By 2020, we will have made the majority of America’s new housing energy efficient, and will have renovated a sizable portion of existing homes to be green. High-performance features will be in higher demand than granite countertops.
Already, many experts agree on components of the sustainable city of the future: energy-efficient homes and buildings, mass transit, greater density with a mix of land uses, and smarter infrastructure. However, the strategies we need to use to reach this future are, at best, vaguely laid out. This is particularly true when it comes to financing. To move forward, we must overcome financial and process-related barriers, and the foundation for this move must be built in the next few years.
Just providing the right mix of financial products will not be a silver bullet. We need to get to consumers much earlier in the home-buying process, better educate the real estate community that serves them, integrate with the business platforms of major lenders and investors, and seek creative public-private vehicles to optimize the scarce resources available.
Data Can Help—And It’s Here
The good news is that consumer interest is surging. A National Association of Home Builders survey conducted in 2012 found that nine of 10 potential home buyers would pay more for an energy-efficient home than for a home without those features that costs 2 to 3 percent less. Harvard University’s Joint Center for Housing Studies also recently found a significant rise in the share of remodeling dollars going to energy-efficiency improvements.
We are also now seeing data that supports the assertion that energy efficiency makes financial sense. A 2013 study from the University of North Carolina’s Center for Community Capital and the Institute for Market Transformation that I worked on found that the default risk for owners of energy-efficient homes is 32 percent less than that of comparable homeowners in less-efficient homes, which is a highly significant amount.
Pricing information—hard numbers that support the hunch that green homes are worth more—is also starting to ripple out into the marketplace. A July 2012 study by Nils Kok and Matthew Khan found that green homes in California sold for a 9 percent premium, and smaller studies in other Western states’ markets have found similar results.
Documentation is the key to understanding the value of building green. A significant initiative called the Green MLS (Multiple Listing Service) will integrate information on green components of homes, and any relevant ratings or certifications, into the standard MLS that millions of home buyers use. It will also capture (and reinforce) the higher prices associated with such sales. Eventually it will also access utility usage in many markets.
We Must Fix Appraisals
Appraisals are another key building block. Currently, appraisals don’t include most of the green and energy-efficient components of a home. There needs to be a standardized method of capturing these features in order to have an effect on the market—as seen through higher sale values for green homes, reinforced by comparable sales. However, while the Appraisal Institute recently took a big step forward with its Residential Green and Energy Efficient Addendum and a major training effort, participation in the program has been low. And few, if any, investors have approved the addendum’s use.
Likewise, home-rating costs are a barrier, since the homeowner usually pays for the rating. We could tackle this by including the cost as part of the home inspection or appraisal process, making it eligible for financing, or offsetting it by means of utility programs.
The various certification programs need to have more standardized data formats, not only for the MLS, but also for lenders and investors during the mortgage verification process. This data must be available in real time and must seamlessly populate the loan files of financial players. That could help in the creation of a vibrant green mortgage-backed securities market so that green properties could be distinguished and verified.
Consumer Involvement is Critical
There is another, very tricky stumbling block. Consumer surveys may show strong interest in green and energy-efficient homes, but actual consumer demand has come in lower. This may have to do with the variety of factors that a consumer has to consider when buying a home and obtaining a mortgage.
If you’ve ever purchased a home, you know this feeling of anticipation: Has your loan been approved? What about the home inspection? Can you lock in a good rate?
Consumers, especially those buying existing homes, must be engaged before they get to this point. Realtors, remodelers, utility companies, and housing counselors must make a concerted effort to market the potential of existing homes, particularly those in job-rich, transit-served markets. Furthermore, we need innovative lending products that can delay the actual installation until after closing, to provide time and space for the consumer to make and manage a better long-term purchase.
Focusing on energy efficiency only at the scale of an individual residence is very limiting. We have to scale this process up to the neighborhood, the city, and the region. We can dramatically amplify the results of higher home efficiency by moving away from the auto-oriented, large-lot suburban model of land use. More Americans want to live in dense, mixed-use developments, with multifamily housing at walking distance from shops, entertainment, and public transit.
Revitalizing cities in this manner is under way in major gateway markets, but many cities have limited economic bases to support such change. An even bigger challenge is remaking the suburbs. Most Americans will likely still be living in suburbs in 2050, and these suburbs have the potential to grow up, and not out, to take advantage of existing infrastructure and to provide better transit access. We could even provide community energy through collective solar and wind farms or large-scale neighborhood gardens.
Ever-greater levels of financial management will be necessary to make this happen. Every existing tool must be brought into this effort: tax-increment financing, mixed-use development, planned-unit developments, loan-loss reserves, risk sharing, securitization, guarantees, and real estate investment trusts, as well as newer financial structures that will be built along the way.
We need to build a broad financial platform for the rapid adoption of energy efficiency, by including it in mortgage underwriting (through passage of the SAVE Act and federal regulatory action), continuing to demonstrate the underwriting soundness of such lending, implementing the Green MLS nationwide, and making the green appraisal addendum standard. We need aggressive training and marketing for all the industry players as well as a vastly improved home buying and mortgage lending process for the consumer.
With this platform in place, by 2020, green can become the new granite.