July 28, 2016
Runstad Center report: Addressing condo construction defect liability may help promote affordable housing in Seattle
The price of a condo soared in Seattle from 2010 to 2015, making them too expensive for most area households.Runstad Center for Real Estate Studies
A new study from the University of Washington’s Runstad Center for Real Estate Studies suggests that Seattle and Washington state could invite development of more affordable housing by easing the legal risk — or the appearance of risk — in condominium development, construction, liability and insurance.
The report, “Incentivizing Condominium Development in Washington State: A Market and Legal Analysis,” was released today (July 28) by the center, which is part of the UW’s College of Built Environments.
The Runstad Center undertook the work after the city of Seattle’s July 2015 Housing and Livability Agenda (HALA) report suggested Seattle work with the center “to explore options to stimulate the condo development market, including revising the warranty scheme in the (Washington Condominium Act).”
The Runstad Center’s study proceeds from the reality that Seattle is growing rapidly in population and wealth, but that wealth is increasingly concentrated at the top of the income spectrum. Condominium production in Seattle over the last five years has been among the highest of major West Coast cities, but the mean price of a condominium rose 84 percent between 2010 and 2015, making them unaffordable to most area households. Prices far exceed recent increases in household income, and housing supply is not keeping up with demand.
Runstad researcher David Leon examined housing and condo availability data for San Francisco, Los Angeles and San Diego, California; as well as Portland, Oregon; Phoenix, Arizona; and Las Vegas, Nevada.
Leon’s study cites a combination of real estate, insurance and market forces contributing to the lack of affordable condos in the Seattle area, as well as geography, land use regulation and state legislation. He adds, though, that soaring prices do not appear to be caused by any one of these factors in isolation.
The pertinent legislation, the Washington State Condominium Act, contains several provisions designed to protect homebuyers, improve construction quality and reduce the cost of resolving disputes over construction defects.
Leon’s study suggests that “to respond to the growing concerns about housing affordability, it may make sense to remove some of the perception of risk and uncertainty” imposed by the act. Toward that end, he suggests:
- clarifying the nature of a construction defect
- incentivizing repairs rather than money damages as a remedy;
- making arbitration mandatory and binding;
- narrowing the standard of appeal from arbitration decisions, and
- limiting attorneys’ fees or adjusting them to a knowable schedule.
There is enough economic incentive for developers to build condos in Seattle’s downtown core, the report states, because that location allows larger buildings that bring higher prices. “Because the potential economic returns of this type of large-scale development offsets the higher costs and any actual or perceived risks, the market has seen a preponderance of this higher end product.”
Peter Orser, Runstad Center director, said that if built in sufficient numbers and at less than high-rise densities, condos could provide an attractive option, “potentially affordable to families earning the median household income.”
But for the market to be incentivized to build smaller-scale and more affordable condos without public subsidy, the report concludes, “the opportunity must offset the greater perceived risks.
“Lowering the regulatory costs and construction costs are subjects for another study. However, it is clear that insurance costs and the risk of litigation are factors that, if mitigated, can contribute to tipping the scale toward the delivery of more affordable for-sale condominium product, as there is clearly a very strong demand.”
Leon’s report also notes that the HALA report and the Washington Condominium Act provide for a home warranty insurance program similar to British Columbia, where condominium development exceeds all the cities studied in the paper.
The research was funded by the Washington State Department of Licensing, the state agency that licenses the state’s 30,000 commercial and residential brokers and real estate agents.
Orser said additional research along these lines might include more study of other cities and states to determine best practices in condominium construction, insurance, financing and legal liability.
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For more information, contact Orser at 206-795-7008 or porser@uw.edu
Tag(s): College of Built Environments • David Leon • Peter Orser • Runstad Department of Real Estate
