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The Affordable Housing Myth


We don't have an adequate supply of "affordable" housing in the San Francisco Bay area. That fact is undisputed. Why not, however, is a more difficult question. Many impediments to increasing the supply of affordable housing have been stated. Uncontrolled construction defect litigation is often cited by builders as the primary reason. However, there are more compelling reasons. Land that is either expensive to buy or expensive to build upon, or both, is one. Land of any kind in the nine Bay Area counties is becoming increasingly rare, especially land that is proximate to most of the available jobs. Buildable land is even rarer, and what is available may require hillside construction, environmental cleanup or expensive infrastructure. An inadequate labor pool is another impediment. In a normal economy the supply of trained construction labor is scarce. In a booming economy, it is almost impossible to locate or prohibitively expensive. Finally, builder profit margins must be "affordable," too.

The concern over the lack of affordable housing should not focus just on the impediments to increasing the supply of affordable housing. We also should recognize those factors that decrease the existing supply. Here is where issues such as the need for extraordinary maintenance and repair brought about by actual defects in the original construction, or a decrease in useful building component life due to the poor quality of materials or construction methods, must be considered.

What, exactly, is "affordable" housing? Does "affordable" mean that every man, woman, and child in the San Francisco Bay Area who wants to buy a house should be able to do so? The usual definition is housing that is sufficiently low in price so that those of low and moderate incomes can qualify for a mortgage. But shouldn't "affordable" also refer to the ability of the owner to not only buy the home initially, but also to be able to afford to maintain it as well? What use is a home that anyone can buy, but few can ever own? Is a home that costs so much to maintain that the owner cannot keep it, truly "affordable?"

If, in order to build homes inexpensive enough to allow everyone to purchase one, they must be of such poor quality that "maintenance" amounts to "reconstruction," is affordability illusory? If "affordable" homes are not watertight, strong in earthquakes, or safe in fires, is the buyer getting value for whatever he is required to pay? Is it possible that the housing industry in California is incapable of building a home in the nine Bay Area counties that is both high in quality and low in price? If so, is "affordable" housing a myth?

To answer these questions, we have to examine why housing-and principally attached housing-in the San Francisco Bay Area, fails to deliver on the promise of "affordability".

Part I — The Litigation Scapegoat

Housing developers say they won't build affordable housing because of fear of lawsuits. That's the message they've been delivering around the state in support of legislation aimed at curtailing such suits. Their fear is justified. The quality of much of the attached housing that has been mass produced during the past twenty years is so bad, and the builder's response to owner complaints so dismal, it is hardly surprising that builders get sued. But the message that construction defect litigation is responsible for the lack of multi-family housing just doesn't square with the facts. It does not take a Supreme Court justice to understand that litigation, any type of litigation, is not a problem unto itself, but one of several alternative solutions to resolving a dispute. The dispute, not the solution, is the issue.

In the case of a construction dispute, it is the presence of defects in a home due to a lack of adequate quality control that raises the dispute in the first place. The litigation merely follows when no adequate remedy for the problem is offered. The inability of the housing industry to properly construct a home at an affordable price is the primary reason for the lack of affordable housing in the Bay Area. In an effort to focus this debate on substantive issues we first offer some history. The occurrence of defects in building construction has been of epidemic proportions since the late 1970s. Loose loans from poorly regulated savings and loan institutions, and a hot real estate market, fueled an unprecedented building boom. It was unprecedented in the quantity of housing constructed, but it was also unprecedented in the lack of quality control practiced by builders who could sell anything that could be built. The lending institutions, often in joint venture with the builders, and their builder clients often had no experience with the mass construction of housing. When many unqualified builders defaulted on poorly supervised loans in the late 1980s, the lending institutions took over the projects and tried to complete them. Their lack of experience made already poor projects worse.

Lack of builder experience, and the lure of extraordinary profit margins, led to the use of construction methods which resulted in poor quality buildings. These included: insufficient architectural detailing; poor coordination and supervision of construction; use of defective building products (aimed at maximizing profits); and use of untrained labor. It took several years before homeowners realized that they had been the victims of a boomtown construction mentality. First, much of this construction occurred during two long drought periods in California. The first covered the four years between 1976 and 1980, and the second extended almost seven years from about 1986 through 1993. Water intrusion issues, the most prevalent type of construction defect, and related foundation problems were consequently not noted until normal rainfall resumed and the normal wet-dry weather cycles tested the inadequacy of the buildings' foundations and waterproofing.

