Foreclosure's Building Problem

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Why not just sue your builder when an irreparable problem arises? Homeowners usually don't have the right to. Most new-home sales contracts state that the customer must go through arbitration before they can even think about bringing their complaint to court.

Exaggerated Effect?

There is little question that foreclosures are up, but it's difficult to discern if construction problems are a key reason. Web sites such as RealtyTrac and Foreclosures.com do not keep track of the reasons why people are defaulting. "While it certainly is adding to the foreclosure inventory, I hesitate to say that it is driving the rise in foreclosures," says Rick Sharga, vice-president for marketing for RealtyTrac. Fueling the foreclosure spike, Sharga says, are the slowdown in home sales, massive defaults on subprime and adjustable-rate mortgages, and regional conditions such as overbuilding and speculation.

Dissatisfaction with new homes is rising by some accounts. According to the 2006 Construction Quality Survey by Portland (Me.)-based consulting company Criterium Engineers, the number of new homes with "significant problems" rose to 17% in 2006 from 15% in 2003, with individual projects in some areas having defect rates as high as 50%. Water intrusion continued to be the No. 1 reported problem, with poor installation of roofs and windows reported to be the primary cause.

Living the Nightmare

According to a study conducted in April and May by Rating Insights, a consulting firm that runs the consumer-rating Web site Rateyourbuilder.com, 14% of consumers expressed dissatisfaction with their builder and 20% said they would be unlikely to recommend their builder to friends or family. "These percentages are not much different from what consumers report in other industries," says Rating Insights President Jonathan Smoke. However, "even though the percentages may stack up well to most industries, a nightmare experience with a home is not as easy to recover from as a bad experience with a telephone company or even an automobile manufacturer."

For Jordan Fogal—who receives phone calls and e-mails each day from homeowners across the country facing foreclosure because of building defects—the effect of shoddy construction on the greater housing market is difficult to downplay.

Fogal has spent the past three years living in a two-bedroom apartment, devoting all of her time to helping out other homeowners by posting about her experience on the Internet and picketing in front of her builder's new developments. This past June, she testified before Congress about the unfairness of binding arbitration agreements.

"I have not had a Christmas tree, I have not had the grandchildren over," Fogal says. "We have nothing but boxes, we live in boxes. But all I do is listen to these people all day long and I think, 'O.K., I can't stop.'"

For a list of the states with the highest foreclosure rates, see BusinessWeek's slide show.

Roney is Real Estate writer for BusinessWeek.com.