Published on August 26th, 2016 | by Guest Contributor0
What If More-Energy-Efficient Homes Were Worth More?
August 26th, 2016 by Guest Contributor
Originally published on One Knob Consulting.
By Nate Adams
What if it was easy to find out how much energy a home uses and how much that energy costs? It could unlock a whole new market that doesn’t exist today worth hundreds of billions.
According to an Elevate Energy study, Chicago homes that disclosed energy costs sold almost ⅓ faster (43 vs. 63 days) and had higher deal closing rates (63% vs. 53%).
Barry Haaser and Jeremy Roberts at the Green Button Alliance noted studies in Illinois and Washington DC that said simply disclosing energy costs raised average sale prices by $4000, regardless of energy use. Transparency is the likely reason for this – there is less uncertainty and friction in the transaction.
Putting a metric on energy use that is easily comparable between homes could begin to value efficient homes more in addition to this effect.
The question becomes what metric(s) is best for doing this? Rather than a laundry list, we need to focus on one or two that could fit in a 50×75 pixel box on MLS. If Zillow/Trulia added it to their listings, that could be the essential first step. I propose Energy Use Intensity, or EUI as kBTU/square foot/year. The rest of this article will show my reasoning.
Focusing down to one or two metrics forces us to think of them in multiple levels. The metric we should be looking for is top level, similar to combined city and highway mileage for a new car. That helps narrow the field of what vehicles to consider, once we narrow down, then we dig deeper into more metrics like what city and highway mileage are, horsepower, safety features, etc.
How This Might Actually Work
In the home buying process, this metric will be used at the stage right after prequalifying. For example a buyer qualifies for a $200,000 loan. What that really means is their income allows them to spend $950/mo at 4% for 30 years.
Enter an energy metric. The real cost to own this example home includes taxes ($200/mo), insurance ($100/mo), and utilities ($200/mo). So what you’re really looking for is about $1450/month including all costs. This ignores maintenance costs for now.
What if one of the homes being compared is Net Zero after solar panels and a Home Performance upgrade? Now utilities are only $35/mo for meter fees. That frees up $165/mo out of the $1450.
$165/mo at 4% is $22,000 over 15 years or $34,000 over 30. That means a house with those energy bills vs. a comparable home is likely to be worth $20,000-$35,000 more than its comps. Possibly more because a home like that is likely to have fewer maintenance issues since efficient homes usually have lower air leakage rates and lower air leakage typically leads to fewer moisture problems. That’s for the market to decide. Right now the market can’t see energy costs, so it doesn’t value them.
If we knew how much operating costs were for 5 comparable homes, and one home had double the operating cost, that would be an easy way to potentially cross one home off the list. That’s what this metric needs to do.
Cost Alone Is Problematic
The trouble with cost alone is that it’s very squishy. It’s not a useful metric over long periods. Costs go up and down. The same house may cost $200/mo with lower energy costs, but 10 years ago when costs were higher it could have been $300/mo for the same usage. Different fuels experience different pricing ups and downs. Fuel costs aren’t directly comparable either, an oil heat home generally costs a good deal more to heat than a comparable natural gas heated one.
In my opinion, the top level metric needs to be usage based, cost is a secondary metric, although a close second.
Benefits of a Good Energy Use Metric
- Home Buying Comparisons – A good metric to compare homes, even of different sizes.
- Home Values – Efficient homes will be valued more, less efficient homes will be devalued. It’s easy to see a spread of $5,000-$15,000 coming from this.
- Drive Home Performance Contracting – If inefficient homes are worth less, it will open up capital to improve them. The Home Performance industry is poised to help.
- Rank Contractors – If contractors can make measureable and predictable reductions to energy use and operating costs, they can be ranked by these capabilities. Better contractors will be able to charge more because they will better be able to predict home value changes.
- Reduce Lender Risk – If a lender knows a home is less expensive to operate, the odds of default will tend to be lower. Lower risk can lead to lower rates. There is some data to back this up. (I nearly lost my first home after utility costs skyrocketed, this is personal for me.)
- Reduce Project Financing Costs for Home Performance Projects – If realization rates get better from HP projects, banks can better predict value changes. The lower the spread in realization rates, the lower the risk of the project. Interest rates should follow. PACE rates routinely run in the high single digits, we find interest rates this high eat up all of the energy savings. Rates nearing prime would really help make more projects happen. Rates wouldn’t be lower out of altruism, the market would show there is lower risk.
If those are the benefits, there are a number of things this top level metric needs to do well.
Elements of a Good ‘Top Level’ Energy Metric
- One or Two – The metrics need to fit on MLS listings, likely 50 x 75 pixels.
- Free – No professional needs to be paid to obtain them
- Actual Energy Use – No proxies, no ratings.
