The Economics of Structural vs. Cosmetic Elements in Homes

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. They don't often consider the unseed structural elements or what happens if these elements fail after the home warranty expires. They don't think about the chances of a foundation cracking due to expansive soil, or pipes embedded inside leaking. If that were to happen, the homeowner would 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 a homeowner to do?

BUILDERS: Good builders, those who pride themselves on making homes that last, are finding it harder to compete against contractors 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 with structural defects that can become uninhabitable, affecting a downward spiral of property values in entire neighborhoods. 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 a homebuilder's qualifications or 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, (2) collateral based on the home’s appraised value, (3) the interest rate, and (4) insurance that covers the home itself and the borrower. Before the housing bubble burst, government regulations forced banks to take on riskier loans to minorities and low-income families with questionable credit and low down payments. They responded by offloading their financial risks by selling mortgage backed securities along with credit default swap “insurance.” And when supply outstripped demand and the bubble finally burst, it became clear that many appraisals were grossly inflated. The banks were in big trouble. Because of the global financial collapse, selling mortgage backed securities is more difficult. We hope banks will now 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 levels, they have less incentive than banks to improve the quality of residential construction. Their biggest exposure would come from widespread damage from hurricanes, tornados and floods. It takes 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 health, safety and welfare of the public vs. the lobby influence aimed at protecting practitioners. 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.