The Impact of Substandard Homes

Sub-prime loans contributed to a record number of mortgage foreclosures. Likewise, substandard construction contributed to falling home prices and an economic recession, which has impacted more than just individuals and families. It has also affected neighbors, entire neighborhoods, towns, the state, and the national economy. 

Each year, thousands of unsuspecting Texans buy new homes that they later find are defective. The defects range from substandard materials and faulty design to bad workmanship, code violations, and improper site preparation and grading. Foundation and moisture problems are especially serious since they can render a home unsafe to live in and impossible to sell.

The impact on families can be devastating and includes loss of property value, mortgage foreclosure, loss of life savings, and years of stress from trying to hold builders or warranty companies accountable. The effect of serious defects extends beyond the individual home. It affects home values across entire neighborhoods, economic development for cities, and the tax base that funds public safety and education programs.

In “Housewrecked,” Consumer Reports Magazine said 15% of new homes (at least 150,000 every year) have two or more serious defects. Many of these can be easily hidden by builders under concrete or inside of walls or siding, unobservable even by professional home inspectors until the damage shows up.

Elected officials in Texas have unfortunately and unwittingly punished homeowners by supporting building industry legislation under the guise of affordable housing. But there is nothing affordable about defective housing.

The Personal Toll

Homeowners and builders look upon construction defects from different perspectives than buyers do. To builders, a new house is a product to sell for profit. To buyers, it's a "home,"   an emotionally charged word that extends beyond the physical dwelling or building structure. Home instills memories of where we grew up or lived.

Your constituents' home is a sanctuary where they rest and recover from the busy day, a safe place to raise their kids, a proud symbol of themselves, and their largest investment. "There's no place like home."

But serious construction defects can destroy the feeling of “home” and inflict emotional and economic harm. When such problems aren't fixed, home buyers can get irate, view home builders as evil home wreckers, and behave in seemingly irrational ways. Public protests and disparaging websites with photos of defects, for example, will almost certainly lower property values but, to many homeowners, the damage is already done. These "victims" just want out from under their defective home, and they want their builder to suffer as much as they have.

As shown above, builders don't have to disclose known defects and risks, but resellers must disclose them all or risk being sued. That often means homeowners can't sell a defective home for anything close to what they paid. And too often if means they're forced to default on their mortgage.

The case of Frank and Sandee Bradshaw is a good example. They left their home, walked away from their mortgage, and accepted the financial consequences. Their home was so defective it became unsafe to live in. Built on a post-tension slab that was inadequate for the expansive clay soils in their Hutto neighborhood, the house now has a cracked foundation and broken pipes inside. Toxic mold filled the home, and Frank's doctor told him to move out or die. His live-in granddaughter also got sick. They left the house vacant and moved in with a relative.

The TRCC confirmed the seriousness of the Bradshaw's defects but was powerless to force the builder to fix them. Surrounding homes have had similar problems. The relatively new neighborhood is already in serious decline. And the property tax revenues that fund public safety and education are in jeopardy.

How homebuilding sparked a Global Economic Recession

Decades of political wrangling eroded the regulatory controls that were established in the 1930's. Banks, mortgage companies, brokerage houses, insurance companies, and homebuilders were allowed to behave in an extraordinarily irresponsible manner with no accountability. America's economy overheated and attracted foreign capital faster than we could spend the money or manage growth. The result was trillions of dollars in losses and a global financial collapse, all triggered by a bursting housing bubble. So who’s to blame?

Texas Homebuilding and the Global Financial Collapse (available soon) is our new white paper describing the role Texas and large homebuilders played. It argues that our laws made the $35B Texas homebuilding industry a magnet for unscrupulous builders, including many from out-of-state. We allowed (and even encouraged) bad builders, substandard construction, and tort reform, destroying the life savings of countless Texans, causing the demise of entire subdivisions, and contributing to the economic recession.

Texas has fared better than most states. With 118,000 single-family housing starts in 2007 (23% of the 776,000 U.S. total per U.S. Census), Texas has become the nation’s biggest homebuilding market. There's an abundant supply of cheap land & labor and no accountability. Texas, in fact, provides special builder protections that aren’t found in any other state or industry. While 28 other states (shown in blue on the map below) have licensing authority to keep builders accountable, Texas substitutes registration for regulation. This all makes Texas a magnet for unscrupulous builders from out-of-state.

Substandard construction has plagued all segments of the Texas homebuilding industry, from starter homes built by volume homebuilders to multi-million dollar custom homes. We talked to many good builders with solid reputations who complained that they have to compete against bad builders who cut corners, use substandard materials and undocumented workers, and hide behind laws that protect them from the public. These good builders are victims too, of increasingly relaxed accountability.

In our survey of 10 large national homebuilders operating in Texas, ALL of them own their own finance companies (mortgage, title & insurance companies). Many also had cozy relationships with subcontractors, material suppliers, home inspectors, and realtors, among others. This vertical integration is a serious conflict of interest. It allows both substandard homes and sub-prime loans to feed “the financial beast,” a beast that's more of a home wrecker than a homebuilder.