NCPA - National Center for Policy Analysis

Lawyers Wreck Multi-Family Housing Market

February 21, 2003

Spurious lawsuits against builders are hobbling construction firms and in some place have brought affordable home building to a halt. At the heart of the problem is a massive increase in "construction defect" litigation.

During the 1980s, when middle-income condominium developments sprang up across the Sunbelt, some were poorly built, and owners and condo associations sued the contractors. Trial lawyers discovered that suits against multiunit complexes could be gold mines, since each case had so many potential litigants.

By the mid-1990s, trial lawyers were actively soliciting condo associations across the country, offering to represent them in suits against builders on flimsy or even nonexistent evidence of faulty construction.

  • By 1998, California insurers were collecting $19.3 million in premiums from builders but paying out $36 million in costs, a loss of $16.7 million.
  • Two years later, the losses increased to $29.6 million -- $2.95 paid out for every $1 in premiums collected.

Predictably, insurers are fleeing the market or ratcheting up their rates so that builders can no longer afford to construct multiunit housing. In California, for example:

  • Multiunit housing construction has plummeted 85 percent since 1994, falling even during the years the Golden State's economy roared.
  • One of California's biggest builders, Barnett America, no longer builds the affordable, multiunit housing it specialized in for 20 years.

Source: Steven Malanga, "Tort turns Toxic," City Journal, Autumn 2002, Manhattan Institute.

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