Analysis: Is construction-defect law stunting Nevada’s housing market?

By Eli Segall

Friday, Feb. 20, 2015 | 2 a.m.

Las Vegas’ once-battered housing market has improved the past few years but remains riddled with problems, some of which are among the worst in the country: foreclosures, underwater borrowers, flat wages, high unemployment, lousy consumer credit.

And yet, Nevada’s homebuilding industry, the same group that flooded the valley with quickly built cookie-cutter homes, is blaming one issue as the biggest roadblock of all: homeowners’ lawsuits alleging shoddy construction.

Assembly Bill 125, dubbed the “Homeowner Protections Act of 2015,” would overhaul Nevada's construction-defect law in builders' and contractors' favor. The state Assembly on Tuesday passed it 25-17, mostly along party lines with Republican support, and the bill is now in the Senate.

Gov. Brian Sandoval seems likely to sign it. In last month's State of the State address, he called for changes to construction-defect law to “revive” the housing market, without saying anything else was needed to boost the industry.

The bill comes after Republican victories last fall gave the GOP full control of Nevada’s Legislature for the first time in decades, and follows years of Democrat-stymied efforts to clamp down on such lawsuits, which can cost builders and contractors millions of dollars.

Supporters say the proposal will boost construction jobs, but outside analysts say it will hammer trial lawyers, a political and business foe of builders, and, despite the bill’s name, will make it harder for homeowners to sue for shoddy workmanship.

“I love the titles of these bills,” professor Eric Herzik, chairman of UNR’s political science department, said with a laugh.

As proposed, AB 125 would, among other things, strip homeowners’ ability to recover reasonable attorney fees in defect cases; require homeowners to state each problem in “specific detail” rather than in “reasonable” detail as current law allows and to give the defects’ “exact” locations in the house; and change the definition of a constructional defect, eliminating the provision that such flaws are made in violation of law and local codes and ordinances.

Construction boomed last decade with the current law in place, Herzik noted, but now, lobbyists are blaming it for the market’s sluggishness.

“Nevadans have so many reasons to be proud of what our state has to offer, and widespread and imbalanced construction defect litigation should not be a reason to hold us back,” Tray Abney, director of government relations for Reno’s chamber of commerce, recently said.

All industries have frivolous lawsuits and eye-popping attorney fees, and homebuilding surely is no different. But to say construction-defect cases are strangling the housing market or the state at large — while ignoring Nevada’s countless serious economic problems — doesn’t jibe with reality.

“That claim is so overstated, it’s really pretty laughable,” Herzik said.

Current law is indeed flawed, according to Herzik. It encourages "lawsuits ahead of settlements” and rewards lawyers who quickly round up homeowners to sue, he said.

UNLV researchers, in a 2013 report for the Southern Nevada Home Builders Association that the housing industry often cites, found the number of defect claims per new home in Nevada has been 38 times the national average since 2006.

But behind the scenes, AB 125 is a proxy fight.

Trial lawyers usually support Democrats, and builders and contractors align with the GOP. Republicans have been trying to change construction-defect law for years but always came up short because Democrats blocked them, often by not even giving their proposals a hearing, Herzik said.

Now the tables have turned, with Republicans controlling both chambers for the first time since the 1930s, he said.

“This is a classic interest group-party linkage,” Herzik said.

The bill is moving through the Legislature quickly, and leading the charge is GOP Assemblyman Ira Hansen of Sparks, chair of the Assembly Judiciary Committee and a licensed plumber and contractor.

•••

During the go-go years of rampant construction, skyrocketing prices, rapid sales volume and all-too-easy mortgage lending, homebuilders couldn’t work fast enough.

At the peak, in 2005, they sold about 39,000 new homes in Southern Nevada, or more than 100 per day, according to Las Vegas-based Home Builders Research.

When you work that fast, the chances for error only grow. Perhaps one way to interpret UNLV’s findings is that Nevada, with its white-hot growth, was more prone to shoddy construction than most states.

Piping-maker IPEX, for instance, in early 2009 agreed to pay $90 million to help re-pipe about 30,000 homes in the valley.

“They were putting up crappy houses,” UNLV political science professor David Damore said of the building industry.

Afterward, when America was mired in the worst downturn since the Depression, few cities were harder hit than Las Vegas. It was a poster child for economic ruin, with widespread foreclosures, empty office buildings and abandoned construction projects. The unemployment rate more than tripled, and new-home sales evaporated, falling about 90 percent.