- Difficult to Game
- Bankable – In time, the metric would be considered by banks for mortgage qualification.
- Layman Friendly – Quickly explainable and understandable
- Raw – A raw number with no math required or transparency to backtrack to raw numbers
- Granular – wide range of values, i.e. 94.2% vs. 1-10.
- Adjustable – Adjusts automatically over time – the housing stock won’t stay the same. HERS is locked on the 2006 IECC which limits its usefulness as a comparison. 90 may be good today, but what about in 20 years?
- Comparable – Easy to compare homes of different sizes and fuels.
How does Energy Use Intensity Stack Up?
EUI (site) has all of these except the raw part. I feel it’s worth the sacrifice for that one item, particularly because with only three numbers behind it – electric usage, heating fuel usage, and square footage, it’s easy to figure out if any funny business was going on. Plus it has a unique benefit:
A Scale of 0-100
In kBTU/square foot/year the scale for EUI generally falls in a range between zero and one hundred. This is very similar to a HERS score, and like a HERS score, zero is net zero. A 0 EUI means either no energy usage or completely offset energy usage. EUI 100 is a bit piggish, but not awful. Explaining what 6.4 million BTUs per year means to a homeowner sounds like work. Explaining 0-100 sounds very simple.
Here is a chart of Energy Smart Home Performance’s projects using EUI using the ResiSpeak tool:
The highlighted home with a 24.9 EUI is an all electric Deep Energy Retrofit for Hiram College called the TREE House. Is it possible that home might be worth more than the home at 100? (Ironically, that is my house.)
Passive Houses aim at 4.75 kBTU/sf/yr for heating and cooling. 475 Supply is named after it. The Department of Energy has the Building Performance Database which uses EUI and has data on thousands of homes across the US. It’s not something new we have to come up with. In fact, here are my projects overlaid on the Building Performance Database homes in Ohio:
Difficult to Game
EUI only needs fuel usage and square footage. Fuel usage usually comes from utility bills, so those are tough to game. We’re down to gaming square footage. I propose we use county record square footages. County records have these attributes:
- Publicly available – Zillow, Trulia et al pull from them.
- Difficult to game – They are what they are. Homeowners can’t simply make up a number and put it in a calculator, although it would be good to give them such a calculator for what-if scenarios like Zillow does.
- Possible to change – Homeowners can petition to have things changed. They have a disincentive to overstate square footage (which will reduce EUI) because they will pay higher taxes. Less gaming is likely to ensue.
- Consistently inconsistent – While frequently incorrect, they are likely to be fairly consistently so. Plus they can be changed.
My argument is for two primary energy metrics: Energy Use Intensity (EUI in kBTU/square foot/year) and total annual energy cost. These are only ‘top level’ metrics. The raw data needs to be available so that deeper analysis can be made when narrowing to a few home choices.
These metrics can create total transparency around ownership costs of homes and influence home values, opening up a new market for Home Performance upgrades and lowering risks for lenders. Lower risks mean lower interest rates, which mean more projects make economic sense: a virtuous cycle.
This virtuous cycle can lead to numerous societal benefits: jobs that can’t be exported, reduced pollution, reduced health consequences from that pollution, and an easier transition off of fossil fuels because more homes will be capable of going all electric. (We have four pre-1920 all electric homes under our belts now – one is getting solar panels this month.) There are many more benefits that could be argued for as well.
All because we started publishing a few numbers. Is this rosy? Of course, but it’s probably not that far off. Chant with me: EUI! EUI!
It’s not that hard to make it a reality, if Zillow and Trulia add it, or the National Association of Realtors pushes for it, it could happen very quickly. The Green Button program can be used with monthly data, making data access for easier. This isn’t that hard of a lift. If you have any interest in helping, reach out!
Note on the inset picture:
This 1900 Cleveland home had a substantial energy retrofit. A 53% air leakage reduction, complete insulation package, and new forced air HVAC system including ductwork and fresh air was installed. It doesn’t look any different than it used to, but it’s much healthier and comfortable than it used to be. The EUI last winter was shockingly low: 10.9. That was unoccupied during a mild winter with a low set point, I look forward to seeing what it is this winter. Shouldn’t this home be worth more because of these upgrades? You can read more about the project and it’s “womb-like comfort” here.
Building Science Corporation – Kohta Ueno – Review of building energy use metrics. A great overview of energy metrics. Ironically he argues against EUI, but Ueno’s aim is understanding the deeper implications of energy use, not a top level metric for driving market value. Well worth a read.
For more insights on pricing home energy efficiency, here’s an article CleanTechnica‘s Kyle Field published on the topic earlier this year:
Buying a house is an exciting part of life, the start of a new chapter, and frankly…freakin’ scary! Typically that’s not because of any spooky creatures but because of the massive mortgage that people usually take on to afford one, the number of things that can go wrong, and unforeseen financial burdens that these ‘money pits’ can become.