Second, the same lack of quality control that sacrificed the weather resistance of the homes also led to structural and fireproofing defects. The Morgan Hill earthquake, the Loma Prieta quake in 1989, and the Northridge quake in 1994 revealed the inadequacy of seismic bracing in many wood- frame structures and the lack of compliance with building codes. These problems, hidden within walls, and virtually invisible to any eye without intrusive testing, were found to be almost as prevalent as poor waterproofing or foundations.

Appeals to developers (many now defunct-following the real estate recession of the early to mid-1990s) were largely ignored. Appeals to municipalities; which had "finaled" the buildings, were ignored. The argument was given that the buildings had "passed" final inspections. Appeals to the California State Department of Real Estate were ignored because the DRE views its jurisdiction as ended upon the expiration of the Final Subdivision Public Report. Appeals to the Department of Consumer Affairs State Contractors License Board failed to produce any meaningful remedies, and even in those rare instances where a contractor's work was found by the Board to be deficient, the $5,000.00 license bond was inadequate to address the problem in mass constructed multi-family housing consisting of not one, but often hundreds of units. Also, the threat of disqualifying the contractor was of no consequence, since many projects were built by entities that were now bankrupt.

In short, no public or private institution provided homeowners with any meaningful remedy for literally millions upon millions of dollars of repairs made necessary by shoddy and often dangerous construction. Homeowners are not naturally litigious. They seek legal counsel when, and only when, other methods of obtaining repairs have been frustrated, usually by builders who do not wish to spend their own funds to remedy a problem in a project for which the construction funds have long been exhausted. This is especially true when the cost of repairs is substantial. Frustration led them to seek the help of lawyers because the lawyers had a remedy, and for no other reason. The only remedy available to homeowners and their lawyers then, and now, is litigation. Even though almost all construction defect suits are eventually resolved, through the good offices of a mediator, without the necessity of an actual trial those mediation efforts would be useless without the compelling force of pending litigation.

But it is not necessarily the recalcitrance of builders that frustrates homeowners. It is probably true that most builders would satisfy their home buyers if there were any practical way to do it. However, the sheer cost of repairs of a building that lacked sufficient quality control is such that the builder often cannot shoulder the responsibility alone. Others involved in building construction are usually more directly responsible than the builder for defects. Designers; general contractors, and subcontractors are charged by their contract with the developer to maintain quality control. They are, however, often reluctant participants in the resolution of a construction defect dispute with the homeowner. This may be due to several factors. First, the very nature of the financial structure of a modern housing development demands that each participating contractor provide the lowest possible bid for the work to be done. Work is often performed on a piecework basis, where speed, not quality, is paramount. As the lowest bidder, a subcontractor may have no extra funds available to perform warranty repairs. Faulty designs, which fail to provide adequate detailing for work performed, are another factor. Architects are often prevailed upon to provide "off the shelf' designs that may not be drawn for a specific site or that are modified in the field by the builder. More critical, however, is that designing architects and engineers are usually not retained to inspect the work to insure compliance with plans. It is suspected that such inspections are inherently in conflict with the piecework mentality. A truly effective inspection program, one which would give the inspector the power to stop the work and order corrections to be made, would cause delays and result in unacceptable increases in the cost of the project. Cheap substitutes for time-tested building products are also at fault. This list of failed roofing and siding products offered as time and labor cost-saving alternatives to quality products is legion. The list includes roofing felts, artificial stucco, hardboard siding, plastic pipe, and cementitious shakes. Builders have often been seduced by claims of product durability which are later proven false by experience in the field. This happens, of course, after millions of square feet of these defective materials have been installed on new homes.

