UHERO study: reveals ‘debilitating impact’ of construction defect litigation on housing access in Hawaiʻi

The Hawaiʻi HomeOwnership Center (HHOC) collaborated with key stakeholders to release a new, independently-commissioned report Monday examining the effects of construction defect litigation on Hawaiʻi’s housing market—first-time homebuyers, current homeowners, builders, and the overall housing industry.

The foundation of HHOC’s mission is rooted in helping Hawaiʻi residents overcome barriers to homeownership. Recognizing litigation as a potential factor hindering housing access, HHOC engaged the University of Hawaiʻi Economic Research Organization (UHERO) to research whether—or how—construction defect lawsuits might reduce the supply of for-sale homes, limit financing, or drive up costs for first-time buyers.

“Our goal at the Hawaiʻi HomeOwnership Center is to ensure the dream of homeownership remains within reach for local families,” said Executive Director Reina Miyamoto. “By commissioning this study, we wanted to discover whether these lawsuits are creating another barrier—and if so, how to address it. Whether through our financial literacy classes or programs, we want families to have every chance to become successful homeowners. The report will be used to improve our services and the information we provide to our members and the community.”

While legal action plays a critical role in addressing legitimate construction deficiencies, the study—prepared for the Hawaiʻi Homeownership Center—examines how the rising volume and scope of lawsuits contribute to financial uncertainty, which increases costs for developers, insurers, and ultimately, homebuyers.

The report reveals that construction defect cases have grown substantially over the past 25 years, now affecting nearly 1,000 units per year on average, and representing a significant share of the 5,000 homes built each year in Hawaiʻi. These lawsuits have resulted in settlements reaching tens to hundreds of millions of dollars, with 30–40% of those sums going toward legal costs and taxes. Rising litigation risks and construction costs have driven up insurance costs for developers—by as much as 500% for builder’s insurance premiums—and increased financing expenses for homebuyers.

“Housing affordability in Hawaiʻi is already a serious challenge,” said Trey Gordner, lead author and policy researcher at UHERO. “As lawsuits become more frequent and larger in scale, they add financial uncertainty for developers, insurers, and homebuyers alike.”

UHERO analyzed housing production data, insurance trends, court filings, mortgage financing
records, and conducted interviews. Among the key findings in the report:

• Increased Costs: Construction defect litigation can push up insurance and materials costs,
  raising the price of homes and limiting developers’ willingness to build for-sale units—
  especially more affordable condos.
• Financing Barriers: Ongoing or potential litigation can make properties ineligible for
  common government loan programs, like FHA or VA which provide low or no down payment
  options, forcing potential buyers into higher-cost portfolio loans that can increase monthly
  payments.
• Market Ripple Effects: Developers may steer away from for-sale projects due to the higher
  risk of litigation, further constraining the availability of entry-level and mid-range homes. In
  turn, aspiring homeowners face tighter inventory and higher prices.
• Effects on Existing Owners: Homeowners in projects under litigation may find refinancing
  or tapping home equity more difficult, while also navigating years-long legal proceedings.

“Our report finds that construction defect litigation in Hawaiʻi has increased significantly over the past two decades, affecting a growing share of newly built homes and contributing to higher development costs,” said Trey Gordner, a policy researcher at UHERO. “While litigation serves an important consumer protection function, its increasing frequency and scale may have unintended consequences for housing affordability and homeownership access.”

One major impact of construction defect litigation is its restriction on homebuyer financing. Units involved in litigation are often excluded from government-backed mortgage programs such as FHA and VA loans, making financing more expensive and difficult to secure. First-time buyers and lower-income households, who often rely on these programs, face particular difficulties. To account for risk, lenders often add 0.25%–0.5% to mortgage rates on homes under litigation. At current interest rates, this translates to $100 per month for every 0.25% rate hike, or an additional $36,000 over a 30-year loan on a $1M home.

The report also finds that developers, facing heightened litigation risks and insurance costs, may be shifting away from for-sale condominiums, which have historically served as an important entry point for homeownership, toward rental housing, limiting the supply of new owner-occupied homes.

Since its inception in 2003, HHOC has provided homebuyer education and related services to more than 6,700 members, of which nearly half have successfully purchased a home. Over half of those homeowners were considered low-income. The study’s results will inform how HHOC continues to “provide education, information, and support to create successful first-time homeowners” in Hawaiʻi.

Click here for a link to the UHERO study.