Educators Conference 2009 - Hunt

How Energy Ratings and EnergyEnergyefficient Mortgages Affect Homebuying 2009 Educators’ Conference January 12, 2009 College Station, Texas Harold Hunt, Ph.D. A Few Statistics • T Texas l d the nation i per capita leads th ti in it consumption of electricity. • Texans pay 24% more per kilowatt hour p y p than the national residential average. • Texans’ residential electricity bills are 56% higher than the national average average. Source: Texas Comptroller of Public Accounts A Few Statistics • Th average monthly residential The thl id ti l electricity bill in Texas is $149.29. $149.29. ($95.66 is the national average) • A 20% gain in home energy efficiency would save Texans $1.9 billion annually in electricity costs. Source: Texas Comptroller of Public Accounts The Legislature Mandated a Study g y • Last session, the Texas Legislature passed HB3070 requiring a study to ID potential ways to improve home energy efficiency in Texas. The Legislature Mandated a Study g y • An advisory committee was formed made up of: – – – – – Homebuilders Building code officials Utility providers Real estate agents Mortgage lenders HB3070: Required that a study be carried out to look at 6 areas of interest: interest: 1) Could standards be established for rating the energy efficiency of new and existing residential real properties in Texas? HB3070: Required that a study be carried out to look at 6 areas of interest: interest: 2) Could new and existing residential real properties receive an energy efficiency rating six months before the time of sale (and could that rating be made available to all potential buyers)? HB3070: Required that a study be carried out to look at 6 areas of interest: interest: 3) Could incentives be created for the future growth and development of home energy ratings in Texas? HB3070: Required that a study be carried out to look at 6 areas of interest: interest: 4) Could a dedicated field be included in residential MLS listings to add certain information regarding the energy i f ti di th efficiency of a residence, including: (a) past utility bills, or (b) an energy efficiency rating HB3070: Required that a study be carried out to look at 6 areas of interest: interest: 5) Could homebuyers be offered some type of energy-efficient mortgage if the home energymeets some minimum standard for energy efficiency? HB3070: Required that a study be carried out to look at 6 areas of interest: interest: 6) Are there ways to create public awareness about the use of home energy ratings and the availability of any energy-efficient energymortgages? mortgages? Section 1 Establishing Standards for an Energy Efficiency Rating Section 1: Establishing Standards for an Energy Efficiency Rating The standard already exists, and it’s called “HERS” (Home Energy Rating System): HERS • Been around since 1995. • Requires a professional home rater to conduct the energy rating. • Scores a home from zero to infinity. – Zero means no “net” energy usage at all – 100 is the “standard” new home Section 1: Establishing Standards for an Energy Efficiency Rating The HERS system: • Off Offers 3 l levels of evaluation: l f l i 1) A “comprehensive energy audit” o Conducts diagnostic tests (blower door, duct test) o Takes 4 hours to complete o Costs $500 to $750 in Texas o Contains a rating and a list of available energy upgrade alternatives (cost, payback, etc.) Section 1: Establishing Standards for an Energy Efficiency Rating The HERS system: • Offers 3 levels of evaluation: 2) A basic “clipboard” audit clipboard o Gives a home energy rating only o Takes 30 to 45 minutes o Costs $75 to $120 in Texas Section 1: Establishing Standards for an Energy Efficiency Rating The HERS system: • Offers 3 levels of evaluation: 3) A “supplementary component” supplementary component o Conducts diagnostic tests (blower door, duct test) o Takes another 45 to 90 minutes o Costs an extra $150 to $250 in Texas o No efficiency upgrade recommendations Section 1: Establishing Standards for an Energy Efficiency Rating TAMU ESL Rating System: • Created to: 1) calculate emissions reductions, and 2) confirm code compliance , ) p for new home construction in Texas. • Could be transformed to estimate a home energy rating by answering about a dozen questions online online. Section 1: Establishing Standards for an Energy Efficiency Rating TAMU ESL Rating System: • As a web-based system, could: web1) E i Estimate a home energy rating at any time. h i i 2) Offer “what-if” suggestions for possible energy“whatenergyefficiency improvements. improvements 3) Be much more affordable than a HERS rating. • Would not allow for calculating the cost or payback period for the suggested upgrades. Section 1: Establishing Standards for an Energy Efficiency Rating Committee’s Recommendations: • The HERS system is currently available as an option for those wishing to pay for it. Consider looking at the time and expense to transform the TAMU ESL rating system so it can be a lower-cost alternative to HERS. lower- • Section 2 Establishing Procedures to Provide a Timely Rating Section 2: Establishing Procedures for a Timely Rating Six months lead time may be too long: long: • Existing