Back in 2011, we saw an interesting trend and based on that, we projected that a significant decrease in defects litigation was just ahead. About 50% of the construction labor force had lost their jobs in the Great Recession, but the defects world was still very active litigating the boom. In the run-up to the housing bubble, it was not too surprising that the number of construction defect cases filed in California grew steadily from 2000 to 2010 just over doubling in that 10-year period. The residential permit volume and construction defect volume trends had been almost an exact match with a 5 to 6 year lag. The above graphs are from that analysis and were used in our presentation to the West Coast Casualty Conference, the largest conference for the defects industry in 2012, where we projected a future possible dramatic decrease in defects litigation cases.
So, what happened? Was the prediction for an upcoming bust in defect litigation true?
Defect case filings peaked in California in 2011, six years after the 2005 peak in residential construction. Then, from 2011 to 2014, defect case filings dropped approximately 40%. Residential construction bottomed out in 2011 and has been climbing out slowly since. We have seen a boom in apartment construction, but residential for sale housing has remained at recession levels.
To find fewer residential units less than 10 years old, and therefore eligible to litigate under statute in California, we must go back over 32 years to before 1984.
Everything is tied to demographics. Millennials have not wanted to get into the housing market, and baby boomers have been looking to downsize. We are starting to see an increase in residential for-sale housing starts and, as the millennials start to have kids, we should see a much more robust housing market returning to more normal levels.
So, what lies ahead for defects litigation? We have probably found the bottom of the defects curve, and as we predicted back in 2011, we have seen an increase in large complex cases involving schools, apartment buildings and commercial buildings which is likely to continue. As we build out of the recession, we can expect that the 5 to 6-year lag of litigation following construction will continue. Apartments have traditionally had a lower frequency of litigation than for sale housing, and that will likely continue. So, we won’t see litigation at the same levels that we saw after the last boom until 5 to 6 years after for sale housing returns to the 2005 levels – which may be a long time away. The good news for builders and insurance carriers is that the old days of the massive subdivision cases is probably not coming back anytime soon.
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