What if more efficient homes were actually worth more?

originally posted here 

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 50x75 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:

EUI comparison among Energy Smart Home Performance projects

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.)

Already Common

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:

EUI Comparison of ESHP Projects

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:

  1. Publically available - Zillow, Trulia et al pull from them.
  2. 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.
  3. 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.
  4. Consistently inconsistent - While frequently incorrect, they are likely to be fairly consistently so. Plus they can be changed.

Conclusion

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.

Resources:

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.

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