homeowners for the timely repair and construction defects when they do arise;
• Focus on quality construction at the time the home is built by requiring participating homebuilders to develop and maintain a quality assurance program which includes a process for inspection of workmanship and a program for hiring, training, and continuing education of employees and subcontractors;
• Decrease frivolous construction defect litigation by providing consumers and homeowners with an even-handed, expedited dispute resolution process, including binding arbitration guidelines and benefits of recent Dept. of Real Estate regulations for ensuring fairness in the arbitration process; and
• Guarantee that only financially sound companies will be backing the warranties and that those companies have the administrative capacity to process complaints and claims.

"Builders want resources devoted to building better homes, rather than to wasteful lawsuits," stated Bill Jorgensen, a Residential Construction expert at CNA. On the other side of the coin, homeowners usually suffer a huge loss of house equity when litigation is filed because lenders are reluctant to make home loans on projects in litigation. As a consequence, the demand for those homes is curtailed and property values are reduced.

Finding equitable and reasonable solutions to costly construction defect litigation is beneficial to consumers and homebuilders alike. The prevention of defects and litigation will improve overall economic conditions to the point that developers and contractors may re-enter the affordable housing marketplace after all. By focusing on quality assurance and customer service, implementing alternative dispute resolution processes, and clearly defining who is responsible through programs like these, the complexity and uncertainty of construction defect litigation can be reduced, resulting in more reasonably priced entry-level housing. And the American Dream may once again, be within the reach of millions of would-be homeowners.

Published: July 7, 1999

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