We’ve all read the headlines “Efficiency, our First Fuel”, “Green: The Future of Homebuilding”, “Building the Net Zero Home”, each story predicts a transformation in homebuilding fueled by consumer demand and guided by regulatory mandates.
Headlines like “Extreme Energy Efficiency-Spectacular Savings”, “Save more $$$’s” and “Energy Star Partner of the Year” on builder websites confirm that builders get the message. Yet, despite all the attention, revolutionary progress in getting energy efficient new homes built remains elusive. Why?
The simple fact is that today’s home buyers and builders face fundamental disincentives to building and buying energy efficient homes.
Let’s consider today’s typical new homebuyer. For them, it’s all about choice -- location, floor plan, options. But when it comes to choosing energy efficiency, the choices are tough. Most consumers have limited budgets and must prioritize between energy efficient features and other desirable options like granite countertops, media rooms and upgraded appliances. Forcing consumers to make this difficult choice strongly undermines the goal of increasing energy efficiency in new homes across the board.
Now let’s consider the case of the new homebuilder who faces tough choices as well. Builders know that buyers want energy efficient features. They also know that buyers don’t like having to choose between a high-efficiency HVAC unit and stainless steel appliances –they want both. One option for the builder is to include energy efficient features in the base price of the house. The risk with this approach is that the builder is competing against other new homes that may not have energy efficient features and resale homes that almost certainly don’t. In today’s highly competitive market the builder must choose between absorbing the cost of the energy saving features or leave them out and hope that buyers will agree to pay more to add them.
A Solution Exists
These difficult choices serve as strong disincentives for consumers and builders alike to optimize energy efficiency in new homes. The good news is that these problems can be resolved by adopting simple changes to mortgage underwriting and appraisal procedures. These changes include updating underwriting procedures so that energy costs –and savings—are included when calculating the total cost of homeownership (PITI+E). This approach will improve the accuracy of mortgage underwriting and reward consumers who purchase energy efficient homes and invest in energy saving retrofits.
At the same time, we need to develop uniform procedures to ensure that energy saving features are consistently and accurately valued in the appraisal process.
Changing the way homes are built and mortgages are underwritten and appraised could be a complicated and time consuming process. However, federal guidance providing uniform procedures for how energy costs and energy saving features will be handled for all federally insured or owned mortgages could greatly simplify and accelerate this transition.
Legislation in Process
Over the past year, an unprecedented coalition has been formed to support a legislative initiative that will require energy costs and efficiencies to be considered in the underwriting and appraisal procedures for any federally owned or insured mortgage originated after January 1 of 2015. This legislation, known as the Sensible Accounting to Value Energy Act (SAVE Act), will be introduced soon by Senator Michael Bennet (D-CO). This legislation enjoys the support of a diverse coalition of interest groups ranging from leading environmental groups to major business groups in Washington DC.
The SAVE Act has three key components:
• Requires mortgage underwriting criteria to be updated to consider energy costs along with principal, interest, taxes and insurance when calculating total cost of homeownership. As shown in Illustration 1, expected energy costs can be derived from a third-party energy inspection or the Department of Energy’s Residential Energy Consumption Survey.
• Requires the net present value of monthly energy savings to be added to the value of a home when calculating the debt-to-income ratio on a mortgage.
• Directs the Secretary of Housing and Urban Development to establish procedures and timetables necessary to ensure that all federally owned and insured mortgages originated after January of 2015 meet the requirements of the Act.
Implementing the SAVE Act will make energy efficient homes affordable for consumers by allowing energy savings to be used to offset the added incremental cost of constructing an energy efficient home. The SAVE Act will also ensure that the value of energy savings are consistently and accurately considered when determining the value of a home.
Implementation of The SAVE Act will also stimulate demand for a range of energy efficient products; from high-performance HVAC systems to innovative building materials. Over time, the growing inventory of energy efficient homes will substantially reduce the amount of energy consumed by the built residential environment. Lower energy use means a stronger economy and a cleaner environment.
To view this article as it appears in our September 2011 issue, please visit our Magazine Archive.
To view Green Builder Coalition's Webinar series on the SAVE Act, please visit our Webinar Archive.
For more information on the SAVE Act, got to www.imt.org. There you can download a fact sheet and see the most current list of groups that are supporting the SAVE Act.