In Focus: The Premium for Green

27 June of 2013 by

green money twenties In Focus: The Premium for Green

Environmentalists, policymakers, building professionals, big businesses are united in acceptance of green buildings. Green = Good! But what about the group that matters most, the buyers?

Are buyers on board with green building benefits?

The introduction of rating systems that certify the green features and energy efficiency of buildings has helped to grow the public awareness of the benefits of green building.

Surveys indicate that today, the public is generally aware of green buildings and associates them with features such as:

  • Lower operating costs and utility bills due to higher energy and water efficiency.
  • Higher quality construction, since green rating systems often go beyond building codes.
  • More comfortable and stable indoor temperatures.
  • Healthier indoor air quality.

In the words of Ara Hovnanian, CEO and president of Hovnanian Enterprises, one of the nation’s biggest home builders, all things being equal, consumers would choose green.

However, things are not equal. To build green, developers have to invest more upfront. It is true that the cost of green construction has been going down: the premium today is 7%, as compared to 10% in 2008 and 11% in 2006.

Still, the builders will be willing to incur the additional expense only if they believe that the buyers are willing to pay extra for lower electricity bills and better indoor environment.

Are buyers willing to go the extra dollar for green?

How much more?

The data used to gauge buyers’ price sensitivity can come from industry surveys, regional research and even anecdotal information from real estate agents. One of the primary resources of information about buyers’ preferences is the National Association of Home Builders (NAHB), which regularly surveys builders and home buyers to get feedback on buyers’ demands.

 

In the 2012 NAHB survey, builders and remodelers reported that on average, people are willing to consider 3% increase in cost for new construction and 5% for remodeling. All in all, 61% of builders and 66% of remodelers stated that their customers were willing to pay more for green building.

Other NAHB surveys indicated that buyers would pay a median $5,000 more for a house that saved them $1,000 a year, and that buyers will pay an average of $17,000 extra for a home with solar power.

The numbers seem to vary by region. An economic analysis conducted from 2007 to 2012 by professors at UCLA and Berkeley – “The Value of Green labels in the California Housing Market” – studied the impact of green labeling on the sales price of a home. The analysis found that homes labeled by Energy Star, LEED for Homes and GreenPoint Rated sell for 9% more (±4%) than comparable, non-labeled homes.

While these numbers may not yet amount to a comprehensive study of buyers’ price sensitivity, they make one thing clear – the economic benefits are motivating the green homebuyer, when people see value, they are prepared to pay for it.

Who are the green home buyers?

The three regions that currently have the highest growth of green homes are:
e468b4e1127f4c1fb9e667b769306b35 In Focus: The Premium for Green

1st place: the West Coast

2nd place: the Midwest’s northern region, west of the Mississippi

3rd place: New England

The “The Value of Green labels in the California Housing Market” study found that:

  • The price premium for green-certified homes varies considerably from region to region. It is the highest in the hottest climates, which means that buyers in those areas value green certification for pragmatic reasons.
  • There is the so-called Prius effect – the premium is positively correlated to the environmental ideology of the area, as measured by the rate of registration of hybrid vehicles. In these communities, green home may also serve as a status symbol.

A number of NAHB’s studies and surveys found that:

  • Affluent buyers, spending $500,000 or more on a house, were willing to invest more upfront to save on utility costs later.
  • 80%+ of Gen-Yers, those born in 1977 or later, expressed preference for a highly energy efficient home with lower utility bills.
  • 37% of baby boomers wanted an environment-friendly home, but only 12% would pay more.

There also seems to be an interesting shift in green home buyers’ demographic. A 2012 survey by NAHB found that only 14%, down from 17% in 2007, of home buyers said they would pay more for a green home for environmental reason. Yet, the total number of people willing to pay more for a green home has actually increased. The difference is coming from people who are willing to pay more for economic reason.

The early adoptors were of the “save-the-world” creed. They were interested in sustainable materials, products with recycled content, and products that reduce or eliminate air emissions out of concerns over global climate change. The new breed of green home buyers focus on energy-efficiency and quantifying the value of green improvements in real dollars. While they may embrace some of the environmentalist agenda, they might not object too much to an insulating material made with ozone-depleting chemicals if it has a high R-value.

Appraisal Challenges

As market interest in green homes grows, builders and buyers are reporting unexpected challenges securing accurate appraisals and financing for such projects. Lenders rely on appraisers for the market value of a property. The standard practice is to base the appraised value on sale prices of comparable homes. However, it doesn’t work for green homes which have features that often exceed the local codes. These features add to the cost, but also have the long-term maintenance and operating cost benefits. If an appraiser doesn’t adequately factor green features into the assessment, the house will get an unjustifiably low appraisal.

To correct this situation, the Appraisal Institute has issued the Residential Green and Energy Efficient Addendum.

However, the buyers can also take steps to make sure they get a correct appraisal:

  • Ask the lender to accept a “cost based” appraisal that takes the component costs into greater consideration when establishing the market value.
  • Encourage the local Board of Realtors to include green data fields in the Multiple Listing Service (MLS). This will help appraisers accumulate data to better locate appropriate green properties for comparison.
  • Find out if local lenders are offering Energy Efficient Mortgages (EEMs), which take into account the money saved on utility bills when determining loan limits.

Regulation

The key enabler of green home construction in the early days  were tax benefits provided in the Energy Policy Act of 2005 to encourage green building. It is currently extended until the end of 2013.

Today, may local governments pass their own bills to encourage green development.  In NYS, Senator Mark Grisanti (R, I-60) announced passage of Senate bill S. 1710 which would provide green development home tax exemptions. Grisanti’s bill would allow a tax exemption of 35%t for real property for a period of no longer than 20 years if authorized by the local municipality.

On a final note

In 2011, green homes made up 17% of construction, totaling $17 billion in economic activity. The value of the residential green building market is expected to grow five-fold by 2016, taking up to 38% of the market and representing $87 billion – $114 billion.

Buyers may enter green home market for many reasons: environmental concerns, cost savvy, desire for a better built home. More buyers will mean more supply, greater choice, better technology, and eventually lower costs. In the end, everybody will benefit from overall better homes, cleaner atmosphere, more sensibly used resources. The key is to convince people it is worth it.

Original Article on CleanEdison Blog

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