Michael Chamberlain – February 16, 2013
A study released by the UNLV Center for Business and Industry reveals that the state’s current construction defect law could be partly responsible for Nevada’s slow economic recovery.
The study, The Nevada Housing Market: Prospects for Recovery, was distributed to legislators late last week. It claims that the sluggish recovery in the construction industry is helping to drag down the state’s overall recovery. At least part of the reason for the slow comeback in construction, according to the study, is the nature of the state’s construction defect law, otherwise known as Chapter 40 for the section of the Nevada Revised Statutes that contains it.
After about six years of sliding, Southern Nevada housing prices are on the rise. Most consider that a good sign. A lack of supply is contributing to the rise, and prices look set to increase over the next few years as the Southern Nevada economy improves. Nonetheless, the overhang of property held in weak hands could dampen any acceleration. In addition, the increase in claims and settlement costs made possible under Chapter 40 may postpone the gains in construction by adding to the costs of new home construction.
Whereas the Silver State had arguably the biggest economic boom before the recession, its recovery has been one of the slowest.
Nevada’s construction sector has not performed nearly as well as its national counterpart since the prerecession peak. Had this sector performed as well as its national counterpart during the recession and recovery, it would account for an additional 54,600 jobs in Nevada. Allowing for multiplier effects yields an additional 52,416 jobs statewide, for a total of about 107,016.
With 107,016 additional jobs, Nevada’s employment would be about 1,255,216, which is only 2.9 percent below the state’s prerecession peak employment of 1,293,100. These figures suggest that the deep recession and slow economic growth in Nevada are largely the result of weakness in the state’s construction sector. Had this sector achieved the same performance as its national counterpart, Nevada would be seeing a stronger economic performance.
The study claims the slow pace of recovery and of home building has not slowed the pace of construction defect lawsuits.
[T]he number of closings dropped by 86.0 percent in Nevada since the peak. In this same time period, the number of claims and the costs of settlements increased by 355.0 and 80.0 percent, respectively.
Compare this to California (Chart 9), which has a less than ideal housing market. Since the collapse, the number of closings were on a downward trend, much like Nevada (down by 87.0 percent), but that is where the similarity ends. Unlike Nevada, in California, settlement costs had been on a downward trend, decreasing by 83.0 percent, much like we would expect with a dwindling number of closings. The number of claims was relatively flat over the time period.
The rate of construction defect lawsuits in Nevada, according to the report, far exceeds that of the rest of the country.
[T]he number of claims per closing in Nevada was significantly higher than in all other states since 2006. Nevada is the only state with a law written like Chapter 40. In 2011, the number of claims per closing reached 1.35 in Nevada. For the average of other states, the highest ratio was 0.035 claims per closing.
Members of the construction industry lauded the report. The Coalition for Fairness in Construction, the group that commissioned the study, issued a press release in conjunction with its distribution.
Rocky Cochran, co-Chairman of the Coalition for Fairness in Construction added “It is widely acknowledged that Nevada’s broken Chapter 40 law is responsible for the HOA scandal. Now there appears to be reliable evidence that this law is also costing jobs and slowing down the economic recovery. It has never been more clear that Nevada needs honest construction defects reforms.”
Cochran is referring to a scandal involving dozens of people in which construction defect attorneys and selected CD construction remediation companies allegedly conspired with boards of condominium homeowners associations to file construction defect claims. The conspirators used straw buyers to purchase homes, rigged HOA board elections and steered CD work to favored attorneys and construction companies. So far, at least two dozen people have pled guilty to charges in the scheme and at least one person implicated by law enforcement in the scandal committed suicide.
Chapter 40 was created to give homeowners recourse in the case of faulty construction. Construction industry businesses and groups complain the law has tipped the scales too far against them and in favor of trial attorneys filing claims. For their part, attorneys claim the law works well to protect the rights of homeowners, just as it was intended.
Members of the construction industry have been attempting to press legislators to make changes to Chapter 40 for several sessions. They are hoping this study will help convince enough legislators to support their cause this time around.
UNLV Study: Construction Defect Law May Stifle Economy – WatchdogWire – Nevada.