Housewrecked

[Guest guest]

January 2004

Housewrecked

Serious hidden defects plague many newer homes. Here's how to avoid

trouble.

http://www.consumerreports.org/cro/personal-finance/shoddy-home-

construction-104/overview/

CR Quick Take

A CR investigation involving extensive interviews with home buyers,

building-industry representatives, inspectors, and others has found

that thousands of consumers, faced with serious defects in their new

or young homes, have spent millions on repairs. The fast pace of

construction during today's building boom is a cause, experts say.

• Fifteen percent of new homes have serious problems, some

inspectors say. That's 150,000 new homes a year. Many only show up

months or years after moving day.

• Your best defense: Hire a real-estate lawyer and a building-

inspection engineer. A few key clauses in your contract and

inspections during construction can save grief later.

• For information on what to do should you discover problems, see

How to prevent trouble and If you think you have a problem.

Last year, consumers bought more than 1 million new homes in the

U.S., a near record. Average sale price: $250,000. But a CR

investigation has found that increasingly, buyers are discovering

that their new dream home has serious defects and that they have

more consumer protections for a fickle $20 toaster than for a flawed

investment-of-a-lifetime.

In Oregon, a family built a semicustom home for $66,000 on a lot

they owned only to discover mold in the walls four months later.

Home buyers in Newark, N.J., found crumbling concrete, falling

bricks, and flooded basements within months of moving into a

recently built condominium complex. An Oklahoma couple says they

face $60,000 in foundation and roof repairs for a house they bought

new three years ago for $127,000.

And it's not just new-home buyers who are getting stuck. One Upper

Saddle River, N.J., couple is paying $375,000 to repair water damage

to a five-year-old home that they bought for $1.4 million (see

Synthetic stucco).

Our investigation, which included dozens of interviews with

homeowners, builders, inspectors, industry representatives,

government officials, and lawyers, found those defects and more in

many new or young homes. Faulty foundations, serious moisture

intrusion, and shoddy framing are often at the root of problems,

which manifest themselves as gaping cracks, rotting walls, and

windows and doors that don't close right. Often, though, they show

up months or even years after the buyer has moved in and the builder

has moved on.

No one seems to be documenting the extent of the problem, yet many

experts agree that construction-defect lawsuits are rising

nationally. Add to that a sharp increase in toxic-mold lawsuits.

Mold is often associated with moisture intrusion.

Alan Mooney, president of Criterium Engineers, a consulting-

engineering firm based in Portland, Maine, with offices in 35

states, estimates that seriously defective new homes account for 15

percent of all new-home construction, or 150,000 new homes a

year. " That's a huge number, " Mooney says, adding: " I don't think

many of these houses will last 50 years. "

CRUMBLING EXTERIOR

HOMEOWNER Cardona, 34, an engineer and treasurer of the

Society Hill at University Heights III Condominium Association, of

Newark, N.J.

PROBLEM Cardona and other owners say that shortly after moving in,

they found crumbling concrete, poor drainage, and loose brick

facades that now must be held in place. In a partial settlement, the

builder agreed to fix some problems and to reimburse the association

$20,000 for previous repairs.

Photos by Tom Mc

Mooney and others identify several contributing factors. Builders

are under pressure to keep costs down so homes are affordable and

profitable. Demands for energy efficiency and environmentally sound

products mean that homes today are more complicated to build. During

the building boom that began in the 1990s, demand has sometimes

outstripped the supply of qualified laborers and quality materials.

Home builders acknowledge isolated problems, but they deny that the

rate of defective homes is on the rise.

" We don't see that there is a systematic or endemic problem, " says

Jaffe, staff vice president for construction liability and

legal research at the National Association of Home Builders, whose

members, most of them small contractors, are responsible for 80

percent of residential construction. " We're always striving to

improve the quality of homes, " Jaffe says.

Some home-building officials and others blame lawsuits on bounty-

hunting lawyers and homeowner associations.

" The real core of the problem is a migration of trial attorneys to

construction defects as a lucrative new practice area, " says Clayton

Traynor, senior staff vice president of the builders' association.

But many homeowners say they went to court because builders ignored

their repeated complaints or they had nowhere else to turn.

