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The government’s announcement that housing starts were disappointing for the second month in a row is not just a substantial economic problem -- it’s also a significant environmental one.
Let me explain:
- This is an economic problem because, as the New York Times has argued, “Until the [housing] market recovers, the entire recovery is imperiled.”
- And it is an environmental problem because if energy-efficient new housing is constructed in location-efficient neighborhoods (those that are in walkable, transit-friendly areas), we can reduce climate emissions from buildings and housing by more than half.
What will it take to reignite the housing market?
As I have pointed out in previous blog posts (here and here), reforming how mortgages are underwritten is essentially the only proposal that will allow more people to qualify for home ownership while improving the security of the mortgage loans. And doing this could accommodate changing demographics and preferences that are increasing the demand for location-efficient and energy-efficient homes.
Other approaches just don’t look like they could work. In my blog post from last September, I predicted that the current Federal Reserve policy of buying mortgage-backed bonds won’t accomplish much. Now we are seeing that the Fed policy was only partially able to get the housing industry going again.
Broad-brush solutions to fixing the economy have been tried ever since the panic of 2008 occurred, and nowhere in the world have they been a crashing success. Instead, we need more targeted policies to reignite housing starts.
The frustrating thing for people advocating reforms to mortgage underwriting that would include energy performance is that it would be so easy to initiate these policies.
The Natural Resources Defense Council announced last month an agreement with builders responsible for almost half of all new-home construction to support an energy code enhancement that would cut energy use and emissions by 20 percent compared to its predecessor -- and by a whopping 40 percent compared to typical code practice in states. We noted that the major builders supporting this agreement also join NRDC in calling for mortgage lending reform that would allow homebuyers more latitude in qualifying for a loan on an energy-efficient home.
The best way to reform mortgage lending is breathtakingly simple: allow the buyer to qualify for a loan based on the sum of energy, transportation and loan payments rather than ignoring the first two costs. (These costs are too large and variable to ignore: together they are larger than housing itself.) So if a homebuyer saves $500 a month in energy and transportation, they could qualify for a loan whose monthly payments are $500 higher.
Some might argue that this is a subsidy, but the reverse is true. Current practice subsidizes bad houses. Homeowners with loans on energy-efficient homes are much less likely to default on their mortgages. This same result is seen for location-efficient homes. Since most mortgages are guaranteed by the federal government, the reverse subsidy has been occurring for the last 50 years -- this one for home buyers with high energy costs at greater risk of default.
While some stakeholders have expressed concerns about the risks of this approach, they seem to be ignoring the immense and realized risk of sticking with 50-year-old underwriting methods. Not only did these methods help lead to the global economic collapse of 2008 by allowing widespread defaults as energy costs rose, but they also continue to push the construction of homes with unaffordable transportation and utility expenses. It is hard to see how we can get a recovery if lenders only allow consumers to qualify for houses that they don’t want and can’t afford to operate.
And without a sustainable economic recovery, all loans are at greater risk of default.
Just as we can enable greater energy efficiency in a house by crediting the value of energy savings, which can easily exceed $30,000 over the life of a mortgage, we can enable greater location efficiency by crediting savings in transportation costs, which can exceed $200,000 over 30 years.
There is no serious opposition to this proposal to count energy and transportation savings. It benefits everyone: homebuilders, home buyers (especially those in the Millennial generation who prefer location-efficient neighborhoods), investors in mortgage-backed securities and the taxpayers who currently subsidize defaults in suburban sprawl developments.
We need to see some leadership from President Obama here. Congress is not needed for these reforms, although the bipartisan SAVE Act could help initiate reform. They could be implemented tomorrow by the administration once it understands the costs and risks of sticking with outdated loan policies when it comes to energy consumption.
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David B. Goldstein is co-director of the energy program at the Natural Resources Defense Council. This piece was originally published at NRDC's Switchboard blog and was reprinted with permission.