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Construction Defects: The Flood to Come?   (June 1, 2006)

This is just speculation, but based on my own experience I wonder if the past few years' housing boom/bubble isn't about to unleash a flood of construction defects to go along with the foreclosures and bankruptcies.

Although it is rarely noted, the supply of experienced, skilled tradecraft workers is inelastic, meaning it doesn't shrink and expand with demand as does unskilled labor. Over time, new demand will encourage workers to enter training programs, and after graduation, they will enter the workforce to meet that demand for those skills. But if the demand is rising faster than new workers can be trained, then the quality of the work tends to suffer.

This is one reason why it's critical to have at least one aircraft carrier and a couple of nuclear-powered submarines under construction at all times; if you cancel the program and retire the experienced workers, you won't be able to replicate that skilled workforce for many many years--if ever.

Though I do not have any data on this, I suspect that a significant percentage of the construction workforce which has built the millions of new housing units is young and not fully trained. From my own experience, I would guess that the point of maximum danger (in term of producing construction defects) is when a worker has a few years under his/her belt and assumes they know pretty much all there is to know.

The other point of maximum danger is reached when small builders suddenly find their workload has increased by leaps and bounds, outpacing their ability to manage the work effectively. I think it is fair to say that both of these conditions have probably been the norm for a significant percentage of the current housing boom.

Put another way: let's say in typical times the rate of serious construction defect is one per 100 housing units built. (That is not a documented data point, just an example). When inexperienced builders and crews are added to the mix, the rate will certainly rise, perhaps as much as 10-fold. (It's actually quite easy to create a serious construction defect; all it takes is a few moments' inattention by one worker.)

Now double the number of units produced. You get not just a percentage increase in defect rates, but a much larger absolute number.

Think construction defects are over-done and a lot of hooey? Read this and re-consider. No place like this home -- fortunately. In all fairness, large homebuilders have a system to take care of defects, and while it fails at times (as in this story), the problem is probably not with the experienced national or regional builders but with new firms which expanded rapidly with an inexperienced workforce.

What's the basis of my speculation? In the five years I was a licensed general contractor, my partner and I built over 100 houses and a couple of commercial projects--everything from small "starter" FHA and FmHA homes to million-dollar models for ritzy ocean-view subdivisions. We were sued once, for a construction defect which I'd failed to fix. Yes, I blew it. I thought I'd done something smart, cantilevering a small deck out of a second story, rather than support it with posts, which tend to rot after a few years. But alas, the cantilevered beams provided a pathway for water, which leaked into the wall. (That side of the house was buffetted by high winds and heavy rains during part of the year.) Yes, I was young and had a lot to learn (the hard way).

Why didn't I fix it right away, like I should have? Because we were over our heads, completely and totally, building a 43-unit subdivision, a commercial building and a million-dollar custom house, all at the same time. Holding onto our sanity (iffy) and making payroll (even more iffy) were our priorities. So we were sued (the homeowner had every right to be frustrated) for $50,000, which was about 80% the total cost of the entire house. The repair was about a $5,000 job at most. (These are 1980s prices, not inflation-adjusted).

Fortunately for the homeowner, we were still in business and so they had someone to sue. Our insurance covered most of the settlement and we paid $5,000 cash. Ironically, everyone would have been better off if the homeowner had just demanded the $5K at the start. As it turned out, their legal fees exceeded the settlement. Perhaps there are lessons here for both frustrated homeowners and stressed-out builders--settle up front for the cost of the repairs.

I wonder what will happen when owners of defect-filled homes discover the builder has vanished. One key element of the construction business is the low barrier to entry. All you really need is a pickup truck, some tools, a license and liability policy and some business cards. (In some states, you also need a workers compensation policy and a construction surety bond.) If things go south, you pack your tools and drive away to new horizons. Recourse available to homeowner: zero.

Water is the primary agent of defects. Leaks cause all sort of nasty things--mold, mildew, toxic molds, dry rot, sagging drywall, etc. etc. I recently passed two large complexes, not that old but not new, either, and all the windows had been visibly torn out and replaced. I knew the problem; insufficient flashing, or improper installation. Only the old guys know how insidious water can be, and they're the only ones who really pay attention to flashing.

One other thought. Since so many units are investor-owned, nobody's even lived in them yet. So who even knows what defects may remain from a hurried construction? Time will tell, but I would be surprised if this doesn't become a serious issue in boomtown America.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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