Municipal building departments are often too busy to keep up with

required permits and inspections, much less investigate problems.

State and federal governments have few explicit consumer protections

for homeowners.

All of which makes it imperative for home buyers to be vigilant

before they sign a contract or go to closing.

" People are willing to pay for Jacuzzis and marble counters, when

they should be more concerned about the quality of the house, " says

Betsy Pettit, architect and president of Building Science Corp., an

engineering, forensics, and consulting firm based in Westford, Mass.

NINE WARNING SIGNS

Serious defects often present themselves in telltale ways. If you

see one or more of the following problems in your home, hire an

engineer to investigate. (See If you think you have a problem.)

1. Deep cracks in the foundation or basement walls. They can be

signs that the foundation was laid on a poorly compacted base or

poorly graded soil.

2. Sagging floors or leaning walls. A shifting foundation or

structural problems with support beams could be to blame.

3. Windows and doors that never sit well in frames or close

properly. House-framing problems may be at issue. If the beams,

studs, and joists weren't correctly sized or assembled, the whole

house may not hang together well.

4. Cracks in interior walls. Wide cracks could signal a foundation

problem. Generally, though, fine cracks are cosmetic, the result of

normal aging.

5. Water damage. Warning signs include mold, rot, and insect

infestation in exterior walls; staining, swelling and discoloration

on interior walls; and a musty odor. Possible causes: improperly

installed roofing, no flashing around penetrations and joints, no

moisture barrier in a climate that requires it, lack of a drainage

space behind brick or siding, poorly installed windows and doors,

holes in siding, and trapped water-vapor condensation from heating

and air conditioning.

6. Flooding, sewer and drain backups, and switched hot and cold

water. Flooding and backups may result from poorly graded land or

faulty sewer and water-main connections. Switched spigots may signal

improperly installed plumbing.

7. Excessive heating or cooling bills. Rooms that don't get warm or

cool enough can be another signal that air ducts may be leaky or

improperly connected.

8. Shorting or dead outlets. The electrical system may be installed

incorrectly.

9. Lack of required permits. This indicates that building

authorities have not performed the required inspections.

Why the problems? Many experts point to the country's 10-year

housing and real-estate boom. The top 100 U.S. home builders

together sold an estimated 1,000 new homes a day in 2002, or one-

third of all new-home sales.

That pace strained production. While home builders nurture the image

of painstaking traditional craftsmanship, most new homes today are

produced as if on an assembly line. Building affordable homes means

being acutely aware of time and costs. Those builders that are

public companies have the added pressure of shareholders to satisfy,

industry executives and former employees say. Builders are

completing homes in 90 to 120 days. A decade ago, the range was 120

to 200 days, according to one industry study.

" We were shooting for 60 days, " says Jim Banks, a former supervisor

for an Ohio-area builder and a contributor to " HomeBuilding

Pitfalls, " a book on how to avoid buying a defective tract

home. " The quicker you do it, though, the more mistakes get made.

Production supervisors aren't working on just one home. They have 8

or 12 going at a time. "

Shortages of skilled tradespeople sometimes contribute to the

problem of shoddy construction. In fast-growing areas, including

parts of California, Florida, Nevada, and Texas, a lack of framers,

plumbers, roofers, and electricians means that less-skilled or

unskilled laborers may be performing this work, industry observers

say. Lack of training and language barriers between construction

supervisors and workers can also contribute to poor workmanship.

To lower housing costs, builders now often substitute new, less-

expensive

materials for those they used in the past, industry experts say. For

example, oriented strand board, a pressed-wood product made from

small strands of wood, has replaced plywood as sheathing.

Some new products are better than those they replace, building

representatives say. But some may not work well with other housing

components or may not last as long as traditional ones. And some new

materials are problematic, lawsuits suggest. For example, plastic

polybutylene pipe has been the subject of product-defect lawsuits

because

of leaks.

Also, homes are more complicated to build today because of

regulations that, among other things, require homes to conserve

energy.

" Home building is a complex process, " says Donna Reichle, NAHB

spokeswoman. " It's not reasonable to expect a house to be 100

percent perfect on the day that they move in. " But builders value

their reputations, she says, so they generally strive to fix

problems.

