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Oct 14, 2015

Residential Energy+ and Transparency: Making value visible for home energy performance


Imagine you're a prospective homebuyer. Knowing that a home purchase may be the largest expenditure you make in your lifetime, you aspire to make a sound financial decision. So you look into utility costs to compare the monthly financial outlook for different properties. However, you soon discover that this information can be difficult to come by—even for a motivated homebuyer—and that buying a home today is akin to buying a car without an MPG sticker. If you are in fact able to procure past utility bills, the information can be confusing and can leave you with unanswered questions about the implications for your potential monthly costs, and how much of the seller’s energy use is based on past behavior rather than the physical characteristics of the home itself.  

Similarly, imagine that you are a homeowner considering a range of home improvement options. You could, for example, invest in marble countertops, open-concept living areas, bathrooms, flooring, or exterior siding, and do so with a general idea about the value the investment will add to your home. This value then becomes real when homebuyers ask for it and as appraisers, lenders, and realtors recognize it with a dollar figure. Unfortunately, this recognition of improvements as a dollar value rarely happens with energy upgrades, despite the utility cost savings, greater thermal comfort, and other benefits they provide. 

In most situations—like those described above—energy performance takes a back seat to other home improvement options—leading to underinvestment. What becomes clear is the need for greater market transparency such that prospective homebuyers are empowered to compare homes based on contextualized energy performance and homeowners can translate energy performance improvements into equity value that’s recognized throughout the market. RMI’s new Residential Energy+ initiative hopes to accomplish this through the three following actions: 

1. Putting a home energy performance metric in all consumers’ hands

Understanding the need for an energy performance metric that allows for comparison between homes and draws a link to home equity, the Department of Energy (DOE) recently launched the Better Buildings Home Energy Information Accelerator. It aims to make a home’s energy information more readily available through means such as efficiency certificates and estimated energy use. 

In parallel, state and local governments are passing energy disclosure ordinances across the United States to promote energy performance transparency in the property transaction process. These ordinances require either utility bill disclosure, asset ratings based on an assessment of a home’s structure and equipment, energy efficiency characteristics of a home, or benchmarking of annual energy use compared to peers. 

Although these efforts at federal, state, and local levels support greater market transparency, they face challenges to scale nationwide—including jurisdictional boundaries for ordinances and laws, requirements for in-person audits, and issues associated with making utility data public. With these challenges in mind, Residential Energy+ will support the collaborative development of a home energy performance metric that can be rapidly developed using both publicly accessible data and property listing platforms already being used by millions of Americans participating in the property market. 

The energy performance estimates used to produce such a score might, similar to a Walk Score, be sufficiently accurate to support increased investments in energy upgrades. These data could come from a combination of various sources such as the U.S. Energy Information Administration’s Residential Energy Consumption Survey (RECS), public records, and street-side thermal scans of wasted energy that escapes a given home’s walls, roof, and windows. This easy-to-understand metric would inform homebuyer decision making, enabling greater preference for homes with a better score and, thus, better energy performance. 

In contrast to a Walk Score—for which a higher score requires broader infrastructure improvements largely outside the control of the homeowner—homeowners could improve their home’s energy performance score through investments in energy upgrades. And for some homeowners, this energy performance metric may compel the pursuit of in-home energy audits associated with federal initiatives like the Home Energy Score or RESNET’s in-depth Home Energy Rating System (HERS)

2. Presenting the total cost of home ownership

Energy can present a major monthly cost for homeowners that is—unlike other major costs such as mortgage payments (or rent), property taxes, insurance, and HOA fees—seldom if ever included in property listings. Homebuyers are therefore forced to make under-informed decisions, as the information readily available in most markets today keeps them blind to a potential source of differentiation between properties. We believe that presenting the total cost of home ownership (on a monthly or annual basis) in parallel with the energy performance metric would increase the weight of energy costs in decision making and better inform the major financial decision a homebuyer ultimately makes. 

3. Converting home energy performance into equity value

The findings from two recent studies conducted by the Colorado Energy Office about the impact of energy efficiency and by Lawrence Berkeley National Laboratory on rooftop solar photovoltaic (PV) suggest that improved energy performance can increase property value and reduce the amount of time a property sits on the market. Although some pioneering appraisers, realtors, and lenders verbally recognize the value of energy performance (and try to rally support in their respective industries to enact new valuation practices), the fact remains that most property values do not yet reflect energy performance. As a result, the economic gains possible from any increased equity value attributed to energy performance improvements remain veiled, perpetuating underinvestment through undervaluation. 

It is critical to develop education and training for appraisers, realtors, and lenders on the link between energy performance and value—likely through the industry associations maintaining widely held industry credentials—so that this link becomes standard practice. These trusted advisors in the home purchase process could then help consumers process potentially confusing energy information and translate it into understandable metrics for comparing home purchase options. 

The key players

Increasing market transparency of energy upgrades requires close collaborations among diverse market actors, including:

  • Data providers: making home energy performance data easily accessible from public sources through scalable sources like public records and street-side thermal scans, or at higher levels of detail through energy audit services 
  • Data platforms: integrating these data into widely used property listing platforms to make an energy performance metric available to homeowners, homebuyers, realtors, appraisers, lenders, and government 
  • Realtors: promoting the greater property value and other benefits of home energy performance directly to homeowners and homebuyers
  • Appraisers: attributing greater property value to properties based on energy performance
  • Lenders: providing loans that reflect the heightened value and reduced default risk of homes that achieve high energy performance
  • Industry associations: distributing information to and training real estate industry professionals to help make high energy performance a standard practice 
  • Government: formalizing standard real estate practices for energy performance as part of property transactions, financing, and insurance

RMI will facilitate collaborations aimed at creating a nationwide home energy performance metric for U.S. single-family homes, starting with the Residential Energy+ Workshop in November. Industry leaders will develop this metric through scalable energy performance assessment methods. The ideal metric will convey energy costs as part of a homeowner’s other monthly cash outlays (e.g., mortgage payment, property taxes, insurance, HOA fees, etc.), and translate energy costs and upgrades into property value. The sought-after collaborative solutions will provide the transparency needed in the market to inform demand among homebuyers for greater energy performance and the boost in property value that can lead homeowners to invest in home energy upgrades. Moreover, these solutions will provide realtors greater motivation to get up to speed on home energy performance—including the options available for energy upgrades—for the properties they help both homebuyers purchase and homeowners sell. 

Image courtesy of Shutterstock.

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