A state system that allows homeowners and homeowner associations (HOAs) to sue builders for construction defects is slowing down the production of condos and townhomes in California, according to Stephen Russell, president & CEO of the San Diego Housing Federation.
It’s called construction defect liability, and it gives homeowners and HOAs up to 10 years after construction to file claims over building flaws. While it’s intended to protect buyers, Russell says it has had the unintended consequence of discouraging developers from building for-sale multifamily housing.
Because of the legal risk, insurance lenders typically require developers to get construction defect insurance upfront, with the full premium paid in advance, making it more expensive to build condos and townhomes. Beyond that, developers also face expenses from potential lawsuits and higher construction standards.
At Voice of San Diego’s recent Politifest: Solutions Showdown, Russell argued that this system is standing in the way of more “naturally occurring affordable housing” for sale, particularly townhomes and condos.
“We need to be able to do a condominium without fear of the construction defect litigation shutting it down,” Russell said. “We need to reform the laws around construction defect litigation to allow lenders to take the risk and to allow builders to take the risk to actually build condominiums.”
Construction of condominiums has been falling in California for years. Most condominium and townhome developments in California are likely to be sued for construction defects at some point during the 10-year liability period, according to a report by UC Berkeley.
“The costs of construction defect liability under current California regulations thus appears to be one contributor to the noted decline in condominium construction, potentially limiting the supply of entry-level, ownership housing in the state,” the report says.
Russell believes reforming those laws could help reverse that trend and increase access to homeownership.
“Homeownership is not just a way of building wealth very significantly, it’s a way of stabilizing your living costs over the rest of your life so you know can continue to live in the community you served,” Russell said.
Watch the Politifest housing session here.