Many of the financial pitfalls can be identified early on in the buying process as part of a quality home inspection, but there’s one big dirty secret that many homes have that is a bit harder to wrap your head around when buying a new place – energy. I’m not talking about the qi (or ch’i) of the house or anything like that, but literally about the energy used by the house on an annual basis in all forms – electricity, natural gas, propane, heating oil, solar, wind, solar thermal, geothermal, etc
Let’s back up a bit. Pretend you’re buying a new car. Do you check the window sticker to see what options it comes with? How about the fuel efficiency? Estimated cost to operate for a year? Me too! …and it’s the same for a house. We want to know which energy options it comes with. Does it use natural gas for heating? Have a high tech heat pump in the basement that is dirt cheap to own and operate?
Fuel efficiency similarly translates into energy intensity. You thought I was going to say energy efficiency there, right? The actual metric for putting data behind this is the amount of energy used per square foot of the house. Roll that up over the size of the house and the months of the year and you get the mega-metric – the total cost of energy to operate for a year.
Before cars kept track of fuel efficiency, knowing what miles-per-gallon your car got was irrelevant to the market – you don’t care what your car gets and the market doesn’t value it…and it’s the same thing with a home. You can invest $15k in solar panels, $10k in energy efficiency improvements, and $3k in a new heat pump, but you’re not going to see much of that money rolling back into the valuation of the house because people don’t speak that language yet.
We need to retrain our brains, and the market, to accurately value not just the cost of the house but the cost to run the house month to month. For example, let’s dig in to the numbers on two houses:
- House A is $1000/month to buy for 1700 square feet, but costs $300/month for the electricity bill and another $150/month to heat it.
- Across the street, House B is also $1000/month to buy for the same 1700 sq ft footprint, but due to the solar panels on the roof and the extra insulation in the walls, floors, and ceiling, only costs $50/mo for the heating bill, with no electric bill to speak of.
Obviously the second house is worth more, and is a better value for the same purchase price. But just how MUCH more does an energy bill that’s $400 lower (every month!) make the house worth? Backing up a bit, how do we even quantify the monthly cost of energy for a house?
Putting a price tag on the cost of energy is the first step in getting a handle on the value of residential renewables – such as solar – into the valuation of the house. That allows homeowners to see the month-to-month cost and quickly extrapolate the cost of energy over the life of the house (the long term cost of energy).
This could be accomplished by reapplying the concept of the Energy Star label on appliances:
Beyond just the base concept of putting a dollar value on, and an increased visibility of, the cost of energy, less efficient homes are actually more risky to banks. Think about it. In the example above, house A carries an energy bill of $450/month vs house B with just a $50/month bill. That’s an extra $400 of monthly debt on house A that will never go away for the homeowner.
That effectively takes the monthly payment for the house from $1000 to $1450 whereas House B is only going to cost $1050/month – a huge difference. One of my favorite sayings that I’ve heard about solar is that it takes a monthly liability (the monthly bill) and turns it into an asset (increased value of the house).
Homes with higher energy bills are riskier investments for banks, as the monthly energy cost is not taken into account when the home is financed. It’s essentially a highly variable chunk of debt (particularly in this era of increasing efficiency and solar) that the bank not only doesn’t know about, but doesn’t seem to care about.
In markets where the energy bill is a large percentage of the mortgage, this can play a large factor in whether a homeowner can actually afford the full cost of the home or not. Further, the variations in energy price can, and likely often do today, single-handedly sink the homeowner’s monthly budget and kick the loan into default.
Finally, these energy costs can be rolled up over the life of the loan as part of the purchasing process. House B might only cost $18k in energy costs over 30 years whereas house A would tip the scales at $162k!! Granted, not many people are interested in stepping back and looking at the total cost of energy over 30 years, but lifetime costs often paint a picture compelling enough to trigger small changes.
If we looked at energy costs this way more often, solar and energy efficiency would be much more likely to have increased value when the house hits the market. Markets value what is measured. We need to measure energy use and turn consumption into an easy to understand comparable metric – like MPG is for fuel efficiency.
Doing that will trigger banks and financial institutions to dig a bit deeper into the value of energy efficiency and residential power generation as a part of the lending process and overall risk assessment. If Energy Use Intensity is being looked at by financial institutions, services like Zillow will start reporting EUI, which completes the cycle back to the consumers.
Homeowners would have more incentive to invest in technologies that are better over the long run and often for the planet, such as making that $5k investment in more insulation, spending $300 on LED light bulbs, or $15k on solar. Homeowners can have the confidence that they are making an investment in the house and in a reduction in monthly operating costs over the life of the home, or at least of the product being installed. For LEDs, that’s just 22.6 years…what a ripoff ?
Reprinted with permission.