A recent report from Harvard University says that home improvement projects are expected to post strong gains throughout 2014. As more homeowners embark on home-improvement projects, the decision of whether or not to “go green” becomes more prevalent.
Likewise, more and more first-time homebuyers are deciding to buy either newly built green homes or set extra money aside to make green improvements.
According to the 2013 Green Builder Media study, “Consumers understand the value of energy efficiency and how upgrading their homes to incorporate better systems will help the planet and save them money.”
We interviewed Dr. Christopher Wedding, Adjunct Assistant Professor of Strategy and Entrepreneurship at the University of North Carolina, Kenan-Flagler Business School, about how to weigh the costs of buying green homes and whether or not the investment is worth it.
A: First, it doesn't have to cost more. Many builders, subcontractors, designers and vendors are over the learning curve and consider these kinds of buildings as part of best practice or quality building. If a green home does cost more, then it depends. Is it worth the extra cost?
- Maybe: Is the extra cost due to demand being greater than the supply of green homes? If so, then "maybe," because the price could be significantly greater than any extra hard costs (i.e. construction and materials) or soft costs (i.e. labor, extra research, services, headaches, etc.).
- Yes: If the extra cost is due to more expensive hard or soft costs that you control (e.g., you are building the home), then probably "yes."
- Yes: If the extra construction costs or higher purchase price is less than 5 percent, then probably "yes."
- Depends: Is the team experienced or are they learning on your dime—is it their first time building a green home? If they are experienced, then the answer is "yes." If they are not the answer is "no."
- Yes: If the green home uses 20 to 60 percent less energy and water than comparables the answer is "yes."
We likely need a new metric for assessing the costs and benefits of buying a green home. In contrast to the payback period, which is a poor metric since the average U.S. homeowner moves every five to seven years, the better comparison is the "total cost of ownership."
For example, if the monthly mortgage were $50 higher on a more expensive green home more but the average annual energy and water bills were $75 lower than a comparable home, the payback period is now -- that is, your cash flow is positive in just the first month.
A: Yes, but it depends as I noted in my example above. Another benefit of an energy-efficient home is that it acts as a hedge against uncertain or rising energy prices. Consider that since 2003 the average retail price of electricity across all sectors of the U.S. economy has risen 33 percent.
A: Increased volume overall: Increases in the volume of green buildings means that more builders, subcontractors, designers and vendors are becoming experienced in this way of building, incorporating new services (e.g. energy modeling) and products (e.g. more environmentally friendly carpets) into their business as usual. The U.S. Green Building Council and its affiliates are certifying an average of 1.5 million square feet of LEED-certified green building each day (this includes all types of buildings, not just homes).
The public sector is also driving this volume. The federal government has certified 130 million square feet of LEED green buildings and has plans to certify another 455 million in its pipeline. For state government, the numbers are 43 million square feet to date and 136 million square feet in its pipeline.
It’s a smart financial move: The financial benefits of green building are also strong drivers. Savings on energy and water bills can be substantial, and these costs are on the rise. According to the U.S. Green Building Council, LEED-certified green homes use about 30 percent less energy on average than homes built to code. Green certification can also increase a home’s resale value.
An economic analysis of 1.6 million homes sold in California between 2007 and 2012 concluded that LEED and Energy Star homes sold for 9 percent more than other homes (after controlling for other variables that affect home prices). Clearly, these benefits depend on the local market and are optimal where energy or water prices are highest, or where more homebuyers care about things such as organic food, hybrid cars or outdoor recreation. Financing alternatives also play a role. If, say, energy-reducing systems can be installed via bank financing or Property Assessed Clean Energy (PACE) bonds instead of using current household income or savings, then the financial benefits are more immediate and motivating.
A: The answer is probably "yes" if the green home is in a "sustainability-oriented" real estate market and the property is targeted to buyers who are interested in such energy-efficient features and an experienced real estate team is involved.
Dr. Christopher Wedding (http://www.christopherwedding.com) is an adjunct faculty member at the University of North Carolina at Chapel Hill and Duke University, as well as founder of IronOak Innovations, a strategy consultancy, and g-bit.com, a market intelligence software.
More help from HSH.com
Should Fannie, Freddie do principal reductions?Dr. Sherwood Clements and Dr. Menna Bizuneh offer their insight on whether Fannie Mae and Freddie Mac should have done principal reductions during the height of the real estate crisis.
How high will mortgage rates need to rise to curtail home buying?Dr. Anthony B. Sanders, distinguished professor of real estate finance at George Mason University, discusses what economic factors will have to take place before consumers see a serious increase in interest rates.
Tax incentives and issues for homeownersEric Zinn of University of Colorado Denver Business School and Bonnie Villarreal of Utah State University's Huntsman School of Business discuss homeowner tax advantages and the effect of circumstantial changes on taxes that homeowners pay.