As the new construction market climbs out of the grips of the recession, it is still fighting a glut of existing homes that are priced to move. The element that is being used to level the playing field is home efficiency, and pending legislation that would help make it more affordable. It’s a ray of light for HVAC subcontractors who want to offer a true value proposition in the new home market. It could mean the cost of an upgraded HVAC system could be written into the home’s mortgage.

Lisa Marquis Jackson is vice president of John Burns Real Estate Consulting, Irving, Texas. She said that although the market is still very broad (with “a ridiculous amount of business models whose result is always to create a profitable home”); “this whole issue of energy efficiency, green, and home automation” is moving forward. In the not-so-distant past, it was more the domain of a custom home buyer. Now, “It’s migrating more to the mass home builder, who is offering more that can be touted as energy efficiency. They recognize the importance of it,” Jackson said.

The key for some customers is to promote energy efficiency rather than green; “Green can even have a negative connotation,” she said. “When you say energy efficiency, it’s a private benefit versus a public benefit.”

A swift payback and immediate benefits are imperative, she said. “In a new home environment, if a builder can show the cash benefit right away, it makes sense. People are very focused right now on their monthly payment.”

Home efficiency can even help homebuilders compete with the existing home market, Jackson said. “A group of the largest homebuilders is proposing appraisal-reform ideas; a special mortgage package recognizes the efficiency of the home.”

MORTGAGE AND EFFICIENCY

In Washington, pending legislation would further promote home efficiency through better mortgages. According to Clayton Traylor of Leading Builders of America, “LBA is working on federal legislation that would require all federally assisted mortgages to consider energy costs in the mortgage underwriting and appraisal process.” The group anticipates that the legislation will be introduced by Senator Mike Bennet (D-CO) later this year.

According to the LBA, “outdated mortgage underwriting and appraisal practices … fail to account for energy costs in determining affordability, and do not consistently and accurately value energy-saving features in appraisals. This means that a $5,000 upgrade for granite countertops is reflected in appraisals, while a $5,000 upgrade for a highly-efficient HVAC system is not.”

The purpose of the SAVE Act is “to require all federal agencies to update their underwriting systems to consider energy costs and the value of energy-saving features.” The legislation requires the Department of Housing and Urban Development (HUD) to issue updated underwriting and appraisal guidelines for all mortgages insured or purchased by federal agencies. “These guidelines would require that energy costs be added to the current criteria used to estimate the cost of homeownership,” explained the association.

Consumers who purchase energy-efficient homes would be able to apply their monthly energy savings to their principal and interest payments. “This change is critical to making energy-efficient homes affordable for consumers to buy,” LBA stated.

The legislation would also require agencies to insure that energy-saving features “are consistently and accurately valued,” by adding the net present value of expected energy savings when calculating the loan-to-value ratios.

The legislation could offer major benefits for the typical homebuyer. “A typical home consumes about $2,800 per year in energy,” LBA pointed out. “A new or remodeled home that is 30 percent more energy efficient than current building codes would consume about $2,400 per year in energy, saving the homeowner about $400 per year, or $35 per month.” Making a new home 30 percent more energy efficient than code increases the cost of the home by around $5,000, thus increasing the monthly mortgage payment by around $30 per month.

Under the SAVE Act, a consumer buying an energy-efficient home would use the $35 per month in energy savings to offset that $30 increase in the mortgage payment. “This change allows homebuyers to purchase energy-efficient homes without increasing their ownership cost.”

For the average U.S. home, energy costs are typically higher than both insurance and property taxes, the association pointed out. “Adding energy as a discreet cost of homeownership will provide lenders with a much more accurate picture of the true cost of homeownership.”

For both newly constructed, energy-efficient homes, and existing homes that have been retrofitted with energy-saving features, homeowners may have an energy rating analysis performed to estimate annual energy costs. The ratings analysis must be performed by a qualified third party, using a system recommended by HUD and the Department of Energy (DOE), such as the Home Energy Rating System (HERS).

If an energy rating has not been performed on a home, the underwriter would need to estimate the annual energy costs using a database maintained by the DOE.

Because the act would make energy-efficient homes more affordable for consumers, it is expected to create more demand for energy-efficient homes. “Surveys consistently indicate that homebuyers value energy efficiency and will purchase energy-efficient homes if they are affordable,” the association said.

It would apply to all federally insured mortgages. However, the legislation would not require an energy inspection for all homes. That decision is up to the consumer. The legislation relies on the DOE’s Residential Energy Consumption Survey (RECS) to determine average energy use.

According to the LBA, “The SAVE Act establishes a specific and accurate method for calculating the value of energy savings that [would] be used by lenders to determine the value of energy-saving features. The legislation also requires the HUD secretary to adopt safeguards to prevent the overvaluation or duplicative counting of energy savings.”

VALUE RELATIONSHIPS

The question for HVAC contractors is whether this will have an effect on how homebuilders select their subs. “It all goes back to construction quality,” Jackson said. “It’s about developing relationships. If you’ve got a unique product that can add to the value proposition, and you can educate the [builder’s] staff to sell it, you’ve got a good proposition. It’s about everybody working together in a way that makes sense, providing value all the way through the chain.”

According to Ed Hudson, National Association of Home Builders (NAHB) director of market research, builders recently reported being “more inclined to hear the opinions of subcontractors about new products and services, and to trust their recommendations,” and that their relationships with preferred subcontractors have strengthened.

However, with the still low numbers of new home buyers in the market, they tend to handle what customers there are “with the highest degree of care” - by themselves.

For HVAC subs, positive differentiation is the key, especially where the sub can increase value and reduce costs. “When comparing installations where the buyer perceives no difference in quality or performance, the low-cost bidder is usually seen as best value,” said Hudson. “Low-cost subcontractors who are unreliable, or who offer poor quality workmanship, are not generally considered a good value.

“Subcontractors who can offer competitive prices through superior design and efficiency, while delivering high-quality work, have made the greatest gains since the housing market downturn.”

GOODBYE, McMANSIONS

Apparently some homebuyers are finished with McMansions. A 2009 Builder/American Lives New-Home Shopper Survey indicates there is a new market for the small home, under 1,300 square feet, with the most energy-efficient features possible - kicking the McMansions to the curb. And because these consumers don’t go out as much, home comfort is a priority.

“We’re going to see far more customization of production housing in the future,” the American Lives survey states. This includes higher efficiency.

“Nearly half of new-home shoppers will pay at least an extra $5,000 for energy-conserving features that would add $35 a month to their payments. Their favorite investments are high-performance windows, high-efficiency HVAC, and insulation that exceeds code.” American Lives called these “the new home builder’s secret weapon against existing home sales.”

However, “other findings suggest that builders aren’t doing a good enough job explaining the benefits of these features to customers.”

“As an HVAC contractor or distributor, are you prepared to partner with the top builders and remodelers in your area,” asked Zonefirst in a recent blog. “Have they been educated on recent advances in HVAC?

“Try hosting a remodelers’ lunch and learn at your local distributor, and bring in the big guns to educate builders on all the newest ways you can keep your customers comfortable - and happy.”

The manufacturer wondered, “why aren’t we partnering with realtors to encourage desperate home sellers to upgrade their HVAC systems? If home buyers want energy efficiency, let’s give it to them.”

Publication date: 11/22/2010