While developers, designers, contractors and product manufacturers must bear a large portion of the responsibility for faulty and defectively built homes, their insurance carriers must bear the majority of the responsibility for the fact that it requires litigation to obtain any reasonable resolution of construction problems. Without going into the intricacies of insurance coverage (or lack of it) for a developer or contractor, suffice it to say that many policies issued to builders or contractors are riddled with exceptions and exclusions to coverage. Also important to this issue is the fact that insurance carriers appear to do little or no underwriting of the risk that they are insuring. Claimed exceptions to coverage, asserted after a claim is filed, leads to almost total non-participation of carriers in the resolution process prior to the time a lawsuit is filed, and only minimally after that. Lack of underwriting means that poorly qualified builders and contractors can obtain insurance and thus at least superficial credibility. The lack of participation of insurance carriers early in the mediation process usually means that a settlement of the dispute cannot be funded even if an agreement is reached between the owner and the developer. There are no owners that we have ever represented who would not have welcomed, with unbridled enthusiasm, a meaningful funded settlement that could be achieved without the necessity of proceeding to litigation. However, under most builder's or contractor's liability policies, litigation is the trigger mechanism necessary to bring the carriers to the table. It is no wonder that (on occasion), we have been quietly invited by builders to file suit against them in order to obtain the necessary participation of their insurance carrier in the resolution of a construction dispute.

There is another important aspect of the problem-warranties, or more accurately, the lack of them. Builders often provide a short, normally one year, warranty on new construction. The California Code of Civil Procedure pro vides for a much longer period of builder responsibility-ten years. The builder's warranty is almost never adequate to saver the type of defects that result in six and seven figure (and higher) costs of repair. But if it were, homeowners, when faced with the choice of a readily enforceable warranty, or litigation, would invariably choose the former. The problem is that the resources of builders alone cannot underwrite such warranties, and unenforceable "warranties" cannot be made an involuntary substitute for judicial remedies as has been proposed.

A truly adequate warranty would not need to be legislated. The free market would determine its adequacy. There is nothing to preclude a builder and its insurance carrier from voluntarily offering a warranty that could successfully compete with any other form of dispute resolution, including litigation. Insurance carriers could specify the terms and conditions of any warranty they chose to offer. It is not difficult to envision a warranty which, when home buyers were given a choice between recovery under a warranty or recovery obtained by the judicial process, would be the unanimous choice. This however, would take a clear and concise procedure for filing a claim; a sufficiently broad scope of the warranty; and a guaranteed payout once the warranty claim process was complete. Warranties fail to protect either the consumer or the builder when they fail to cover the defects giving rise to claims, fail to deliver a fait and equitable claims handling process, and fail to deliver funding at the conclusion of the process.

Construction defect litigation is no more the reason for an inadequate supply of affordable housing than is chemotherapy the reason for cancer. The real reason for construction defect litigation is construction defects-and the lack of any meaningful alternative to litigation. A warranty can be an effective alternative to litigation; but consumers will not accept a warranty that does not give them a reasonable choice any more than they will choose any other product over a superior competitor. Market considerations should prevail. A competitive market for quality housing should not only provide a quality product but also back that product with a competitive remedy for resolution of any dispute arising from the construction of the home. Healthy competition can rarely be legislated. As long as housing consumers perceive that the remedies offered by the builder are inferior to what they can obtain from a court, they will continue to litigate construction issues and have the constitutional right to do so.

Of course, the most direct way of avoiding litigation of construction issues is to build quality homes. That, however, requires adequate designs and inspection by the designer, trained labor, quality building materials, and proper coordination and supervision of trades. Virtually all construction defects that are the subject of litigation can be traced to a lack of one or all of the foregoing. And why are they lacking? Simple economics. It costs more to build a home with a proper design and designer inspection, trained labor, quality building materials and adequate supervision. It may even be possible that today's construction industry cannot deliver adequate quality at current profit margins. The question should not be whether builders can build housing that is affordable, but whether builders can afford to deliver quality housing. The debate over construction defects will certainly continue as long as profits compete with quality.

Better warranties, but more importantly, quality construction, and perhaps, better use of available land, is the real answer to the shortage of affordable housing. Litigation, like any headache, is merely a symptom of a problem; it is not the problem. For builders to avoid litigation over their projects, they should be challenged to find creative and innovative ways to build quality housing. It is entirely possible that rising to that challenge would yield new housing models that will protect the consumer, the environment, and the builder-professional in ways no one has yet imagined.

Part II — The Time Bomb of Unexpected Maintenance

Affordable housing supplies are in jeopardy in ways few have really confronted. In an article that appeared in the May 1999 issue of the Journal, "The Uncertain Future of Community Associations,." we examined the political and economic reasons that one of the largest supplies of affordable housing condominiums and attached planned developments-are already threatened by failing structures. The difficulty of maintaining such projects and the consequent shortening of their useful life poses a problem as large as, if not larger than, the inability of the housing industry to build new affordable homes. There are more than 30,000 common interest developments in California. They provide affordable housing for as many as 5,000,000 Californians. Loss of any substantial portion of that housing stock would greatly affect the ability to house many residents of this state.

