Disclosing energy efficiency?

In today’s WP, Ken Harney reports HUD Secretary Shawn Donovan’s interest in mandating energy efficiency ratings on homes and and providing financing incentives for loans on more energy-efficient properties.  Here’s the pith:

A Harvard-trained architect who ran New York City’s Department of Housing Preservation and Development for four years before coming to HUD, Donovan said his agency is in the early stages of discussions with federal energy officials to develop “a relatively simple scoring system for housing that would allow you to understand what you’re buying and at the same time allow lenders to underwrite that into their mortgage. Ultimately, if your energy bills are going to be lower, there ought to be some [mortgage] benefits to that.”

The system might also factor in transportation costs to employment centers in some way, he said, because “most people don’t realize that the average American family spends over 50 percent of their income on a combination of housing and transportation.” Even with lower prices for houses in the far-flung suburbs, “their transportation costs are huge,” he said, and metropolitan sprawl itself represents a massive energy-consumption inefficiency.

Mortgage terms — higher loan amounts for buyers to make energy-conserving improvements, lower mortgage rates for energy-efficient homes — “can be a very powerful tool” in residential energy conservation, he said, and the booming Federal Housing Administration insurance program would be a good place to start.

“If in the long run there’s a cost of $5,000 to upgrade a house that will produce $10,000 in savings over time for utilities, the perfect tool to realize those savings is a mortgage,” he said. Although Fannie Mae, Freddie Mac and the FHA all have had versions of “energy-efficient mortgages” on the books for years, their programs have been poorly marketed and little used. Donovan wants to revive and improve the whole concept.

This past week, I learned that a provision to mandate precisely that kind of disclosure is included in Congressman Henry Waxman’s (D-CA) energy bill, backed by the Obama Administration and currently under consideration in Congress.  I suspect NAR is following this issues closely and will weigh-in at the right time.

At any rate, I see a dubious new industry — energy efficiency inspections — in the making.

Question is, who’ll be responsible for those energy-efficiency disclosures, and what will an energy-efficiency assessment add to the price of the home (not to mention the almost-certain retrofitting that will have to be done to raise the energy efficiency of a property)?

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6 Responses to Disclosing energy efficiency?

  1. There are certainly many questions that need to be addressed and I am always leery when the government gets involved.

  2. That is an excellent question Scott.

    Mr. Donovan’s proposal is to amortize energy efficient upgrades in a new mortgage, which in reality costs the borrower less. It took me a while to realize it, but it turns out to be an easy choice. It all hinges on a good energy audit and an effective scoring tool.

    Here is one example of the economics of the proposal: http://www.earthcrafthouse.com/resources/TCO.htm.

    If you have two houses that are exactly the same, but one costs $1,000-$3,000 more a year to operate due to certain latent inefficiencies, where is the accounting of this in the current transactional system?

    Simple retrofits to save up to 30% on utility expenses cost an average $2,000-$2,500. One could add $6,000-$8,000 to the budget to upgrade the HVAC system and insulation which could increase the efficiency 50-60% and potentially save $1,000’s every year. What better place exists to capture the savings but an amortized mortgage. I was taught in Finance 101 that an investment that pays itself back in 3-5 years is a good one. Even if the upgrade costs aren’t amortized, the simple improvements often pay themselves back in 2-3 years.

    I understand your hesitance to “new” concepts, but as the referenced article indicates, the existing system lacks fundamental marketing and understanding. The technology has been around for decades as well as scoring systems such as the HERS rating(www.natresnet.org). Energy Star, EarthCraft House, and LEED uses this scoring system for homes. I just built a home with a score of 40 which means it is at least 60% more efficient than code requires. I also just audited a 45 year old home that scored 260, which means it is 160% less efficient than code. The market price on these two homes would roughly be the same. I purchased a work truck a few years ago and the final decision factor was to choose the one that got 20 mpg over the one that got 12 mpg. That was a $35,000 purchase, not including the 40% less I’d be spending on gas. The automobile manufacturer is required to disclose the miles per gallon the trucks attain, but we spend 5-10, even 20+ times that amount of money on homes without such disclosures. Where is the parity?

    I’m sure I could bore the heck out of you with fact and figures, so my suggestion is simply to follow the money.

    Maybe it is time for a fresh new look at the concept to simplify the process.

  3. Everyone, Stand up and just say NO!! We don’t need any more expenses added on to the home sale/purchase process.

  4. I really like the truck analogy that Chris used and I agree. It’s crazy that we factor in energy costs into a $35K purchase, but not into a $350K or even $1M purchase.

    I’ve only had a few buyers truly look at the overall cost of home ownership which includes utility bills/energy costs. Many moved into McMansions that “they could afford” only to start struggling to make ends meet once their utility bills doubled, tripled and even quadrupled as compared to their last residence.

    If the only thing you’re stuck on is an added cost of a few hundred dollars on a $250,000 transaction, you’re not seeing the big picture. It’s like buying a gas-guzzling H2 or Chevy Tahoe at 0% financing and $10K off the MSRP rather than a Honda Prius or a fuel-efficient 6 cylinder at 2.9% financing with only $1K off MSRP because you think the initial “vehicle sale/purchase process” is less expensive. Just wait till gas prices go back up again…

  5. Good question scott… we have to oppose that and we shouldn’t accept the additional expenses for purchasing a home.

  6. Sam Chapman says:

    Austin has already jumped on that. The city will require energy audits on many homes starting this summer.

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