Builders Hit With Wave of Defect Claims as Reserves Swell

The nation’s biggest homebuilders are facing a reckoning over alleged construction defects, as costly lawsuits pile up from homeowners claiming their newly built houses are literally falling apart.

Builders including D.R. Horton, Lennar and PulteGroup have seen legal liabilities surge in recent years as defect litigation spreads across markets, the Wall Street Journal reported. The claims range from cracked foundations and mold infestations to improperly installed roofs and failing ventilation systems.

Homeowners say the issues stem from an industry that prioritized speed and margins during the pandemic-era housing boom, leaning heavily on subcontractors while facing labor shortages and rising materials costs.

In Henderson, Nevada, a pair of retirees allege their Pulte-built home began sinking shortly after they purchased it in 2022. Cracks spread across ceilings, doors stopped functioning and an engineer reportedly concluded the foundation had shifted several inches because of soil compression. Pulte acknowledged that about 5 percent of homes in the community may have been affected by soil issues but said it stands behind its construction standards.

The legal exposure is mounting. Lennar’s self-insurance reserve climbed 21 percent last year to roughly $337 million, while D.R. Horton’s reserves tied to legal claims ballooned to $1.1 billion, up 57 percent from 2022. Nearly all of Horton’s reserve relates to construction-defect disputes.

Homeowners and plaintiffs’ attorneys say the litigation wave reflects systemic quality-control problems that intensified during the building frenzy of the past five years. Builders counter that defect claims represent only a sliver of overall production and argue that aggressive lawyers are recruiting homeowners into questionable lawsuits.

The lawsuits are becoming another drag on builders already grappling with sluggish home sales, elevated mortgage rates and thinning affordability. Many public builders have been leaning on rate buydowns and incentives to move inventory as the once-red-hot housing market cools.

Builders have increasingly tried to push claims into arbitration, but plaintiffs’ attorneys have recently succeeded in challenging some arbitration clauses in court, a shift that could expose developers to larger jury verdicts and even more litigation risk.

As one attorney told the Journal, construction-defect litigation now costs “more than … to build a house.”

— Holden Walter-Warner