Shoddy Building in the Housing Boom?

Millions of new homes have gone up over recent years -- and so have complaints and class actions charging defective workmanship

Annette Perry was giving her daughter Susan a bath when she heard what sounded like "a truck" slamming into the second story of her new $133,000 home in suburban Phoenix. She ran outside with her towel-clad two-year-old to inspect the roof. Nothing was visibly wrong. It wasn't until she was back inside that she noticed her dining-room ceiling was newly cracked from front to back. She says the builder, KB Home (KBH ), had installed the wrong type of supports for the roof in one spot and failed to align them in another area, causing her walls to bow.

KB Home agreed to repair the damage. But 12 months later, Perry and her husband Derrick Webber say they are now preparing to sue to force the builder to buy the home back from them. In addition to construction defects, they learned their home was built on the site of a former crop-dusting airfield that used a now banned pesticide, toxophene.

KB Home says it performed all appropriate repairs to the house at its cost, that the site was inspected by environmental consultants who advised KB that there were no concerns, and therefore Perry is being unreasonable in her demand for KB to repurchase her home. Perry says she's worried about her family's physical and financial health. "We thought in four or five years, because we had made a good investment, we would be able to buy the house we really wanted, and put money in the bank for Susan's college," says Perry, a former accountant. "Now we're 10 years behind in our plans."


  Homebuilding has been on a roll for the past three years. But a growing legion of critics say the building boom papered over problems that could now come back to haunt builders. A mushrooming number of complaints and lawsuits like Perry's claim shoddy construction, sometimes on questionable sites. In response, builders' insurers, who ultimately pay for these suits, have hiked rates for big builders tenfold or are refusing to insure them at all.

Even as the stock market fell and the economy flattened out, builders posted fat profits. Their stocks became shelters from the storm. Sales of new homes hit new records every month from August, 2002, until December, when they peaked at 1.06 million.

Sure, Alan Greenspan's comment on Mar. 4 that it would be unreasonable to expect home prices to keep up their 2002 growth cooled these stocks a bit -- the S&P Homebuilders Index fell 7% that day. But despite a dip in new home sales in January and February, the index has more than rebounded, closing at a two-year high of 421.54 on Apr. 23.


  The industry's critics now warn that builders face a rising tide of consumer dissatisfaction. In their rush to put up new homes, some skimped on materials and labor costs, industry watchdog groups charge. "You can break into some of these new homes with a razor blade," says Robert Batcheller, a former builder who says he quit the industry last year, disgusted by some of practices he saw.

Some have been taking shortcuts like substituting foil-covered foam for plywood behind siding, he says. "In the past 10 years, cars have gotten safer and more reliable, and homes have gone in the opposite direction," Batcheller says. "Expect a big backlash against builders."

Builders balk at the notion that quality standards fell during the boom. "We're one of the most regulated industries in the country," says Gary Garcyznski, president of the National Association of Homebuilders. Homebuilding is mainly a customer-referral business, he explains, making builders doubly careful about quality.


  "This hasn't become one of the largest industries in the country because it provides an unsatisfactory product," adds Henry Cisneros, former Secretary of Housing & Urban Development, who now sits on KB Home's board. KB started making quality and customer service one of its highest priorities in 1999, says Chief Operating Officer Jeffrey Mezger, when a third-party firm hired to assess its customer-approval ratings found they had slipped. Now, Mezger says, nearly 95% of KB homeowners surveyed would recommend the company to a family member.

Still, the backlash Batcheller predicts seems to have started. In Las Vegas, one of the fastest growing cities in the U.S. for nearly a decade, an average of seven new construction-defect suits (often class actions) are now filed monthly in county court, which has developed a fast-track program for adjudicating them. The largest case to date: A class action brought against Beazer Homes (BZH ) by 200 homeowners ended on Feb. 28 with a jury award of $7.8 million. Beazer declined to comment.

In Texas, a still-booming Sun Belt State, more than 1,300 complaints were filed against homebuilders with the state attorney general last year. Three years ago, builder complaints didn't make the Texas AG's top-10 list of business complaints. This year, they're No. 4, after gripes against telecoms, debt collectors, and used-car sellers.


  Angry homeowners and their advocates say regulators haven't kept up with the building boom. Some inspectors are so busy that they conduct "drive-by" inspections, says Batcheller (see BW Online, 4/25/03, "Giving Your House a Spring Once-Over"). An extra complication: Requirements for builders and construction standards vary from state to state, creating a patchwork of codes and standards.

In Texas and Colorado builders aren't required to get a license, even as areas around Denver and Austin are consumed by suburban sprawl. And no nationwide agency takes homeowner complaints and investigates builder quality -- although ex-HUD Secretary Cisneros cautions that the industry is just too big to regulate from Washington. "To be able to do that, it would take HUD's entire budget," says Cisneros. "It's just not feasible."

Builders say the problem isn't quality, it's trial lawyers filing too many class actions. The homebuilder lobby is pushing hard for state-to-state legislation that would force buyers to go to third-party mediators before they can file a suit. Already, such legislation has passed in six state capitals. But overall, results are mixed -- in February, Democrats in the Colorado Senate nixed legislation to limit buyers' ability to take their builders to court.


  One thing builders and their critics can agree on is the shortage of skilled labor available to the construction industry. "For years, every parent in the country has been telling their children that rather than being a carpenter, they have to go to college and be a computer engineer," says NAHB President Garczynski. Critics say the homebuilding industry's lack of skilled labor means much recent work has been done by unskilled immigrants who speak English as a second language and have little building experience or training.

Insurance companies have taken notice. Premiums for general-liability coverage for big residential builders have increased 1,000% to 1,500% in the past five years, estimates Zurich Re, one of only two big insurers left in the business. At American International Group (AIG ), homebuilders can't even buy insurance to cover finished homes. "The construction-defect problem is considered one of the most serious problems in the insurance market today," says Robert Hartwig, chief economist for the Insurance Information Institute in New York.

Big insurers, as a rule, generally agree with their clients that the main reason litigation is rising is because of too many class actions. But not everyone pins the blame for rising complaints against builders solely on lawyers. "Way too many defective houses have been built and sold," says Zurich Re's Michael Markman, an executive vice-president who heads the outfit's construction division.


  And insurers, Markman says, aren't going to foot the bill: "Poor construction is a builder's problem. The insurer should not be there to bail them out for these practices." So builders either will have to pay higher prices for insurance or build up reserves to cover suits themselves.

Janet Duncan, a Frisco (Tex.) homeowner, has been battling with her builder for two and a half years to get it to buy back her home. Duncan says the foundation is unsteady, causing her walls to crack. She worries that her $130,000 investment is now worth far less. Her builder, KB Homes, says Duncan's home passed a HUD inspection and that the foundation had been engineered appropriately.

Still, Duncan is resolute. "I have to live with this every single day," she says. "At this point, I've cried all the tears I'm going to cry. Now I'm mad." In June, Duncan says she'll take her builder to court. The industry can only hope that such tears and anger don't eventually crack their own foundations.

By Heather Timmons in New York

Edited by Douglas Harbrecht

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