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You Call This A Home?


By Mara Der Hovanesian Residents of a new housing development in South Carolina fear that fumes from contaminated soil have caused dizziness and blackouts. In Colorado, homeowners say they were led to believe they'd enjoy a recreational lake that never materialized, causing property values to slip. As the housing slump worsens, U.S. homebuilders increasingly find themselves fending off complaints of shoddy construction, unsavory sales tactics, and use of unsafe land.

There's no definitive gauge of consumer sentiment toward builders, but several signs point to growing unease. The annual new-home satisfaction surveys done by J.D. Power & Associates, which like BusinessWeek is a unit of The McGraw-Hill Companies (MHP), showed customer attitudes improving from 2001 to 2004 and then leveling off. But last year's survey, released in September, showed a 7% increase in the number of construction-defect complaints per home.

Criterium Engineers, a Portland (Me.) building-inspection service active in 35 states, found that from 2003 to 2006 the number of new homes with "significant problems" rose more than 13%. A public fund in Nevada created to settle builder complaints paid claims of nearly $1.2 million in 2006, up from $234,000 in 2003.

This is only the beginning, says Ronald T. Kozlowski, a property casualty actuary with the consulting firm Towers Perrin in San Francisco. "Right now you're seeing the construction claims start to come in," he says, "but it'll take five to seven years" to get a full measure of the angry fallout. Anti-builder Web sites are proliferating, and two consumer groups, HomeOwners for Better Building and Homeowners Against Deficient Dwellings, are compiling online lists of beefs against developers.

Whenever there's a rush of building as there has been over the last five years, complaints are sure to follow. Some can be written off to unrealistic expectations. The National Association of Home Builders says 55% of customer grievances concern caulking, paint, and other nitpicky issues. This time the grumbling may be exacerbated by frustration over developers' lending practices. And in areas where home values are dropping, every chipped tile is infuriating.

The range of consumer gripes is broad and includes dissatisfaction with conditions outside the home as well as within. Summer Fujiki says she moved to Dunes Park, a subdivision in Henderson, Colo., in 2004, in large part because salespeople for builder D.R. Horton Inc. (DHI) said there would soon be a recreational lake nearby. The 31-year-old human resources manager says Horton's reps referred to boating, walking trails, and lake views from her three-bedroom home. But the area where the boats were supposed to sail is owned by Denver Water, and the agency has no plans to create a recreational lake. Fujiki's house, which looks out over dry terrain, has been on the market for two years, its appraised value slipping from $235,000 to $218,000. Only three potential buyers have come to see it, according to Fujiki. "Everyone says: What's up with the dirt hole?'"

Asked about Fujiki's account, Horton doesn't deny that it suggested a lake was in the works. In a written statement, the company says that it takes "great pride in constructing quality homes and aesthetically pleasing neighborhoods. We understand that the proposed use of adjacent property is important to potential home buyers. Therefore, we may share with potential buyers our understanding of zoning and future plans for adjacent properties. However, we do not control those plans and they are subject to change based on further zoning/use actions between the land owner and the municipality."

Builders have inoculated themselves effectively against customers taking their objections to court. Homeowners generally don't have the right to sue; their only legal recourse is arbitration, as required in most sales contracts. Contracts also typically prohibit customers from disclosing problems to the media or prospective buyers. Better Business Bureaus aren't always helpful, because builders can simply drop out. Four big builders voluntarily left Houston's BBB in 2004 and 2005, for example. And builders are only lightly regulated, primarily by state and local authorities.

Even so, consumers are becoming increasingly vocal in their complaints. Clyde M. and Tracy D. Singleton, a couple in their 50s from Shepherdstown, W.Va., say that one month after they moved into their new $409,000 house last October, the basement filled with sewage a foot deep. Tracy says the couple spent three months in a hotel before their developer, Reston (Va.)-based NVR Inc. (NVR), got the place cleaned up. The Singletons have resisted arbitration. Instead they have alleged in a suit pending in federal court in Martinsburg, W.Va., that NVR failed to put in an underground shut-off valve to prevent sewage from backing up into their house. The plaintiffs claim that since the valve should have been installed outside of their home, the dispute isn't covered by the arbitration clause in their contract.

NVR counters in a motion to dismiss the suit that the action lacks any merit. The Singletons have "failed to allege any facts" indicating that the company "unreasonably used its property" to harm the plaintiffs, NVR argues.

Lennar Corp. (LEN), another large builder, has drawn scrutiny in South Carolina. Residents of its new Pebble Creek development in North Charleston, such as Bill and Holly Hurley, say they have suffered from light-headedness, lethargy, and depression. Home inspections they commissioned showed unsafe levels of methane gas, which the Hurleys and others fear may be linked to possible soil contamination by a previous land owner.

Miami-based Lennar says in a written statement that it "hired a consulting firm before the land was developed and found no evidence of recognized environmental conditions" at that time. Playing down health concerns, Lennar acknowledges that methane has seeped out of "broken sewer pipes and improperly seated toilets," which it says it has now repaired. The ultimate source of the gas hasn't been determined, however. The company has bought back one house as a result of the controversy.

Lennar perceives another cause for anxiety in Pebble Creek. Its general counsel, Mark Sustana, says in an interview that buyers are aggravated over seeing their investments depreciate as the housing boom has given way to a bust.

With John Cady and Tyler Hill


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