While a lot of attention has been paid to lax lending standards that resulted from the mortgage boom, we might have over-looked another problem arising from the boom years: lax building standards. As it turns out, a lot of the new homes built during the boom are shoddily built. And now they are falling apart, dragging values lower and making buyers more hesitant.
There’s a long article in the Wall Street Journal that is worth reading in whole. But here’s the meat of it:
At the height of the boom in 2005, more than two million houses were built in the U.S., according to the National Association of Home Builders, a trade group. Criterium Engineers, a national building-inspection firm, estimates that 17% of newly constructed houses built in 2006 had at least two significant defects, up from 15% in 2003.
Residential construction-defect claims filed with insurance companies in the current housing slump have been receding, “but the ones that are being filed are pretty severe in terms of the total damage alleged,” says Paul Amirata, vice president of claims for Axa Insurance Co. in New York, a unit of AXA SA.
Does anyone have data on home defect discovery rates? The drop in construction-defect claims may be linked to limits on how long homeowners are permitted to file those claims. Can you file a claim on a defect that is discovered five years after a home is built? Do defects emerge as homes get older? Or are homes basically defect free if they haven’t fallen apart after the first couple of years? For some reason, I think that shoddy building standards might keep showing up as a home ages, unlike seasoned loans defaulting less over time.
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