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ENERGY EFFICIENCY UPGRADES
INCREASE MARKET VALUE OF HOMES

A peer-reviewed study published in The Appraisal Journal shows that homebuyers are willing to pay substantially more for energy-efficient homes. This study, titled "Evidence of Rational Market Values for Home Energy Efficiency," concludes that people are willing to fully pay for the monthly fuel savings of energy efficient homes with higher monthly mortgage payments" which translate into higher home values. Thus, homebuilders and homeowners who invest in energy efficiency can expect to recover the market value of their energy efficiency investments when they sell their homes.

The ICF study reviews published research on energy efficiency and home values, and presents an extensive statistical analysis of American Housing Survey (AHS) data. The published research shows that market values for energy efficient homes appear to reflect a rational trade-off between homebuyers' fuel savings and their after-tax mortgage interest costs. The ICF statistical analysis explicitly tests this "rational market hypothesis" against National AHS data for 1991, 1993, and 1995, and metropolitan statistical area data for 1992 through 1996. Both of these distinct AHS samples provide data on home characteristics (including home value, number of rooms, square feet, lot size, and utility bills) as reported by homeowners in lengthy interviews with the Census Bureau. The study presents separate statistical results for each year, for detached and attached homes, and for detached housing with different heating fuels (gas, electric, or fuel oil). These statistical results support the conclusion that home value increases by $20 for every $1 reduction in annual utility bills, consistent with after-tax mortgage interest rates.

This research was conducted for the U.S. Environmental Protection Agency (EPA) ENERGY STARŪ Homes program. ENERGY STARŪ homes use at least 30% less energy than a Model Energy Code home while maintaining or improving indoor air quality and increasing comfort in the home. EPA estimates that the cost to upgrade a new home to ENERGY STARŪ levels can range from $2,000 to $4,000, and that a typical ENERGY STARŪ home reduces utility bills by $420 per year. The ICF study indicates that $420 in annual utility savings will add about $8,400 to the market value of an ENERGY STARŪ home (or to any equally efficient home), or two to four times the builder's upgrade costs.

The study should also encourage homeowners to consider energy efficiency upgrades for existing homes. An important conclusion from this research is that homeowners "can profit by investing in energy efficient homes even if they are uncertain about how long they might stay in the home. If their reduction in monthly fuel bills exceeds the after-tax mortgage interest paid to finance energy efficiency investments, then they will enjoy positive cash flow for as long as they live in their home and can also expect to recover their investment in energy efficiency when they sell their home." This research also has significant implications for home appraisers, mortgage lenders, and housing assistance programs at the federal, state, and local levels.

Written by: The Appraisal Journal by Rick Nevin and Gregory Watson


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