FEW CHECKS AND BALANCES

State and federal officials offer uneven help for home buyers with

serious housing defects. In 20 states, no state building code

exists, and in many rural and new suburbs there isn't even a local

one.

Even where building codes do exist, many local governments have lax

enforcement. Home buyers can't assume that officials have protected

them by performing the required inspections. Building-department

officials say they are understaffed and underfunded, and can't keep

up with permitting and code enforcement in areas where hundreds of

new homes are being erected at a time.

In suburban Cincinnati, for example, the Enquirer newspaper reported

this past June that in one county alone, at least 750 houses built

between 1993 and 2001 lacked certificates of occupancy, which are

supposed to prove that a home has been inspected and is safe to live

in.

In New Jersey, state and county prosecutors have launched fraud

probes into allegations that building officials in one county

falsified reports on hundreds of homes in several large developments

that were never inspected. Homeowners had long complained of faulty

construction and poor sewage and storm-drainage connections.

FAULTY FOUNDATION

HOMEOWNERS Schnackel, 47, an artist, and her husband ,

37, a software engineer, of Edmond, Okla.

PROBLEM In 2001, a year after buying a new house for $127,000, the

Schnackels say deep cracks formed in the floor and the brick

exterior. An inspector noted a poor foundation, roof, and grading.

The repair bill: $60,000.

Photos by J.D. Merryweather Photography

Concerning home-warranty programs, which builders provide buyers to

warrant certain home systems, only 10 states regulate the programs

or post bonds to secure performance. They are Arizona, Colorado,

Connecticut, Florida, land, Massachusetts, Mississippi, New

Jersey, Oklahoma, and Oregon.

And 23 states don't regulate home inspectors. Some states have

contractor-licensing boards; others do not. Licensing requirements

also differ among states.

Governments have little incentive to make consumer protection a

priority, say homeowner activists and government-watchdog

groups. " Construction defects are a very political thing, and

everyone wants to dance around that, " says Owen, executive

director of the National Association of Consumer Agency

Administrators, whose members are consumer-agency officials across

the U.S. Builders, developers, and real-estate companies are among

the most influential political constituencies, and often heavy

campaign contributors. And new housing helps swell tax rolls.

Consumer-affairs departments and state attorneys general can

investigate home-building fraud, but they usually don't give such

investigations high priority unless there are many victims. Local

Better Business Bureaus take complaints, but can't force builders to

make repairs.

At the federal level, the Consumer Product Safety Commission

regulates few housing components, and the Federal Trade Commission

hasn't filed suit against a builder for defective construction in

more than a decade. Starting in the late 1970s, the FTC sued several

big builders, including Kaufman and Broad Home Corp., the corporate

predecessor to KB Home, one of the nation's largest production

builders. Whether the subsequent consent degree is being honored is

an ongoing issue.

" Major structural damage that could have been avoided by reasonable

steps beforehand was defined as an unfair or deceptive trade

practice, " says Stanton, a former FTC official. Stanton says

the lawsuits were meant to prod the home-building industry to reform

itself. Since then, he says, " things seem to have gone in the wrong

direction. "

In this vacuum of oversight, ad hoc groups such as Homeowners

Against Deficient Dwellings, www.hadd.com , and Homeowners for

Better Building, www.hobb.org , have taken the lead in the battle

for home-buyer protections. On their Web sites, dissatisfied home

buyers swap information about builders and remedies and call for

better laws.

REPERCUSSIONS

Construction-defect and related lawsuits and claims have drastically

affected the cost of insurance.

Homeowners-insurance premiums are soaring, in part because of water-

damage and mold-related claims. Premiums rose 20 percent in some

areas in 2000 and 2001 and 10 to 15 percent in 2002. They are

expected to have risen up to 10 percent in 2003. In Texas, some

insurers stopped writing new policies when the state tried to impose

price controls and to mandate mold coverage. The situation

threatened to slow sales of new homes in Texas when potential buyers

couldn't get coverage because lenders wouldn't extend credit on

uninsured collateral. Similar problems have been reported in

California and elsewhere.

HIDDEN MOLD

HOMEOWNERS Haynes, 41, a homemaker, her husband , 44, a

pilot, and their sons and Liam, of Sandy, Ore.