homeowners may not even know they are selling that far ahead ahead. •N New h homes may not even be under t b d construction that far ahead of time. Section 2: Establishing Procedures for a Timely Rating Earlier legislation in place: • SB-5 (passed in 2001) alread req ires SBalready requires that new homes be constructed in an energy efficient manner. manner • So stricter building codes are already being applied, but no energy “rating” is being calculated. Section 2: Establishing Procedures for a Timely Rating Committee’s Recommendations: • F existing h For i ti homes, real-ti real-time online l li rating systems such as TAMU’s ESL system should be considered further. t h ld b id d f th • The problem will be deciding who should enter the data for the rating. g (Homeowners, inspectors, Realtors or potential homebuyers.) Section 3 Creating Incentives for Home Energy Ratings Section 3: Creating Incentives for Energy Ratings Ways to create an incentive: 1. Mandate that homes be rated - No state mandates that all homes be rated - However, several states are considering it (CA, MA, NJ, NM, NV) CA, MA, NJ, NM, NV) Section 3: Creating Incentives for Energy Ratings 2. 2 Make ratings voluntary. voluntary. Assume the right incentives will guide people to: a) Consider energy-efficiency in new homes, or energyb) Invest in energy-efficient upgrades for energyexisting homes The right incentives would hopefully lead to: Growth in the demand for home energy ratings. ratings. Section 3: Creating Incentives for Energy Ratings So, what incentives create such an environment? 1. Market Forces - Some believe that high utility costs will cause people to invest in more energy efficient homes. (Consider the auto market when gas prices were high) (C id th t k t h i hi h) 2. Subsidies, 2 Subsidies tax credits, etc. credits etc - Some think investment in energy efficiency will occur sooner with some monetary assistance from government. government. Section 3: Creating Incentives for Energy Ratings What do previous academic studies show? The Market will be the incentive to invest in home energy efficiency when: gy y 1. 2. 3. 4. Energy costs are perceived as long-term & “burdensome” longIncome is sufficient to afford investing The cost, return and payback period can be estimated for a particular investment in energy efficiency There is a “credible” source of advice or information laying out which investment would be most cost effective Unless all 4 are in place, people will attempt conservation measures without investing. investing. • Section 3: Creating Incentives for Energy Ratings What do previous academic studies show? The Market will be the incentive to invest in home energy efficiency when: gy y 1. 2. 3. 4. Energy costs are perceived as long-term & “burdensome” longIncome is sufficient to afford investing The cost, return and payback period can be estimated for a particular investment in energy efficiency There is a “credible” source of advice or information laying out which investment would be most cost effective Low subsidies, tax breaks, etc. affect no. 2. (but high subsidies will also affect 3 and 4) 4) • Section 3: Creating Incentives for Energy Ratings What do previous academic studies show? The Market will be the incentive to invest in home energy efficiency when: gy y 1. 2. 3. 4. Energy costs are perceived as long-term & “burdensome” longIncome is sufficient to afford investing The cost, return and payback period can be estimated for a particular investment in energy efficiency There is a “credible” source of advice or information laying out which investment would be most cost effective Energy ratings solve no. 3 and no. 4 if they include a credible energy audit producing a “what if” analysis. • Section 3: Creating Incentives for Energy Ratings Conclusions: 1. Under a mandatory system: • • The initial incentive for an energy rating is the Th i iti l i ti f ti i th mandate. Long-run, Long-run, people will come to rely on energy ratings for comparison purposes when they buy a home, if efficiency is important at the time. time. (ex. (ex Auto industry) industry) • But, when choosing to invest in energy efficient upgrades, a more extensive “energy audit” will energy audit still be necessary (assuming low subsidies). (ex. older CA homes) homes) Section 3: Creating Incentives for Energy Ratings Conclusions: 2. Under a voluntary system: • When buying a home, an energy rating could be used for comparison purposes (if available). But acceptance of home energy ratings as a valuable decision tool in the buying decision will be much slower. • Section 3: Creating Incentives for Energy Ratings Conclusions: 2. Under a voluntary system: • Higher utility prices alone (market forces) will not be enough incentive to promote an investment in home energy efficiency. Nor will subsidies, tax credits, etc. (assuming low subsidies). An “energy audit” with credible cost/benefit information will still be a necessary component for investment in energy upgrades. • Section 3: Creating Incentives for Energy Ratings Committee’s Recommendations: Committee s • A mandatory rating would be expensive, requiring: 1) Compliance enforcement costs ) p 2) Education and licensing of energy inspectors 3) Additi Additional closing costs, affecting affordability l l i t ff ti ff d bilit • The recommendation is for voluntary home energy ratings. Section 4 S ti Including a Dedicated Field in MLS Listings for Energy Ratings or Past Utility Bills Section 4: Including a Dedicated Field in MLS A phone survey was carried out: h i d t • There are more than 400 MLS systems in U.S. y • Their geographic areas vary widely. • The Real Estate Center attempted to contact: 1. State Assoc. of Realtors 2. Largest MLS Systems in State 3. Prominent realtors in major cities Section 4: Including a Dedicated Field in MLS • The surveyor asked 3 specific q estions abo t s r e or questions about the information in MLS listings: 1. A dedicated field for an energy rating? 