New study of housing market from UNLV makes case for construction defect reform

A new analysis of the Las Vegas housing market cites the "unintended consequences" of Nevada's construction defect statute as inhibiting the recovery of a slowly mending sector.

The study, which I am told was given to lawmakers and I have attached here, was done by UNLV economist Stephen Brown for the Southern Nevada Homebuilders Association, which has long sought reforms to Chapter 40 of Nevada law.

Brown's general conlcusion:

The Nevada housing market is finally showing signs of recovery. Home prices began rising in 2012. Following a six‐year decline, building permits for residential construction were more than 50 percent higher in 2012 than in the previous year. Despite signs of recovery, Nevada housing construction faces several impediments. The inventory of houses in weak hands remains relatively high. In addition, home builders in Nevada face higher regulatory costs than are found in most other areas of the country.

But he goes on to say:

Chapter 40 of the Nevada Revised Statutes, which was conceived to protect homeowners from home defects caused by builders, has had unintended consequences. The term defect is loosely defined, allowing for many lawsuits outside the original intent of the law. Using data from four firms, we find that claims against builders have skyrocketed when we would expect them to be declining. Between 2000 and 2012, new home sales in Nevada decreased by 86 percent while construction defect claims increased by 355 percent. Since 2006, the number of claims per new home in Nevada has been 38 times the national average.

Most construction defect cases are settled outside of court by insurance companies, leading to higher premiums for builders. These settlement costs are increasing in Nevada, while dwindling in other states, even California. According to industry sources, Nevada’s premiums are about 85 percent of California’s, whereas more competitive western states such as Arizona and Texas have premiums less than half of California’s. These escalating costs are then passed onto Nevada consumers in the form of higher home prices. In addition, higher premiums have forced small builders out of the market disproportionally; they have 340 percent more share of the market nationally than in Nevada.

And more detail later in the 27-page report:

One problem with Chapter 40 is that a construction defect is not well defined. This has led to many lawsuits about nonthreatening imperfections common in any home, outside of the original intent of the law.

Most of these suits are settled outside of court by insurance companies. This, in turn, has caused premiums to rise for builders, forcing them to either raise prices or, more commonly, go out of business.

There are plenty of charts and lots of data. It's worth at least perusing.

I expect the trial lawyers to say the homebuilders got what they paid for. But the more important question is: What will lawmakers say?