PROBLEM In 2002, four months after moving into their semicustom

$66,000 house on land they already owned, the Hayneses say they

discovered mold throughout the walls. They have moved out, citing

allergy-related problems. Repair costs: $70,000, their lawsuit says.

Don Marr Photography

Liability insurance for builders and subcontractors also has

skyrocketed in the last few years, with recent annual premium

increases of more than 400 percent for some contractors. The

increases became so high in California and Nevada, for example, that

some builders and insurers withdrew from those states, and others

slowed the pace of condominium building because they believed condo

associations were especially litigious, say insurers, builders, and

lawyers.

Builders have responded swiftly to those developments by trying to

stamp out new lawsuits. They started including mandatory-arbitration

clauses in many new-home contracts, requiring homeowners to take

disputes with builders to an arbitration panel rather than to court,

and to abide by the panel's decision.

Builders say arbitration is faster and cheaper than litigation. But

homeowner and consumer groups, including Consumers Union, the

publisher of Consumer Reports, say arbitration panels may be stacked

in favor of industry and deprive citizens of their constitutional

right to a jury trial. The outcomes may also be sealed, meaning the

public can't learn about serious issues.

Resale buyers are not bound by arbitration clauses because they were

not a party to the original contract. In part to keep these buyers

from suing over defects, builders have successfully lobbied states

to pass " right to cure " laws. These require builders to be given a

chance to fix defects before homeowners can sue.

Eighteen states have passed such laws in the last two years, and

legislation is pending in at least two others. But homeowner groups

complain that right-to-cure laws create unfair obstacles to justice.

For example, if, after abiding by a right-to-cure law, a homeowner

still wants to sue, he may not be able to if the statute of

limitations has expired. In any case, no one we spoke to said they

sued their builder without first trying to get repairs made.

Computer databases that track the claims history of a house are

another development in the property-insurance industry that could

have an effect on the resale housing market. A house with many

claims may be difficult to insure or sell without major repairs.

Prospective buyers who don't check the claims history in the home's

Automated Property Loss Underwriting System (A-PLUS) report or

Comprehensive Loss Underwriting Exchange (CLUE) report could find

out too late that they must pay huge premiums to insure it.

Lenders could also suffer if shoddy construction problems multiply,

and the effects could ripple throughout the economy. Banks and

federally chartered institutions that buy bank mortgages, including

Freddie Mac and Fannie Mae, with $3.3 trillion in mortgage-backed

securities, could end up with a significant inventory of reduced or

worthless collateral. Consider the case of one New Jersey homeowner

who in 1995 paid $278,000, including a $150,000 mortgage, on a

property recently reassessed at just $90,000 because of serious

structural defects.

While mortgage lenders require real-estate appraisals as a condition

of lending for a mortgage or equity loan, they generally don't

require a property inspection that would reveal defects that could

undermine its value.

THE FUTURE

Consumers Union believes that home buyers deserve a better system to

prevent serious housing defects and a fair way to resolve disputes

and to compensate consumers for shoddy work. These steps would be a

start:

Expand quality initiatives. The NAHB Research Center last year

launched the National Housing Quality Certified Builder Program, to

match its Certified Trade Contractor program. " The goal is to

improve quality, " says Dean Potter, director of quality programs at

the center. Five builders are participating in the trial program,

which monitors on-site practices and results. " Satisfied customers

don't sue, " Potter says. " We have to do something to improve the

perception of quality in our industry to reduce the likelihood of

lawsuits. "

Certification programs are also appearing for manufacturers and

installers. Such programs should be expanded.

Improve government oversight. States and municipal governments could

better enforce codes by ensuring that building departments are

adequately staffed. Homeowner groups also want " lemon " laws similar

to those that protect new-car buyers from defects. And federal

officials should survey new-home buyers to determine the extent of

serious problems.

Require inspections for loans. Lenders should require independent

inspections, not just appraisals.

Be proactive. Consumers should never buy a house without first

hiring a real-estate attorney and a home-inspection engineer. As Jim

Banks, the former construction supervisor, says, " If you don't think

that you can afford them, you need to think twice about whether you

can afford a house. "

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