As the national housing market started to recover in the last couple years, there have been a slew of articles with headlines like this September 2014 Washington Post story: “Housing recovery missing key group: young first-time buyers." In November 2014, the National Association of Realtors' annual survey said, “Despite an improving job market and low interest rates, the share of first-time buyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential.”
Writes the Post,
There are multiple reasons for the lack of participation in the housing market by first-time buyers and, unfortunately, I don’t think the situation is likely to change in the near future,” said Rick Sharga, executive vice president of Auction.com. “The main culprit is that the age cohort of first-time buyers, who are normally 25 to 35, was hit the hardest by the recession. Unemployment is still high among that age group and the jobs they do have are often at low wages or are even part-time.”
Reasons also include more difficult loan standards. Student loan debt. Even high rents, which make it harder for young people to save for a down payment (let alone more lucrative to build rental units!)
Here’s something that no one mentions: lawsuits by condo owners who are victimized by shoddy construction - except, that is, if you happened to be a lobbyist for Colorado builders. They seem to have convinced some Colorado lawmakers to try to solve problems in the national housing market on the backs of Colorado victims of substandard condominium construction. They are actually arguing that the “condo market has dried up in Colorado because construction-defects law has increased the liability — along with insurance premiums — for builders to the point where owner-occupied multifamily projects are not viable.”
Specifically, here is what they’d like to do to condo owners. They would like to force them to resolve substandard construction disputes in expensive, rigged arbitration systems designed by the builders, preventing owners from going to court. And they want to make it more difficult for them to join their claims together in class actions, so individuals would have to litigate their construction defect case entirely on their own even though everyone in the complex has the same problem. Notably,
Jonathan Harris, the chairman of a coalition called Build Our Homes Right, says making it more difficult to sue builders for shoddy construction is good for builders — and no one else. "They’re looking for ways to make it harder for the consumer to hold them responsible for their substandard construction," Harris says. "I think that's just so appalling."
Harris speaks from experience. In 2004, he bought a new condo at The Point in Denver's historically African-American Five Points neighborhood. The homes there, he says, weren't built the way they should have been. For example, drainage holes along the bottom of the sliding glass doors were inexplicably sealed over, which causes water to drain into the units instead of away from them when it rains. Two units at The Point suffered so much water damage that they were deemed uninhabitable.
After unsuccessfully negotiating with the general contractor to provide quality repairs, The Point filed a lawsuit in 2011. The two sides eventually reached a settlement, though Harris says the money isn't enough to pay for all of the work that needs to be done. The homeowners, he says, will be stuck making up the difference. Those familiar with construction-defects litigation say that's a common scenario. But Harris worries that forcing homeowners into mediation will result in even worse outcomes, especially if the builders hire the mediator.
"It’s a real stacked system of justice," Harris says.
Critics like attorney Cass McKenzie, who has represented homeowners, said the measure will just shift legal liability from builders to homeowners. “Forced arbitration on these homeowners could cost tens of thousands to them that they don`t have,” said McKenzie. In addition, McKenzie says condo owners don’t want to trade a jury for an arbitrator because he says the measure will allow builders to pick the arbitrator. “They want to tell you this is the arbitrator that`s going to decide our claims. The problem is it`ll be an arbitrator they`re using over and over again.”
The Colorado builders complain that “condos accounted for more than 20 percent of all housing starts (more than 4,000 units) in late 2005 but only 3 percent through most of 2014.” And, “in 2014, 5 percent of all new housing stock in Colorado was condominiums.” Yeah, well, take a number. Nationally, in November 2014, multi-family starts were down 11% from the same time last year. Moreover, according to the U.S. Department of Housing and Urban Development and the U.S. Census, its August 2014 report showed a “steep 31.7 percent decline in multifamily production.”
In fact, Colorado parallels many national trends, particularly regarding first time buyers. According to a new report commissioned by a local coalition of homeowners, Housing Market Analysis: Supply and Demand, written by Boulder-based Pacey Economics Inc.:
Economic conditions following the recession have contributed to a market in which buying a home is more difficult and expensive than it used to be, the study says.
Higher fees, required credit scores and home prices, as well as wage stagnation, unemployment and lower marriage rates have all kept potential buyers out of the market, said Pat Pacey, principal at Pacey Economics, during a conference call Tuesday.
Higher student-debt loads have also contributed to the younger generation holding off on buying a home, she said.…
With apartment demand and rental rates high, it's more profitable for developers to build apartments, Pacey said.
She says:
“Clearly, the increased down payment, origination fees, mortgage insurance premiums, reduced real earnings are all more significant financial deterrents to home ownership than any barrier from construction-defect laws.….
Her study also concluded that the market value of apartments relative to condominiums and detached homes has grown steadily since 2006, creating an incentive to build apartments. She said the condominium market was built to a point of surplus in 2009, leading to the current ebb in condo construction.…
Oh, and here is another thing these lawmakers want to do: “lessen the amount of time a homeowner would get to take legal action against a builder or contractor — known as the statute of repose — from six years to three years after a project is completed,” arguing that “could lead to a reduction in the cost of insurance for homebuilders.”
Funny story. Back in 1997, the general aviation industry (small aircraft) got Congress to do the same thing, to enact a “statute of repose” for victims of plane crashes caused by product defects, promising that this law was needed to bring down insurance rates. The next year, John E. Moore, Cessna’s senior vice president, was called to testify before the Senate Commerce Committee, and was forced to admit that the law caused no decrease in insurance costs and that the price of planes had gone up.
Congress got taken for a ride on that one. I know Colorado lawmakers are smarter than that.
