When Mike Baldwin built a home for his client in Maryland that was 40 percent more efficient than an average single-family residence, he figured it would command a better price in the market. He was wrong.
An appraiser valued it for $5,000 less than it was built for, saying it was "overbuilt" compared other homes in the area. So thousands of dollars came directly out of Baldwin's pocket.
"Builders aren't going to leap into this market unless energy-efficient homes are appraised differently," said Baldwin, who is president of Baldwin homes.
The problem is far bigger than the one appraiser who didn't value Baldwin's energy-efficient home. It's a systematic issue that goes back to what's valued within a mortgage itself. Even though efficiency retrofits reduce energy bills -- which can account for 15 percent of the cost of home ownership -- the lending industry doesn't factor them into a loan.
That's because the data on whether energy efficient homes truly reduce risk hasn't been clear -- until now.
"We found that Energy Star certification reduces default and payment risk. The more efficient the house, the less the risk is for prepayment and default," said Nikhil Kaza, a researcher at the University of North Carolina's Center for Community Capital.
Kazah was referring to an empirical study released yesterday by the Institute for Market Transformation (IMT) comparing Energy Star-certified homes to standard homes. Energy Star is a federal standard for houses that are 30 percent more efficient than average homes. Kazah and his colleagues reviewed nearly 30,000 single-family Energy Star residences around the country and compared them to 71,000 conventional homes. The study controlled for size, homeowner income, loan type, employment, and credit score, ensuring that the profile of each category was similar.
They found that Energy Star homes were 32 percent less likely to go into default. And those findings, said Kaza, are at a 99.9 percent confidence level.
"We've been talking about this for a while, but now we have the data to back it up," said Cliff Majersik, executive director of IMT. "It's time now to fix mortgage underwriting guidelines to consider energy efficiency."
Indeed, the folks at IMT and others have been talking about factoring efficiency into mortgage standards for years. In 2011, the organization helped promote a bipartisan bill introduced in the Senate called the SAVE Act that would instruct the Department of Housing and Urban Development to include energy use in new mortgage guidelines. Lenders factor in income, personal assets, and property value -- why not energy, which costs homeowners roughly $2,200 a year? If homeowners save on energy costs, argue the researchers, then they have more money to pay a mortgage.
There are lots of potential qualitative unknowns behind the data. Perhaps homeowners who care about efficiency are more fiscally responsible and are therefore more likely to repay their loan; maybe those living in energy efficient homes are happier and stay in their homes longer; or maybe education level plays a role.
Mike Frantantoni of the Mortgage Bankers Association agreed that there are inexplicable factors at play that could slightly "overstate" some of the findings. But the researchers made sure the control group was very similar to the Energy Star homes in almost every way.
"It looks like the people who are buying energy-efficient homes are similar to the ones who are not. [These factors] might change the result slightly, but it doesn't lead me to question it," said Frantantoni.
Those advocating for revised lending standards say it's time to include energy consumption. Action wouldn't come on the lending level, but at the federal level, where mortgage guidelines are created. That could spawn a culture shift that would reach all the way down to the appraisal level -- ensuring that builders like Mike Baldwin get fairly recognized for the efficient homes they're building.
"If we can somehow get a mortgage that encourages efficiency, Energy Star buildings will increase across the board," said Baldwin.
This is the first study of its kind to quantify the relationship between reduced lending risk and energy efficiency, said the researchers. Although some of the underlying factors at play are still fuzzy, they argued that the numbers are enough to spur change.
“You can act on this without knowing the exact cause. We now have enough information to adjust federal mortgage guidelines. The fact is that we are seeing lower default rates, and that’s a lender's biggest concern," said IMT's Majersik.