Last Cast Letter #37: Another Headache

Hi All - Happy Sunday. It’s the last day of the month, which means it’s time for the Last Cast Letter.

Two articles caught my attention this month. The first was a Reuters story about Americans increasingly using AI tools like ChatGPT, Claude, and Grok to help pursue legal claims without attorneys. The second was a Wall Street Journal article about major homebuilders setting aside significant reserves to deal with growing construction defect litigation.

There was some definite overlap and both stories pointed to a similar trend: technology is making it easier than ever for people to take action, organize, and pursue claims. So costs are falling on this side of the spectrum. At the same time, the costs associated with defending those claims are rising.

The result is a fascinating tradeoff, like squeezing one side of a balloon so the air moves to the other. Friction is disappearing in one part of the system and showing up somewhere else. I’m not convinced it’s great for anyone at the moment to be honest. Let’s dive in.

The Democratization of Litigation

For most of history, pursuing legal action required a significant amount of time, money, and expertise. Even people with legitimate grievances often chose not to pursue claims because the economics simply did not make sense. Hiring an attorney was (and still is) expensive, navigating the legal system was (and still is) intimidating, and many disputes died before they ever began.

AI is beginning to change that equation. Today, someone can upload a lease agreement, summarize a contract, research local statutes, draft a complaint, and prepare legal documents in a matter of minutes. What once required thousands of dollars in legal fees can now be attempted with a laptop and a subscription. (Attempted is the key word here, keep reading).

There is something positive about that from a patriotic perspective. Access to information is becoming more democratic. People who previously lacked the resources to advocate for themselves now have tools that can help level the playing field. In theory, legitimate claims that once went unchallenged may finally have a chance to be heard.

Here’s the rub: AI is amazing but it remains imperfect. In fact, it’s downright awful sometimes. ChatGPT specifically has gotten super cringey and spits out a lot of non-sense. Anyone who uses these tools regularly knows they can hallucinate, misinterpret facts, and confidently provide incorrect answers. The technology is powerful, but it is not a substitute for expertise yet.

You’ve probably had it give you some bogus answers and hopefully it hasn’t been too big of an issue. Major law firms have been been victims as well, take a look at just one of the examples below:

So, this creates an interesting dynamic. More people now have the ability to initiate legal action, but it doesn’t mean the underlying information is correct. And whether a claim is valid or frivolous, someone still has to respond.

The Cost of Responding

One line from the Wall Street Journal article stuck with me. The article described mounting legal expenses as “another headache” for homebuilders.

That phrase resonated because it captures the reality facing many operators today. Insurance costs have increased. Labor costs have increased. Material costs remain elevated. Financing costs are materially higher than they were just a few years ago. In many markets, builders are already offering mortgage-rate buydowns just to move inventory.

Now, legal expenses are increasingly being added to that expense item list and I think this trend is only going to continue with the consumer adoption of AI.

A frivolous lawsuit does not need to win to be expensive. A claim does not need to succeed to consume time, attention, and resources. Defendants still need lawyers. They still need to prepare responses. They still need to navigate a process that can be lengthy, unpredictable, and costly.

What’s worse from a builder, investor, owner perspective is that now more of these suits are making public appearances as well. Plaintiffs’ attorneys are increasingly challenging arbitration clauses that historically directed construction defect disputes into private arbitration rather than public courtrooms.

Whether that is good or bad likely depends on your perspective. Homeowners may argue they deserve access to a jury trial. Builders may argue that arbitration is faster, cheaper, and more predictable for everyone involved.

What interested me was not which side is right. What interested me was what happens when the venue changes.

Court proceedings are generally more expensive and they often take longer. In general, they introduce additional uncertainty. Moreover, juries are frequently perceived as being more sympathetic to homeowners than private arbitrators, which creates another layer of risk for builders and owners.

The Social Media Effect

AI is just one of the technologies that will accelerate this trend. It probably goes without saying, but of course social media is playing a major role as well.

For example, The Journal noted that homeowners with similar complaints are increasingly finding one another through social media. Someone who once thought they had an isolated problem can now discover dozens of neighbors discussing the exact same issue. What may have felt like a one-off annoyance suddenly looks like a broader pattern.

That matters because information spreads quickly, but so does coordination.

A homeowner discovers an issue. They find others discussing it online. Someone shares photos. Someone else shares documents. Before long, an entire community has formed around a common grievance.

This is where the overlap with the Reuters article becomes especially interesting.

Social media helps people identify potential problems. AI helps people understand what actions they can take. Together, they dramatically reduce the friction that once prevented many disputes from moving forward.

The internet democratized information, social media democratized coordination, and now AI is democratizing execution. Of course, big law firms are using all three to make major class action suits more efficient as well.

Here’s the Issue: America Still Needs More Housing

As I thought about these stories, I kept coming back to housing.

America remains structurally short housing in many markets. Affordability remains one of the biggest challenges facing households. Regardless of political affiliation, most people seem to agree that the country needs more supply.

The challenge is that supply does not appear out of thin air. It requires capital, labor, materials, land, financing, and a reasonable expectation of profit. When any one of those inputs becomes more expensive, building becomes harder.

Most people focus on obvious costs. They focus on interest rates, lumber prices, labor shortages, zoning restrictions, permitting delays, and insurance premiums. Those are all important factors.

But legal reserves are a cost too. Litigation is a cost, compliance is a cost. Every dollar set aside for future liabilities is a dollar that cannot be deployed elsewhere.

That does not mean the liability is unjustified. It simply means there is an economic consequence, and this will slow us down as a country when it comes to building something what many people agree we need, which is more housing.

In a way it kind of feels like we are shooting ourselves in the foot, or a little bit of an own goal. Not completely, but that thought kept popping up as I was writing this.

En Fin

So yes, that’s what I had an eye on this month. Keep an eye out for more “Pro-se” litigation, or cases in which people are representing themselves.

The rise of AI-assisted legal tools may help legitimate claims move forward that otherwise would have died because of cost. Social media may help individuals organize around issues that deserve attention. Greater accountability may improve outcomes for consumers and homeowners. To be sure, I genuinely do think there is something good about all of that.

At the same time, the costs associated with defending claims, maintaining reserves, navigating litigation, and managing risk are increasing. For builders, landlords, insurers, and operators, those costs become another input. And like every other input, they eventually influence behavior. If all of these costs keep compressing margins, and then you have certain cities weighing rent caps (like I’ve written about in the past), you simply ask yourself: is it worth it? For the record, I think it is, but you better know your local market, know your numbers and have some conviction before you dive in.

And then zooming out, the question I keep coming back to is whether we are fully considering those second-order effects.

At a time when America needs more housing, more construction, and more investment, we are making it easier than ever to identify, coordinate, and pursue claims. Maybe that is exactly what should happen. Maybe some of these changes are long overdue.

But if we are going to celebrate the reduction of friction on one side of the equation, we should probably spend some time thinking about where that friction ends up on the other side. It may come back to bite us, or at the very least continue to be a thorn in our side.

Until next month,

Brooks

— Brooks