Litigation over construction defects is contributing to higher housing expenses, project delays, financing challenges and, ultimately, reduced opportunities for residents to own a home, according to a new University of Hawaii Economic Research Organization report. 

What You Need To Know

  • Construction defect cases have grown larger and more frequent over the last 25 years and now impacts nearly 1,000 units each year in the state, with settlements reaching tens and hundreds of millions of dollars
  • The report notes that units involved in litigation are not eligible for federal housing loans and the secondary market, which makes it harder for potential buyers to find financing and which raises cost via larger down payments, higher interest rates and more stringent borrowing standards
  • The Hawaii Contractor Repair Law provides a process for resolving construction defect disputes through repairs and mediation rather than litigation but, as the report notes, 'attorneys may seek to circumvent CRA requirements by arguing that its provisions apply only to individual claims and do not preclude mass litigation.'
  • There have been multiple legislative attempts to reform the system and encourage resolution of defect-related disputes out of court

 

While land-use constraints, infrastructure availability and permitting delays are frequently identified as the major causes of the state’s ongoing housing shortage, a UHERO team that included policy researcher Trey Gordner and economists Justin Tyndall and Kimberly Burnett found that legal action to redress construction defects has had broad economic implications and raises questions about the efficiency of the current Contractor Repair Act process.

Construction defects include flaws in the design, materials or workmanship of a building that may compromise its structural integrity, functionality or aesthetics. Homeowners are increasingly taking legal action to compel builders, developers, architects and/or contractors to repair defects or provide compensation.

According to the report, construction defect cases have grown larger and more frequent over the last 25 years and now impact nearly 1,000 units each year in the state, with settlements reaching tens and hundreds of millions of dollars.

“Homebuilders estimate that the cost of their insurance premiums have increased by up to 500% and litigation expenses by 200% over the last 20 years,” the report states. “Although litigation can be a crucial avenue for homeowners to address serious defects, these rising costs also risk diminishing housing affordability, both by raising prices and discouraging future development.”

Regarding housing consumption, the report notes that units involved in litigation are not eligible for federal housing loans and the secondary market, which makes it harder for potential buyers to finding financing and which raises cost via larger down payments, higher interest rates and more stringent borrowing standards.

“First-time buyers and vulnerable populations in particular depend on public programs to access homeownership and may struggle to afford higher interest payments,” the report states. “Owners may also have trouble accessing their equity through second mortgages or (home equity lines of credit) because of active litigation.”

The Hawaii Contractor Repair Law provides a process for resolving construction defect disputes through repairs and mediation rather than litigation but, as the report notes, “attorneys may seek to circumvent CRA requirements by arguing that its provisions apply only to individual claims and do not preclude mass litigation.”

Also, because defect-related claims are subject to state-imposed deadlines, homeowners and associations sometimes pre-file lawsuits while the CRA process in still ongoing. This, the researchers claim, introduces additional complexities, including additional legal costs and the obligation to disclose the suits to insurers, lenders and prospective buyers. There have been multiple legislative attempts to reform the system and encourage resolution of defect-related disputes out of court.

“Adjustments to the CRA, improvements to Hawaii’s permitting and inspection processes and application of lessons from other states could reduce costs without undermining homeowner protections,” the report concluded. Policymakers could explore strategies to encourage prompt defect resolution, ensure that settlements prioritize necessary repairs and create financial mechanisms that lower the overall cost of dispute resolution. By addressing these challenges, Hawaii can progress toward a more predictable and sustainable development environment, supporting long-term policy goals of increasing housing supply and affordability.”

Michael Tsai covers local and state politics for Spectrum News Hawaii. He can be reached at michael.tsai@charter.com.