2. field f 2 A fi ld for any hi t history of past energy bill ? f t bills? 3. 3 Any other place to showcase energy-efficient energyfeatures of a home? - Any check-box? check- How about the Remarks section? Section 4: Including a Dedicated Field in MLS • MLS Systems and/or brokers in 30 states were willing to talk. • Overview of the survey: – 2 have a dedicated field for an energy rating (AK, WA) AK, WA) • For both new and existing homes • Not mandatory to report the rating – Colorado showed ratings in 1995 (removed in 2004) Section 4: Including a Dedicated Field in MLS • Overview: – 0 list any historical utility expenses • CO and WY report a “monthly average” • Utah reports “high and low” in last 12 months – 2 have boxes for LEED Energy Star, etc. (OR, WA) LEED, Star (OR WA) OR, • Only for new construction in Oregon Section 4: Including a Dedicated Field in MLS • Overview: – 7 use check-boxes or extra fields for specific checkenergyenergy-related features (AZ, AR, HI, IN, LA, MN, OR) AZ, AR, HI, IN, LA, MN, OR) • Th f t The features th list are all different they li t ll diff t Section 4: Including a Dedicated Field in MLS • Arizona CheckCheck-boxes are provided if the home has: (1) Insulated windows (2) Insulated doors (3) Electrical load controllers (4) Multi-zone A/C Multi(5) Solar hot water heater Section 4: Including a Dedicated Field in MLS • Arkansas CheckCheck-boxes are provided if the home has: (1) Insulated windows (2) Insulated doors (3) Extra insulation in walls or ceiling (4) Solar hot water heater Section 4: Including a Dedicated Field in MLS • Hawaii CheckCheck-boxes are provided if the home has: (1) Solar hot water heater (2) Solar electricity Section 4: Including a Dedicated Field in MLS • Louisiana Under the category “fuel” fields are available to fuel enter: (1) R-factor of insulation (2) Wall thickness Section 4: Including a Dedicated Field in MLS • Minnesota Under the category “heating” check-boxes list heating checkthe following options: (1) Electric (2) Natural Gas (3) Propane (4) Solar Section 4: Including a Dedicated Field in MLS • Oregon Added 6 new MLS fields for new homes only: (1) GREEN CERTIFICATION: E-Star, LEED, etc. CERTIFICATION: (2) ALL ROOM FEATURES: Bamboo fl, etc. FEATURES: fl etc (3) KITCHEN FEATURES: E-Star appliances E(4) INTERIOR FEATURES: Bamboo fl, etc. fl etc (5) HEAT: High efficiency furnace HEAT: (6) FUEL: Solar Off-grid, Solar supplemental FUEL: S l Off- id S l l t l Section 4: Including a Dedicated Field in MLS • Everyone said listing energy efficient features in the “Remarks” was allowed. Section 4: Including a Dedicated Field in MLS Reasons for Colorado abandoning the reporting of ratings: (1) Very few qualified raters at the time (2) Sellers balked at $150 inspection cost (3) Brokers didn’t understand the rating system and didn t use it in marketing didn’t (4) No checks and balances verifying whether the rating was correct or even whether it had been carried out at all Section 4: Including a Dedicated Field in MLS Alaska s Alaska’s rating system: (1) Developed by the State 20 year ago (2) Cost of a rating is $200 - $350 (3) Currently 50 State-certified raters State(4) Rating is voluntary unless AHFC money is involved (5) AHFC offers lower mort. rates for retrofits made by buyers of existing homes • Based on amount of improvement in rating Section 4: Including a Dedicated Field in MLS Alaska: What brokers said: • Rating does not specify amount of energy savings • Rating not high on the list of reasons to buy • AHFC money not as cheap as it looks VA and FHA most common • Health & safety retrofits expensive enough Section 4: Including a Dedicated Field in MLS Oregon: (1) Aft 1 year, energy-efficiency fields not After year, energy- ffi i fi ld t widely used in MLS (2) Brokers believe consumers and R.E. professionals need more education about energyenergy-efficiency Section 4: Including a Dedicated Field in MLS Oregon: Private fi P i t firm offers 2-d training program: ff 2-day t i i • For realtors, inspectors, appraisers and realtors, inspectors, other professionals ($365 cost) • Receive certification as “Earth Advantage S.T.A.R. S T A R Accredited Professional” Professional • Some brokers fear buyers will know more than they do about energy-efficiency energy- Section 4: Including a Dedicated Field in MLS Listings Conclusions: 1. Energy ratings not widely reported in MLS listings. st gs 2. History of p y past energy bills are not reported. gy p 3. Check-boxes used, but not widespread. Check• No standardization across the country 4. 