UHERO report finds spike in construction lawsuits is factor in rising housing costs

A report by the University of Hawaiʻi Economic Research Organization finds that construction defect litigation in an already constrained Hawaiʻi housing market has become a significant factor to rising costs, financing challenges and shifts in development patterns that might reduce homeownership opportunities.

The report — prepared for the Hawaiʻi Homeownership Center — examines how an increasing number and scope of construction lawsuits is contributing to financial uncertainty, which increases costs for developers, insurers and ultimately, homebuyers.

Construction defect cases have grown substantially during the past 25 years, now affecting nearly 1,000 units per year on average.

They represent a significant share of the 5,000 homes built each year in the islands. These lawsuits have resulted in settlements reaching tens to hundreds of millions of dollars, with 30% to 40% of those sums going toward legal costs and taxes.

Rising litigation risks and construction costs have driven up insurance costs for developers, by as much as 500% for builder’s insurance premiums, and increased financing expenses for homebuyers.

“Housing affordability in Hawaiʻi is already a serious challenge,” said the report’s lead author Trey Gordner, a policy researcher at University of Hawaiʻi Economic Research Organization. “As lawsuits become more frequent and larger in scale, they add financial uncertainty for developers, insurers and homebuyers alike.”

One major impact of these types of lawsuits is their restriction on homebuyer financing.

Units involved in litigation are often excluded from government-backed mortgage programs such as Federal Housing Administration and Veterans Affairs loans, making financing more expensive and difficult to secure.

First-time homebuyers and lower-income households, who often rely on these programs, face particular difficulties.

The report says lenders often add 0.25% to 0.5% to mortgage rates on homes under litigation to account for risk. At current interest rates, this translates to $100 per month for every 0.25% rate hike, or an additional $36,000 throughout a 30-year loan on a $1 million dollar home.

Findings also show that developers, facing heightened litigation risks and insurance costs, could be shifting away from for-sale condominiums, which have historically served as an important entry point for homeownership, toward rental housing, limiting the supply of new owner-occupied homes.

The report further acknowledges that construction lawsuits serve an essential function in addressing serious deficiencies that affect homeowner safety and building integrity.

It does not evaluate the legal merits of individual cases, but notes that changes to the state’s Contractor Repair Act and other legal processes could help balance homeowner protections with a more predictable legal environment for builders.

Furthermore, the report highlights recent policy reforms in other states, including alternative dispute resolution mechanisms and streamlined settlement processes designed to prioritize timely repairs instead of lengthy legal battles.

You can read the full report “Construction Defect Litigation, Housing Affordability and Homeownership in Hawaiʻi,” on the University of Hawaiʻi Economic Research Organization website.