Wanted: Energy Efficient Housing

Good policies can help home buyers get what they really want.

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The Owens Corning(TM) EnergyComplete(R) Sealant is part of a whole-home insulation and air sealing solution designed to help increase a home's comfort and energy-efficiency.

Among the characteristics that homebuyers are increasingly looking for in a home is energy efficiency. In fact, in a recent National Association of Home Builder survey of homebuyer preferences, energy efficiency features topped the list of desirable items.

For example, the survey data indicate that 94 percent of homebuyers want energy-star rated appliances, 91 percent want an energy-star rating for the home and 89 percent want energy-star rated windows.

However, surveys of homebuyers also indicate that cost and payback time horizons remain concerns when selecting energy efficient features. For example, the 2012 NAHB survey found that the average homebuyer was willing to pay $7,095 more for a home to reduce energy costs by $1,000 annually. This suggests a required 14 percent rate of return. And this rate-of-return requirement increases for more cash constrained lower-income and first-time buyers. First-time homebuyers demand on average a nearly 16 percent rate of return, according to the survey.

The good news for homebuyers is that the nation's housing stock is becoming more energy efficient through remodeling. And newly-constructed homes tend to be more efficient than older homes with respect to energy use, particularly as measured on a per square foot basis.

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The Department of Energy's Energy Information Administration Residential Energy Consumption Surveys data provides proof. Using the 2009 data, the chart below reports per household member and per square foot energy use by year of construction for homes. There are clear energy efficiencies available for newer homes, including notable benefits for homes built after 1970.

Households in homes built in the 2000s use on average 37.1 thousand British Thermal Units (BTUs) per square foot annually, while homes from the 1980s use 43.5 thousand BTUs per square foot. For homes built before 1940, which account for about 15 percent of the housing stock, annual per square foot energy usage rises to an average of 51.6 thousand BTUs.

The RECS data also reveal the cost savings of energy efficient housing. Residents of housing built in the 1980s spend on average $1.06 per square foot per year on energy. In contrast, residents of housing built in the 1990s spend 96 cents per square foot and an even smaller 88 cents per square foot for homes built in the 2000s.

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Given that more than 86 percent of the nation's housing (owner- and renter-occupied) was built before the year 2000, housing policy can help promote more energy efficient homes. For example, in the last decade, various federal tax incentives have been in place that promoted energy efficient improvements by millions of households. 

While the tax code section 25C incentive, which expires at the end of 2013, is familiar to homeowners who have replaced old windows or aged water heaters in recent years, another valuable tax credit is perhaps less well known.

The section 25D credit provides a 30 percent tax credit for the installation of qualified solar panels, wind turbines, geothermal heat pumps and fuel cells. The credit can be claimed against the cost of the property as well as certain installation costs. And it can be used by taxpayers who have Alternative Minimum Tax liability. And unlike 25C, the 25D program is scheduled to remain in law until the end of 2016.

And if you are building or buying a newly built home, the 25D credit can be claimed for power production property installed in the new home. In 2010, the 25D credit was claimed by more than 273,000 taxpayers for tax benefit of more than $750 million.

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A proposed change that would also promote more energy efficient features in homes is the SAVE Act, a bipartisan bill introduced by Sens. Bennet, D-Colo., and Isakson, R-Ga. Supported by a broad coalition of housing/building, business and environmental groups, the legislation would improve federal mortgage underwriting rules to make adjustments for a home's expected energy cost savings.

Under the SAVE Act, homebuyers would have the option to provide an energy efficiency report to mortgage lenders. The lender would use estimated energy savings to determine affordability (such as through debt-to-income calculations) and to appraise the property's value. This process would improve borrowers' access to financing for energy-saving home purchases and renovations without increasing the overall cost of homeownership, which would particularly help first-time and younger homebuyers who rely more heavily on credit to purchase a home.

Over time, lenders may be able to offer more attractive interest rates for more energy efficient housing, thus altering the types of homes buyers seek, as well as the kind of home improvements owners choose to undertake.

Policies like the SAVE Act and the 25D credit can build on the already existing trend of buyers wanting more energy efficient housing while helping to increase the rate of return homeowners need for investments. And unlike some inflexible, costly and poorly targeted building code requirements that have no impact on existing, older homes, these policies work with market forces to realize savings for years to come.

Robert D. Dietz is an economist with the National Association of Home Builders. Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's Eye on Housing blog and @dietz_econ on Twitter.

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