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While official statistics may be lacking, many builders attending the NAHB National Green Building Conference in Raleigh, N.C., on May 16-18 said that they have been able to sell sustainably built homes considerably faster than the traditionally built new homes that have been languishing in today’s tough market.
Green builders, however, have little immunity from the tight financial conditions that have been plaguing the housing market and imposing difficulties for both home buyers and sellers. And the widespread problem of low appraisals — driven largely by a glut of foreclosed properties and a slow market — has been doubly frustrating for green builders because the vast majority of appraisers are unable to recognize the value that green features add to the home.
Energy efficiency, according to speakers at the conference, remains the most salient aspect of the industry’s move to sustainability, and is the one benefit that’s most easily recognized by consumers. Unfortunately, the prospect of sharp reductions in monthly utility bills has not gained much attention from the lending community, and mortgages recognizing those savings remain mostly an idea whose potential has been largely unrealized.
Another ongoing challenge is that the concept of green housing is not well understood by the general public, conference panelists said, and a significant share of prospective buyers are actually turned off by it. Green builders were advised to market the specific benefits of their homes rather than selling green, and to avoid providing too much technical information, which can quickly go over the heads of buyers and discourage sales.
While builders have found that there are buyers who are willing to pay a premium for green features, speakers at this year’s conference emphasized that the price gap between green and standard housing is closing, helped along by tax and other incentives. In general, however, home buyers may be reluctant to pay more for certain items unless they can be shown how these will pay for themselves through lower operating and maintenance costs over a reasonable period of time.
Several builders were on hand in Raleigh to discuss how they have been successful in moving sustainable construction principles into affordable housing. Those attending the conference also heard how green is being incorporated into the multifamily sector and factory-built housing, the latter profiting from a manufacturing process that inherently provides greater precision and holds construction waste to a minimum.
Industry professionals attending the show seemed to feel fairly optimistic about their business prospects and expected green to give them even more of an edge as this segment of the marketplace becomes further established during the full-scale housing recovery that will emerge in the next couple of years.
But the mortgage market isn’t geared up to do an effective job of providing financing for those green homes, they were told, a complaint that hit an especially raw nerve at the conference.
Green Homes Face a Red Light
In a show of hands from the audience at Porter’s breakout session on the latest in appraising and lending on green building, only a few said that one of their customers had ever been offered an energy efficient mortgage (EEM) or energy improvement mortgage (EIM) or that an appraiser had solicited information on the energy features of one of their homes.
Citing Fannie Mae guidelines advising lenders not to assume that an appraiser is competent, Porter told builders, “You have every right to say I want a competent appraiser. You do not need to roll over on this. If they have not seen or appraised a green home, ask for an appraiser who has appraised one of these homes or has knowledge in energy efficiency.”
Builders have the misperception that they are not even allowed to talk to appraisers these days, said Porter, but as long as they are not unduly trying to influence the valuation, they can voice their concerns through the lender and Appraisal Management Company.
The Appraisal Institute has initiated a one-day seminar on green building and it is presenting webinars, he said, “but I don’t know if this is enough.” Only about 25% of the nation’s roughly 105,000 appraisers are even a member of an organization, “so they are nomads.” In the meantime, underwriters are “tinkering” with appraisals.
As part of the third-party verification process, Porter said that builder should be sure to obtain a residential energy report form from the HERS (Home Energy Rating Systems) rater and provide copies to the lender and appraiser, as documentation that the home is qualified for an EEM or EIM.
Porter also said that Fannie Mae’s Uniform Residential Appraisal Form (Form 1004) should have a box at the top for information such as the HERS rating and its certification. In the version of the form that exists today, towards the bottom of the front page there is one line provided for additional green features, such as special energy-efficient items.
To make appraisers and lenders more knowledgeable about the value of green, Porter said that builders should also be handing out or referring them to “Marshall & Swift Green Building Costs.” Selling for $98.95, the publication includes the costs of the most common green items for new construction and retrofits, including labor and other factors. About 1,500 items were recently added to the list.
Comps a Sacred Cow
Porter said that taking the cost approach is “a start” to moving away from appraisals based on comparable sales made nearby and recently. Finding suitable comps has been difficult enough for traditionally constructed homes in a down market, but even more problematic for innovative homes with features that are not commonplace.
“Who made comps the sacred cow?” Porter asked. Moving to a different approach, he suggested, and compiling market information at the national level might be able to substantiate such claims as "green homes sell faster."
The good news in this regard is that Multiple Listing Services have begun to include information on green features, and a Green MLS Tool Kit is now available to educate Realtors® about gathering data on green homes so that comparables will be possible. The bad news, he said, is that only an estimated 20 to 40 of the 850 MLSs in the U.S. have started tracking green so far. Also, a disproportionate number of new green homes are not listed because they are custom built. “The answer is to build some specs,” he said.
Also, lenders need to factor in utility and maintenance costs to the calculations they use to qualify buyers for mortgages, he suggested. “What happens to the $400 differential” between a house built in the 1960s with an average monthly expenditure of $500 for energy and an Energy Star house that costs $89 a month? Lenders, he said, “are not looking at the full cost of ownership.”
Demanding Energy Efficient Mortgages
In effect, the energy efficient mortgage treats savings on energy as an addition to the borrower’s income. While these loans exist mostly in theory, “you need to start demanding these,” he said.
Although it has been hardly used, Porter said that the Federal Housing Administration’s 203(k) is “the loan right now to get a home green and energy-efficient” and the answer to the energy retrofit that most existing homes need. The loan enables cost-effective energy-saving measures to be financed as part of the mortgage and enables the buyer to qualify for a larger loan amount by considering the monthly savings on energy and allowing higher qualifying ratios. The actual amounts are based on the HERS report.
While no one to date has systematically estimated the actual value green adds to a home, Porter (along with at least one other speaker at the conference) referenced early research calculating that every $1 in annual energy savings brings roughly $20 in additional value. Finding enough data to reach such a conclusion is one problem, and further complicating things is that fact that the bottom line on how much energy is saved ultimately depends on the behavior of the occupants of the home.
Conducted by Rick Nevin and Gregory Watson and published in 1998 by The Appraisal Journal, beyond making calculations, the research concludes that: “The implication for appraisers is that cost-effective energy efficiency investments do appear to be reflected in residential housing market values. Therefore, the appraised value of energy-efficient homes could understate their actual resale value if the comparables used in the appraisal do not reflect the value of a cost-effective energy efficiency investment.”
As an additional resource, Porter mentioned www.dsireusa.org, which is a compendium of available incentives for features that promote renewable energy and energy efficiency. “Lenders and appraisers need to know about them,” he said.
For more information, e-mail Calli Schmidt at NAHB, or call her at 800-368-5242 x8132.