The Economics of Structural vs. Cosmetic Elements in Homes

[Homeowners of Texas.org]

INTRO: Consumers buying new homes have vastly different economic perspectives than contractors building them, banks financing them, or insurance companies and other stakeholders.

HOMEOWNERS: The typical mortgage is a 30-year financial commitment, which often includes a consumer’s life savings. But most consumers don’t understand residential construction science or know about decisions made for them by the builder. So, their buying decisions are made from judgments about what they can actually see and understand: the cosmetic elements, which may include granite counter tops and high-quality faucets, textured walls with rounded corners, Decora-style light switches, and monitored security systems. What happens if the home warranty expires by the time structural elements fail, the foundation cracks due to expansive soil, or pipes embedded inside leak? The homeowner would then face repairs that can easily cost tens or hundreds of thousands of dollars. Consider the repair cost of faulty plumbing in the slab, and how jack-hammering the slab to get to the plumbing can affect the integrity of the slab itself and the framing on top. When the “repair” causes more problems and renders the house uninhabitable, what’s the homeowner to do?

BUILDERS: Good builders, who pride themselves on making homes that last, are finding it harder to compete against those who conceal serious structural defects and offload their warranty responsibilities to 3rd parties. With no regulatory accountability, these unscrupulous builders have learned how to cut corners on the less visible parts of the home and instead use professionally decorated model homes to showcase cosmetic features – the “wow” factor.

MATERIAL SUPPLIERS: As the worldwide price of copper pipe increases, suppliers have responded with less expensive plastic plumbing, which is then embedded in the concrete slab foundation and never again seen. And as lumber costs rise, framers have responded with cheaper grades, smaller sizes and recycled and spliced wood, which can affect the structural integrity of load bearing walls. Builders may argue that decisions to use cheaper materials help them extend homeownership to lower income families, but the end result is a significant number of homes that will become uninhabitable, affecting a downward spiral of property values and tax bases and insidious social costs. Rather than covering up shoddy work and substandard materials, we encourage builders to improve their efficiency with on-site supervision, coordinated scheduling of subs, and better communication with Spanish-speaking workers).

MORTGAGE COMPANIES: Banks, like consumers, have little to no knowledge of homebuilding and have shown little interest in homebuilder reputation or their decisions relating to structural elements or infrastructure components. Instead, the factors banks and mortgage companies use to approve loans include (1) the buyer’s credit worthiness and (2) collateral, (3) the home’s appraised value, (4) the interest rate, and (5) insurance (covering the home itself and the borrower). Government regulations forced banks to take on riskier loans to minorities and low-income families with questionable credit and low down payments. So, they responded by selling mortgage backed securities along with credit default swap “insurance.” And when the bubble finally burst, and it became clear that many appraisals were grossly inflated, the banks were in big trouble. Because of the global financial collapse, banks now find it much harder to sell mortgage backed securities; and we think they will support residential construction reforms that keep them from being stuck with defaulted loans due to construction defects.

INSURANCE COMPANIES: Because current laws allow insurance companies to raise rates whenever profits fall below certain level, they have less incentive than banks to improve the quality of residential construction. Their biggest exposure would come with extensive wind damage due to hurricanes, because it would take a long time to recover from such losses even after raising rates.

POLICY MAKERS: When politicians understand these different perspectives and natural biases, they can better balance their moral obligation of protecting the public vs. the lobby influence aimed at protecting practitioners. (Use the “elephant” example.) Another important perspective for them is that a few homes with major construction defects can have a spiraling effect on property values of entire neighborhoods, and thus the tax base that funds public safety and kids’ education.