Things are better today, but Las Vegas’ economy and housing market still have a long way to go. And yet, public enemy No. 1 is construction-defect litigation?

Homebuilders, real estate agents and other industry types gave the Sun a litany of reasons the past few years for the market’s struggles. No one, in this reporter’s memory, ever mentioned construction lawsuits.

Today, lobbying groups are singing a different tune, at least in letters to lawmakers and statements in press releases.

• “Serious abuse of our state’s law on construction defects has practically halted new home starts.” — Bill Miles, president of the Builders Alliance of Western Nevada

• “Construction of owner-occupied multifamily housing has been shut down by an excess of abusive lawsuits under Nevada’s construction defect law.” — Abney, of Reno’s chamber of commerce

• “The housing industry is an essential part of Nevada’s economy. ... But this economic growth has been limited by a pervasive and significant problem: an excess of abusive lawsuits under Nevada’s construction defect law.” — Brad Spires, the Nevada Association of Realtors’ legislative chairman

• “It’s very frustrating to see the construction defect issue blocking construction job growth generally and stifling home construction startups.” — Javier Trujillo, former chairman of the Las Vegas Latin Chamber of Commerce

Despite these claims, developers have big construction projects in the works. In the past year or so, investors have revived several master-planned communities in Southern Nevada — mini-cities planned for thousands of homes on thousands of acres — that stalled during the recession, including 1,700-acre Skye Canyon and 2,700-acre Park Highlands.

Overall, homebuilders had a rough time last year compared with 2013, with a steep drop in sales, volatile prices and reduced construction plans. Still, sales were up more than 50 percent from the depths of the recession, and executives shrugged off 2014’s results, saying better days lie ahead.

“The market’s a little slow now, but over the long-term it’s going to have good health,” LandWell Co. CEO Mark Paris, whose company is developing the 2,200-acre Cadence community in Henderson, said last spring.

Construction jobs are a shadow of what they were last decade but are rebounding. The Las Vegas area had 43,600 construction workers as of September, up 22 percent from two years earlier, according to the Associated General Contractors of America.

Nevertheless, the market has plenty of weak spots, but the woes don’t seem to have anything to do with home-defect lawsuits.

Las Vegas has one of the highest rates of underwater borrowers, Nevada has one of the highest foreclosure rates in the nation, and the state’s unemployment rate is tied for fifth-highest in the country.

Locally, about 60 percent of the jobs lost to the recession had been recovered by last fall, according to Las Vegas-based RCG Economics. But by and large, employers aren’t expanding much, giving employees more hours or raising pay, even to keep pace with inflation, all of which crimp people’s ability to buy a house.

All told, Nevadans’ personal finances are some of the worst in the nation. Two-thirds of residents have subprime credit scores, second highest-rate in the United States, according to the nonprofit Corporation for Enterprise Development, which recently ranked Nevada’s financial health 48th in the country.

This makes it hard, if not impossible, for many residents to qualify for a mortgage. Indeed, home-loan approvals are “a bigger issue for me than anything else,” Jeremy Parness, Las Vegas division president for homebuilder Lennar Corp., said last summer.

What’s more, U.S. housing officials last year reduced the pool of potential buyers by slashing the limit on mortgages they’d guarantee in Las Vegas, to $287,500 from $400,000 for the purchase of a single-family house.

“That took a big chunk of folks out of the market,” Parness said.

Also, banks typically won’t give a mortgage for several years to someone who had a foreclosure, bankruptcy or short sale, problems that blanketed the valley in recent years. Buyers have pent-up demand but are “just waiting for these time limits to expire,” Rob McGibney, Las Vegas division president for KB Home, said last summer.

As lobbyists noted, construction is slower than it was years ago, but that's probably because builders have largely stopped the high-volume, speculative development of years past.

Today, they mainly break ground on homes only after they find buyers, unlike during the boom years when they built communities all over the place without customers lined up first.

“Everyone’s more conservative,” Klif Andrews, Las Vegas division president for Pardee Homes, said last year.

Still, industry lobbyists are ignoring these issues.

“It becomes a partisan fight as opposed to what’s best for the homeowner,” UNLV’s Damore said.

Sun reporter Kyle Roerink contributed to this story.