Housing availability and affordability have long been issues in the Islands, with the state's housing shortage often attributed to factors like high costs and regulations that can stymie new development.
But the University of Hawai‘i Economic Research Organization says that legal action related to construction defects is becoming an "increasingly significant source of uncertainty and risk in Hawai‘i's housing marketing."
A new UHERO report looks at the economic implications of such lawsuits.
"While legal action plays a critical role in addressing legitimate construction deficiencies, the study — prepared for the Hawaiʻi Homeownership Center — examines how the rising volume and scope of lawsuits contribute to financial uncertainty, which increases costs for developers, insurers and, ultimately, homebuyers," UHERO said in a March 10 announcement.
Here are some highlights from the report, which was published on March 10 and can be found online here:
— To begin, let’s define construction defects and construction defect litigation.
UHERO says construction defects are "flaws or deficiencies in the design, materials or workmanship of a building that may compromise its structural integrity, functionality or aesthetics," and may arise during or shortly after construction, or develop over time.
These defects may stem from the lack of planning, the choice of material, improper construction techniques, inadequate inspection processes or undetermined causes, and can range in seriousness, the report notes.
Construction defect liability is the legal responsibility that the homebuilders, developers, architects and contractors have to repair or compensate for such defects, which the report says is limited to a certain period set by law. Meanwhile, construction defect litigation is legal action filed against one or more of those parties that allege defects have occurred.
— The number of new homes being built in Hawai‘i is not meeting demand.
Housing production has slowed over time, the report notes, citing data from the 2023 5-year American Community Survey. During the 2010s, 44,000 housing units were produced in Hawai‘i — 40% fewer than the prior decade and nearly 70% fewer than the 1970s.
"Many factors increase housing costs and discourage developers from bringing new homes to market, including a restrictive regulatory environment," the report states. Meanwhile, median home prices have continued to rise.
— Based on public records, UHERO says construction defect cases have grown larger and more frequent over the past 25 years, now affecting nearly 1,000 units per year on average, a "significant share of the 5,000 homes built each year in Hawai‘i."
"Public records also show settlements of tens and hundreds of millions of dollars, 30% to 40% of which is for legal costs and taxes," the report notes.
According to the report, Hawai‘i law requires homeowners alleging construction defects to submit a written notice to the contractor at least 90 days before taking legal action that includes a "detailed description of the alleged defect as well as any relevant test results." The contractor then has 30 days to inspect the property and offer to repair the defect, propose a financial settlement or reject the claim, UHERO says.
If an agreement can't be reached, the report says the parties must enter mediation before pursuing litigation.
Proposed legislation under consideration by state lawmakers aims to amend laws around resolving construction defects. More about House Bill 420, can be found online here. The measure has crossed over to the Senate and that chamber's Committee on Commerce and Consumer Protection has a public hearing on the matter set for 10 a.m. March 19.
— According to the report, hard costs like materials and labor, and soft costs, like legal fees, builder’s insurance and project delays, might increase “due to the legal and financial complexities brought on by defect claims.”
Although these costs are generally not publicly available, UHERO said it gathered data from 14 one-hour interviews with industry experts, with the report also noting the scope and limitations of the evaluation. UHERO did not evaluate the legal merits of these cases.
The report notes that construction defect litigation "most directly" leads to changes in design and materials. Developers must update their own practices — whether in response to lawsuits filed against them or other developers in the same area. These are changes that can be made of their own volition or required by insurers or changes to code.
These changes often call for the use of more durable — and expensive — materials than are specified in building codes, changes that UHERO says can have wider impact on housing affordability and homeownership.
Because projects in an area tend to incorporate new practices at roughly the same time, the report further notes that "the effect on new home prices is quick and nearly universal, while wages and salaries change more slowly." This can put "a typical new unit further out of reach for the typical household."
— Soft costs have also "risen sharply" because of construction defect litigation.
"The majority of developers purchase insurance against these types of claims; however, in recent years, only one to two insurers have been active in the Hawai‘i market at a given time," the report states. "Limited competition and increasing litigation risk have led to stricter underwriting standards, higher premiums, higher deductibles and lower coverage limits."
Increased insurance prices are passed onto homebuyers in the final purchase price.
Developers also noted that the cost of defending against such claims have increased by up to 200% in the last decade, the report stated.
— Generally speaking, construction liability litigation also makes it harder for homebuyers to find or afford mortgages.
That's because homes that are under litigation aren't eligible for public financing through the Federal Housing Administration the U.S. Department of Veterans Affairs, the U.S. Department of Agriculture and other agencies, according to the report.
The loss of those public subsidies can especially affect lower-income households and first-time homebuyers "whose ability to purchase is typically more dependent on the lower mortgage rates and down-payments associated with public programs," the report notes.
And while those who are able to qualify for a conventional mortgage can still do so, the report also states that loans on homes under litigation can't be sold on the secondary mortgage market.
Andrew Pereira, director of public affairs for Pacific Resource Partnership, told Aloha State Daily in an email that the nonprofit organization — which represents the Hawai‘i Regional Council of Carpenters, the largest construction union in the state, and 250 contractors across the Islands — has, for many years, heard from its homebuilders that construction defect litigation was having a negative impact on their homebuilding efforts.
"The UHERO report was startling, but not surprising, as it clearly showed what PRP had long suspected — construction defect litigation is preventing homes from being built, and those that are built face higher construction costs as homebuilders try to protect themselves from the potential of additional lawsuits," he continued. "Ultimately, these higher costs related to building materials, insurance and litigation are passed onto homebuyers, adding tens of thousands of dollars to the cost of purchasing a home."
Stephanie Salmons can be reached at stephanie@alohastatedaily.com.
