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Homebuilder Shares Undermined by Creeping Costs of Construction Boom Flaws

February 9, 2011 — By Peter Robison and Kathleen M. Howley, Bloomberg News, Feb 9, 2011 9:01 PM PT

Seattle city planner Alan Justad is reviewing a project that will bring back the cranes, dust and noise absent since the real estate bust. This one will subtract from the skyline rather than add to it.

The owners of McGuire Apartments opted to tear the 10-year-old tower down after discovering corroded support cables and other faults that would cost $60 million to repair, almost double the tab to build it. “We’ve never had anything like this happen before,” said Justad, who expects demolition of the 25-story structure to begin later this year.

The U.S. construction boom between 2000 and 2005 added more than 10 million apartments, condominiums and single-family homes to the nation s housing stock. It is still generating a repair bill for construction flaws that may hamper the industry s recovery, as homes with cracked foundations and sagging ceilings add to the supply of hard-to-sell properties.

The rush to meet demand fueled by low interest rates and liberal lending resulted in a doubling of defects per unit from 2000 through 2005 compared with the previous six-year period, according to International Association of Certified Home Inspectors Inc. estimates. Add to that the litigation legacy of allegedly dangerous Chinese drywall imports, and builders are facing a growing liability headache.

“It’s yet another detriment to real estate values,” said Vicki Bryan, an analyst at Gimme Credit LLC in New York. “Homebuilders don’t want to draw attention to it, but they ve got creeping costs for construction defects.”

Liabilities Are Underfunded

PulteGroup Inc., the largest U.S. homebuilder, recorded a one-time expense of $272.2 million in the third quarter, or 25 percent of its revenue in the period, to increase the reserves that cover losses when homeowners demand repairs to new houses. Chief Financial Officer Roger A. Cregg told analysts on a Nov. 3 conference call that there were a greater frequency of newly reported claims by people with company-provided warranties against defects.

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Reprinted courtesy Bloomberg News. Mr. Robison can be contacted at robison@bloomberg.net and Ms. Howley at kmhowley@bloomberg.net.

Homebuilder Shares Undermined by Creeping Costs of Construction Boom Flaws