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A new report from the University of Hawaiʻi Economic Research Organization (UHERO) finds that construction defect litigation has become a significant factor in Hawaiʻi’s already constrained housing market, contributing to rising costs, financing challenges and shifts in development patterns that may reduce homeownership opportunities.
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.”
Impact on homebuyer financing
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.
At the same time, the study acknowledges that construction defect litigation serves an essential function in addressing serious deficiencies that affect homeowner safety and building integrity. The report does not evaluate the legal merits of individual cases but notes that changes to the state’s Contractor Repair Act and other legal processes could help balance homeowner protections with a more predictable legal environment for builders. It highlights recent policy reforms in other states, including alternative dispute resolution mechanisms, adjustments to liability frameworks, and streamlined settlement processes designed to prioritize timely repairs over lengthy legal battles.
The full report, “Construction Defect Litigation, Housing Affordability, and Homeownership in Hawaiʻi,” is available on the UHERO website.
UHERO is housed in UH Mānoa’s College of Social Sciences.
UHERO’s Trey Gordner provides an overview of the construction defect litigation study in this episode of UHERO Focus.
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