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Addressing home affordability through efficiency in financing process

October 15th, 2010 · 3 Comments

There are a myriad of ways in which the U.S. home mortgage system is weak to even broken. The extent of the housing bubble to the shoddy paperwork (and, in too many cases, outright fraud) in foreclosures are just two minor little examples of the problems we face.

One contributing factor — to the housing bubble, to foreclosure rates, to wasteful U.S. energy practices, to Americans’ heavy carbon footprints — is the absence of efficiency from the home financing process. The home financing guidance from the heavy-weights (the Fannies) doesn’t take efficiency into account for determining mortgage affordability as there is not a serious consideration of the energy cost implications of a home purchase decision and how that can impact affordability.

There are at least two specific elements that the home loan process should consider:

  • Location efficiency
  • Building energy efficiency

Location efficiency: Very simply, location matters.  Live far away from work, stores, and recreational facilities and you are (MUCH) more likely to be hopping in that McSUV to buy the carton of milk for breakfast.  The costs relation to that location inefficiency include your time (which might be used, for some people, to generate more income via more work), automobile/transport costs (insurance, gasoline, ownership of more cars, paying for a garage/driveway), and potentially higher costs for things like deliveries and services (those people need to drive longer to get to you).  Live in an urban area, a walk to work and stores and schools, and that inefficiency cost plummets. 

After a mortgage, owning and driving vehicles is the second highest household expense, and people who live in a walkable neighborhood near shops and schools can save serious money each year. That makes the “drive ‘til you qualify” mindset as outdated as buying a gas-guzzling SUV.” 

As NRDC’s David Goldstein and colleagues documented earlier this year, there is a very strong correlation between location efficiency and default rates. More that “gas-guzzling SUV” is required, the higher the chance of default.

Energy Efficiency is rather straightforward: how efficient is the house system in terms of energy (and, well, water) usage.  An old home with bad insulation, leaky windows, and decrepit appliances will cost more to heat and cool than a home built to modern standards.  And, a house built to Energy Star (or, even better, passivhaus) standards will have even lower heating and cooling bills. While there are mortgages that relate to energy efficiency, this is mainly in theory as most lenders simply aren’t aware of them.  A homeowner with a more energy efficient house, which costs $1000 less per year in heating/cooling bills, will have more money available to pay the mortgage. And, this is seen in actual default rates as the more energy efficient the home, the lower default rate.  Sadly, essentially no lenders take house energy efficiency into account when making lending decisions.

What should we do?

Clearly, at a large-scale policy level, there is a clear path forward: introduce location and building energy efficiency in the mortgage application process to start a societal shift toward a (fiscally and economically) sensible favoring of location and building energy efficient purchases vs costing in the risks and burdens of location and energy inefficient options.  There are, of course, quite serious opponents to such a shift that range from mortgage brokers comfortable with their ever-so successful business practices, auto-makers opposed to actions that would reduce sales, politicians in exurban areas dismayed over the potential limits this might place on McMansion expansion in their communities, and …. Business as usual has an inertia.  National policy change — with stronger building codes, advanced appliance efficiency standards, and requiring sensible approaches in analyzing mortgages — should occur and yet faces significant obstacles.

On the other hand, a building purchaser should consider location efficiency in their purchase. For my household, while interested in a specific school for our children which made us far less served by public transportation than we would have preferred, we focused on those homes that would allow us to walk to stores, the library, and parks. 

And, a home buyer is a fool if they don’t inspect the property prior to purchase — a home inspection is de rigeur for most home buying purchases.  Yet, how many get an energy audit prior to a purchase (or, well, after purchase)?  (And, to be honest, my informal (uneducated) inspection when buying failed to see many problems that I later identified.  That failure easily cost us $1000s in unnecessary utility bills and tons of additional CO2 emissions.)

Some local governments, recognizing the value and importance of improving energy efficiency, actually require home energy audits as part of the real estate process.  For example, Austin, Texas, put a home energy audit requirement into force as of 1 June 2009.  And, the results seem to justify the requirement:

Of the first 400 audits performed, nearly 90 percent of homes needed both additional attic insulation and duct repair to be considered “acceptable” by the city’s standards.

Austin, however, is the rare case rather than the rule when it comes to the requirement even though the results almost certainly are not radically out of step with what we should expect with America’s existing inefficient built infrastructure.

My community, for example, is dominated by 50-year old single-family homes.  When built, the insulation requirements were essentially non-existent and the ceilings had about R-9 and the walls about R-3 (based on some informal audits of neighbors’ homes and conversations with energy auditors working the neighborhood).  A few decades ago, the ceiling code was R-23 and it was then strengthened to R38.  The Department of Energy guidance for the area: R-45.  Very few of the homes in the neighborhood are R-45 and most have significant air leakage.  Rectifying much of this can be done with rapid payback.  A few dollars of spray foam and a few hours of work can make the home more comfortable while saving $10-100s per year.

But, of course, the challenge is knowing what to do and finding the most productive options to improved energy efficiency. That’s where the energy audit comes into play.  A piece of advice that I give essentially every friend or acquaintance when they ask me about their home’s energy and to everyone buying a home: get an energy audit. (And, as part of the process, I have lent my copy of Home Energy Diet to easily 15 households. ) While I can (and do do) informal energy audits.  I have yet, in 10s of times this has occurred, to fail to find cost-effective actions to improve a home’s energy efficieny.  Everything from air leaks to inadequate insulation to old (poorly working) appliances to …, sadly, it isn’t difficult to see problems with the naked eye.  I, however, arrive without an infared camera nor an air blower — the hidden behind the wall problem can remain hidden for me. 

The value of energy audits isn’t exactly a hidden secret even if too poorly understood by the vast majority of Americans and undervalued by the financial system.

Secretary of Energy Steve Chu took some time out this week to highlight the value of energy audits


While, sadly, many of the questions focused on renewable energy generation (which should be pursued after energy effciency is moving forward), that Secretary Chu took the time out to speak to the power of energy audits is a good signal of the DOE’s focus.

QUESTION: Is there some resource you recommend for helping homeowners evaluate whether particular improvements make sense for their homes? I imagine it’s not trivial to replace the skill of a professional with easy rules of thumb, but I’d find something like that useful. Getting a professional to come over and make customized recommendations requires quite some effort.

ANSWER: The best approach is to use a professional – a professional home energy assessment can help you identify areas of energy loss and set a plan to start saving. You’ll get a prioritized report to help you identify which improvements to make first. Some utilities and local governments offer free home energy assessments. For more on what to expect from a home energy assessment.

But there are some things you can do yourself: You can perform a do-it-yourself energy assessment as well. The results are not as precise, but it may help you identify some easy savings opportunities. For more on that visit:

If you have an older home, the odds are pretty good that you need more insulation. Insulating (or adding insulation to) an attic or crawl space can make a significant difference both in your family’s comfort and your energy bills.

Because energy efficiency is closely linked to regional climate conditions, it’s hard to provide a guideline that works nationwide. A few things to think about:
*check your attic insulation, if you have four inches or less of insulation, you’d likely save by adding more *replace the light bulbs you use most often with ENERGY STAR Compact Fluorescent Lights. *airseal and caulk – check around windows and doors, if you can feel air movement, you need to airseal. Be sure to check around basement rim joists (where the floor above connects to the walls), that’s often a place with no insulation at all.

Also, check out the energy efficiency calculators.

Following the Secretary’s engagement, the DOE blog posted this overview video on energy audits.


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Tags: department of energy · Energy · energy efficiency · financial policy

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