Can We Make our Homes Energy Efficient without Radical Changes to Lending Practices? Part 2

homeeemortgagecoverIn the first blog on this topic, I gave an overview of the UNC Center for Capital Research Report – Home Energy Efficiency and Mortgage Risks.

This second blog addresses the Report’s findings regarding financing energy efficiency and the challenges that face consumers when seeking additional dollars to make energy upgrades in their homes.

According to the Report, the U.S housing stock is valued at about $14.5 trillion. To even devote 2% to energy efficiency improvements would require an investment of nearly $300 billion.  While there are federal, state and local energy efficiency loan funds and other mechanisms in place to provide assistance, they can’t possible cover what is required.

The most widely used mechanism is direct borrowing in the form of consumer loans, home equity loans and traditional or specialized mortgages.  Most of these financing options require consumers to have either substantial equity in their existing home, the personal reserves to pay any added costs out-of-pocket or larger down payments for a home purchase. Many homeowners have seen the equity in their homes diminish over the last few years due to the struggling economy. 

For many first-time homebuyers or moderate-income borrowers who do not have these financial resources there are energy-efficient mortgages (EEM) which offer lenders flexibility in the debt-to-income and other underwriting considerations so borrowers can qualify for larger loans or lower interest rates. However, few lenders currently offer these.

If we are going to see significant improvement in the retrofitting of existing buildings for energy efficiency, owners need to be incentivized. This usually manifests itself as access to affordable capital.  While it is a good start, it is not enough to offer tax incentives especially for homeowners who do not have cash resources to make some of the more pricey upgrades to older homes.

This debate is going to Capitol Hill and groups like the Residential Energy Services Network (RESNET) are lobbying to encourage underwriting flexibility on energy efficient homes and to promote energy efficiency to consumers – particularly for moderate- and middle- income borrowers seeking financing for energy efficient upgrades.

It’s apparent that business as usual will not get us where we need to go.  This Report is a reminder of a prevailing situation that continues to be raised but not resolved.  Is there money available that we don’t see?  Are there resources somewhere that could be re-allocated to move the green needle and help moderate- and middle- income borrows obtain the financing needed to make necessary energy upgrades?

We, as consumers, cannot strive to be sustainable nor can cities strive to be the ‘greenest’ cities without resources to make this happen.  Are the gloves off?  Can we really move the needle this time?

Can We Make our Homes Energy Efficient without Radical Changes to Lending Practices? Part 1

homeeemortgagecoverA recent study by the University of North Carolina Center for Community Capital/Institute for Market Transformation puts forth some very interesting data regarding energy efficient home building, mortgage lending and the state of the lending industry. This report, Home Energy Efficiency and Mortgage Risks has some interesting findings that I plan to address in a few blogs.

The study includes:

  • National sample of 71,000 home loans from 38 states and the District of Columbia
  • Variables examined for the homes included age of the house, square footage, FICO (credit) scores, ZIP code average incomes and unemployment rates, typical time to default, sale price, heating/cooling degree days and electricity prices 
  • Average home price in sample was $220,000

The study finds that default risks are on average 32 percent lower in energy-efficient homes.  There is, perhaps, a mixed message in this premise.  We have seen over the last decade that the early adopters of energy efficiency are more educated, probably make more money and most likely live in more urban locations. People in more rural parts of the country may not have local resources for information or education about energy upgrades and may not have access to capital from lenders to make these upgrades.

The study says that the amount of money homeowners spend on energy annually equates to 15 percent of the cost of home ownership. While these costs vary around the country, rural households pay $400 more on average than urban household. There could be many reasons for this. Is it the nature of construction?  Is it utility costs?  

Are the resources to make energy improvements to these homes available?  We have blogged before about the fact that if you have a home built prior to 1980 you should consider energy upgrades and if you are refinancing include them as part of your lending conversation.

The heart of the problem lies in the valuation of homes and the lack of information regarding mortgage lending options.

Think about it. Is your home worth more or less than it was five years ago? Slim chance of any “magical” home equity showing up to be cashed in and spent on upgrades.

The only way we can move the needle to upgrade existing homes and buildings so they are more efficient is to rationalize the underwriting process and include energy upgrades as part of the mortgage.

Stay tuned. There is more to come on this study.  If you have any thoughts on this subject, I would love to hear them.

Make Energy Upgrades Part of Your Refinancing

Lucas Hamilton

As the real estate market begins to come back every mortgage broker and real estate agent should be talking to customers about adding energy upgrades if they are refinancing or changing properties.  If you are touching your mortgage in any way, now is the time to include the energy upgrades into your plans. 

If you are changing properties and moving to a new house get energy upgrades built into the mortgage because it will generate positive cash flow immediately. It’s like buying a rental property and having a tenant in it already.  Also, you are borrowing at a lower rate and getting paid back at a higher rate. Adding insulation and tightening the building envelop in older homes will improve your energy efficiency almost immediately.

I recently participated in a panel discussion about energy upgrades and presented the results of a series of REM / Design simulations that showed what the actual savings would be by adding insulation and making a home more air tight.  I secured a quote from an insulation contractor for a passive upgrade to a house built in the 1980’s to show what the cost versus savings would be, not only upfront, but over time.  It would cost $22 per month in the mortgage but it saved $28 per month in energy costs. These figures are based on today’s energy prices. As energy becomes more expensive, the savings increase. Not only do the upgrades save energy but they also contribute to a healthier indoor environment in the home.

You can never go wrong upgrading an older home to 2009 building code standards because it will enable you to compete with newer, more energy efficient construction when you decide to sell.  As I discussed in an earlier blog, if we begin to label homes with energy ratings it is in the best interest of the homeowner to upgrade so they will have a higher energy rating. 

With mortgage rates as low as they are, it makes perfect sense to make those energy upgrades now.

Lucas Hamilton is Manager, Building Science Applications for CertainTeed Corporation

The Cost of Home Energy as Percent of Income

I was preparing for a presentation for Energy Awareness month and came across a startling statistic from the U.S. Department of Housing and Urban Development about the amount of net income that goes toward paying utilities.
 

The income level percent of net income for utilities is:

  • The U.S. median for working Americans……………… 4 percent
  • Social Security –  elderly………………………………….19 percent
  • Social Security (DE, IL, VT)…………………………….. 25 percent
  • American Families with Dependent Children…………..26 percent

For those of us who are in the fortunate group of wage earners (4%ers) this is reasonable but when you look at fixed and low income homeowners; this is shocking. Keep in mind that energy is the most volatile of utilities and is related to heating, air conditioning, water (don’t forget that cleaning and transporting water takes energy), cooking, and everything you plug into the wall. 

For these reasons, energy efficiency is critical in order to insulate the group of people on fixed incomes from the volatility of market prices.  For the most part these groups understand the need to conserve energy. They are, generally, much more disciplined regarding turning off lights or waiting to turn on the heat or air conditioning. Think about the last time you saw your Grandparents waste energy (other than lighting 80 candles on a birthday cake.)

In a previous blog about Aging in Place, which is the movement among older Americans to remain in their homes as long as possible, we discussed the benefits of low maintenance products for the home.  This energy statistic provides a wake up call for many of us to take advantage now of making energy upgrades in the home in order to minimize energy usage as we approach retirement age. If you are one of the lucky 4%ers, use your income now to get energy efficient while you can still pay for it. If you wait until retirement to get efficient, you may not be able to afford to do so once you get there.

 

Lucas Hamilton

Lucas Hamilton is Manager, Building Science Applications for CertainTeed Corporation