There is a growing "reality gap" between those repairs that are expected and funded, and those that are either unexpected or unfunded, or both. The "reality" is the amount of money it would take to sufficiently fund all of the repairs, to common interest attached housing that, if they were adequately inspected, would be identified. It represents the difference between funded and unfunded liability for future repairs, whether known or unknown. That there is such a gap is becoming increasingly more apparent. Experience with certain building components has shown that it is unusual for an owner's group to discover the necessity for repairs until the damage is obvious. Dry rot is one of the best examples because it attacks unseen portions of the building. It can infect the inner wall cavities of a building until major structural damage is caused-all without warning to the owners.

A 285-unit project in Daly City, California was about nine years old when the structural supports for a portion of one building collapsed, taking parts of two units with it. The homeowner association called in a contractor to repair the damage. As the contractor peeled away the exterior stucco of the building, it was discovered that the rot extended inward to the framing members of the building. The cost of that one repair exceeded $60,000 and, prior to failure, was completely invisible from the outside of the building. Inspection of the remainder of the project revealed extensive rot in other buildings. The cost of repair for the entire project is expected to exceed $8,000,000! The problem was water that leaked into the inner wall from the roof. It did not enter the units but remained in the walls because the walls had been improperly sealed. The repair will require that all of the stucco in the entire project be removed and the wood framing beneath it repaired.

If the funding for the foregoing repairs had to be raised by an assessment to the residents, the assessment would be over $28,000.00 per unit! These homes were intended as "affordable" housing. It is difficult to conceive of a less affordable home than one where low to moderate income families would be required to raise an amount representing approximately one third of the market value of the home. More frightening: $8,000,000 probably exceeds all of the owners' equity in the project! The owners "bought" the homes, but clearly, without outside funding assistance, they could not afford to "own" them.

This example is not the exception to the rule. It is the rule in thousands of projects up and down the state. Inadequate funding for unexpected repairs leads to a substantial "reality" gap. Another project, this one in San Mateo with 300 units, employed a contractor to perform repairs five years ago. The repairs were poorly performed and failed to stop widespread leakage and dry rot. The owner's association sued the repairing contractor but could not sue the original builder because the statute of limitations on such actions had expired several years before. The suit was settled and the owner's association received about $4,000,000 from the insurance carrier for the repairing contractor-a good result if only a portion of the project's required repairs. However, the contractor had only worked on a limited number of units, and a claim could therefore not be asserted against the contractor for the remainder of the project, all of which suffered from the same problems. The repair estimate for the entire project: $20,000,000. Assessment per unit: over $50,000.

Ironically, this project, is suffering no slowdown in sales of units. Due to the high demand for housing in the San Francisco Bay Area, units in this project are selling at market value, determined as if the severe damage did not exist. Sellers are receiving their full equity from buyers of these units. Even considering the superheated real estate market, a truly informed buyer would not likely pay full market value for such a home. The owners' association has relevant information available for review by prospective buyers, but few ask for it. Either they are not interested, or they have not been told it exists. It is likely that most of the owners' equity in that project is offset by the unfunded repair "reality." At some point in the future either when the economy slows enough to re-introduce simple caution into the purchase of a home, or when prospective buyers are confronted with an explanation of the required repairs and their cost which cannot be ignored or denied-reality will catch up with this project, and the owners at that time will realize that they can never "own" that affordable home.

So does the seller really have anything to sell? If equity is offset by the reality of deferred maintenance, are the new "buyers" receiving anything of value? If not, are the lenders who hold all of the deeds of trust on that property really the actual owners? And what do they own-a property with a massive unfunded liability for repair that someone will eventually have to acknowledge. Could it be that "buyers" in this situation are actually more like renters? If they cannot accumulate equity because the property is heading for obsolescence, their "ownership" will be short-lived.'

The "gap" does not get smaller with time. Unless extraordinary amounts of cash are injected into the project, it is likely that the owners' association will not catch up with the deterioration in these buildings. If allowed to continue unchecked, basic habitability will be compromised to the point where condemnation is a distinct possibility. The mythical "affordable" home therefore becomes decidedly less so.