4 MLS providers will add fields if directed to. id ill dd fi ld di t dt Section 4: Including a Dedicated Field in MLS Listings Committee’s Recommendations: Committee s • MLS systems answer to local Realtor Associations who can request th t a A i ti h t that special field be added at any time. Until energy ratings are commonplace, commonplace, p p p little participation should be expected from the real estate community. Under a voluntary rating system, this may be quite some time. • • Section 5 Offering Energy-efficient EnergyMortgages to Homeowners Section 5: Delivering Energy Efficient Mortgages Fannie Mae and Freddie Mac are effectively out of the energy-efficient mortgage energybusiness. • Fannie Mae reported handling an average of 61 energy efficient loans (nationwide) from ffi i t l ( ti id ) f 2005 to 2007. Section 5: Delivering Energy Efficient Mortgages Two options available today: 1. 1 VA Energy Efficient Loan • • Not allowed on a new energy-efficient home. energyOn an existing home: – $1 to $3 000 for upgrades based on receipts only $3,000 ◦ Homeowner can provide the labor, if desired • The program has received limited use. use. Section 5: Delivering Energy Efficient Mortgages Two options available today: p y 2. FHA • For a new energy-efficient home: energy– Lenders can “stretch” the Debt-to-Income and Debt-toPayment- toPayment- to-Income ratios by 2% to qualify buyers for larger mortgage. The assumption is that the utility savings will compensate for the larger loan payment. – Section 5: Delivering Energy Efficient Mortgages Two options available today: p y 2. FHA • For an existing home: – – – Borrowers can obtain up to 5% of the original FHA loan amount in extra funds. Lender must show a “net dollar savings” after the mortgage increase and utility decrease. Requires a “HERS” report from an energy inspection to calculate the net savings. Section 5: Delivering Energy Efficient Mortgages Committee’s Recommendations: • Encourage Fannie Mae and Freddie Mac to reconsider offering mortgage incentives for home energy efficiency. efficiency Section 6 S ti Creating Public Awareness for Home Energy Ratings and EnergyEnergy-efficient Mortgages Section 6: Creating Public Awareness for Ratings and EEMs Thus far, very little awareness: awareness: • Only two states put energy ratings in MLS O l t t t t ti i listings (yet ratings have been around since 1981) 1981) In 2000, only 27,000 of 871,000 FHA mortgage originations were EEMs ( b t 3%) (about 3%) • Section 6: Creating Public Awareness for Ratings and EEMs The question is, is it better to target: • Homeowners ( d let them pressure H (and l t th lenders and real estate agents to promote their use) ex. Alternative home construction techniques (ICFs, SIPs) Section 6: Creating Public Awareness for Ratings and EEMs Or is it better to target: • Lenders and real estate agents ( d let L d d l t t t (and l t them promote their advantages to the homeowners) ex. Alternative mortgage products before credit crunch Section 6: Creating Public Awareness for Ratings and EEMs One problem with targeting homeowners is: “Coolness factor” of ratings and EEMs. Ratings and EEMs aren’t as exciting as a new innovative building style like an insulated concrete home. home Section 6: Creating Public Awareness for Ratings and EEMs Problems with targeting lenders and real P bl ith t ti l d d l estate agents include: • Agents may fear discussing energy efficiency with potential buyers (liability issue) Both agents and lenders may fear that EEMs ill l EEM will slow the transaction (fewer deals) th t ti - Benefits of larger loans may be outweighed by increased paperwork, oversight, time, etc. - Some type of “facilitator” may be necessary to take all excess work away from agents and lenders. • Section 6: Creating Public Awareness for Ratings and EEMs Committee’s Recommendations: C itt ’ R d ti • Create a Texas “brand” for home e e gy C eate e as b a d o o e energy efficiency in Texas to use on all public awareness material. • Provide a comprehensive website to promote home energy efficiency with Texas-specific Texasinformation, tips and resources. Section 6: Creating Public Awareness for Ratings and EEMs Committee’s Recommendations: C itt ’ R d ti • State go e government s ou d partner with real e t should pa t e t ea estate agents and lenders to raise the awareness about energy-efficient mortgages. energy• Partner with utility companies to produce utility bill inserts promoting the proposed TAMU ESL rating system. Final Thoughts So, how will energy ratings and energy-efficient energymortgages affect homebuying in Texas? • Bottom line: A voluntary home energy rating y gy g system won’t have much effect at all on homebuying. homebuying. • And energy-efficient mortgages (EEMs) are a energyhard-sell ( hard h d- ll (even when energy prices were high). h i high hi h) h) • Same with trying to convince homeowners to invest in energy-efficiency in existing homes. energy- Final Thoughts Still, a glimmer of a plan for promoting home , g p p g energy efficiency has been established for the future.