At some point in the future, when either the economy slows enough to reintroduce simple caution into the purchase of a home, or when prospective buyers are confronted with an disclosure of the required repairs and their cost which cannot be ignored or denied, reality will catch up with these projects and the then owners will discover that they can never "own" that "affordable" home. When that happens, the buyers will realize that their "investment" is as mythical as the promise of affordability. The "Uncertain Future" article discussed the difficulty of pulling such a project from the tailspin into obsolescence. Outside funding becomes nearly impossible to obtain, as well as any hope of obtaining new capital from the owners. While a situation this drastic may not consume many developments for a decade or more, there are enough presently exhibiting such tendencies that concern for the future of existing affordable housing stocks is not misplaced.

Part III: A Radical Proposal

One answer to this dilemma may be to alter some municipal zoning and increase densities to the point where building high-rise residential/commercial complexes is economically feasible. The design and construction of these concrete and steel structures normally is much superior to their low- rise, wood-frame cousins. They are not often the subjects of construction defect litigation, and if they are, the issues in dispute are usually very limited. Further, there is the additional and not inconsequential benefit of more permanent structures, better use of available land, less suburban sprawl, and the opportunity to concentrate more housing adjacent to public transit.

Cities, especially suburban (or "edge") cities, would have to adjust to the idea of clustered high-rise "transit villages" in various locations, but the benefits to home buyers and to the environment would be enormous. Given the option of a well-built unit in a tower adjacent to public transit in a suburban location, or a shoddily built single-family home on a lot in a sprawl neighborhood many miles from work, many home buyers would gladly choose the former. Builders would benefit from less litigation and, if the densities were sufficient, given the lower cost of suburban land, their construction investment might very well yield profits similar to or better than those they obtain from low-rise, wood-frame construction inefficiently using available land.

These issues are of major concern to Bay Area residents. A study commissioned by the Bay Area Council found that affordable housing and transit were by far the problems causing the most concern among the respondents to the poll (San Ramon Valley Times, page 1, December 17, 1999). But if we believe that affordable housing is truly a myth in the San Francisco Bay Area, addressing those concerns will be extremely difficult without a radical departure from existing planning approaches. Presently, planning for "high density" housing in the urban core of San Francisco and Oakland has allowed high rise residential and mixed use structures. This is not true in the suburban areas. The Santa Clara Valley, once farmlands and orchards, is now paved over with one and two-story structures. The only "high rise" structures are mainly office towers in downtown San Jose. But high rise residential towers could solve many of the problems discussed above. They have a place in suburban areas, and that place is most likely to be along transit corridors like BART, Caltrain, and the light rail system in Santa Clara County.

A story in the San Jose Mercury News discussed the race to develop the new light rail corridor (San Jose Mercury News, December 17, 1999). Business and residences are being constructed specifically to take advantage of the light rail stations. But the densities described in that article are too light; most of the construction is still one and two story wood frame buildings. This type of construction is fraught with many long-term issues that make it a poor choice for affordable housing. Short-term deterioration, inefficient use of land, and the inability of the construction industry to deliver adequate quality in such structures suggest that we should scale back building low-rise, wood frame buildings for attached residential housing and substitute some high-rise construction.

High-rise steel and concrete buildings in sufficient density, built along transit corridors and including retail and office space, could easily compete with low-rise construction for affordable construction costs. Moreover, tower buildings would be, virtually permanent, instead of having the forty- to fifty-year life that is to be expected from low-rise wood frame construction. This is a concept whose time has truly come.


Whether truly affordable housing can be built in the San Francisco Bay Area depends as much on economic factors as anything else. It may be that during the current economic boom, housing prices and availability will remain out of reach for many consumers. But one thing is certain-the current debate over construction defect litigation is too narrowly focused and therefore begs the question. Effective planning for the new millennium will address not only affordable housing issues, but also saving the environment from sprawl, protecting existing housing supplies, and insuring that new buildings meet rigorous quality standards. And it is these last three factors that broaden the inquiry and begin to paint the big housing picture for the future. The legitimate remedy for the problem of affordable consumer housing is to provide a product that doesn't need a remedy and instead becomes part of the solution to a multitude of other problems facing the Bay Area. Organizations like ECHO are trying to focus the debate on practical, realistic solutions to the complex problem of how to provide quality, affordable housing to everyone.

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