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Energy and the Value of a House

Paul Kando

Most people shop for a house based on purchase price, curb-appeal, amenities, and other visible features. Those are the things that advertise a house for sale, be it an in-town house, a short walk from everything in town, a rural farm house, a McMansion on a cul-de-sac or a condominium on the beach. Yet, for all its appeal, thoughtful people don’t buy a house as if it were just another product like a car, refrigerator, laptop computer or TV set.

Nor is a house some Wall Street gambling chit, to be purchased in hopes that, even as its inefficiency renders it out of date and its maintenance needs increase with age, somehow its sale price would still increase. A smart home buyer will ask, instead: “does this house satisfy my need for a comfortable and secure shelter at a price I can afford to keep on paying, month after month, year after year?” This monthly cost must match the schedule of other bills and paychecks and can turn out to be more significant for the pocketbook than the mortgage payment. After all, mortgage terms end, but other occupancy costs remain as long as we live in a house.

So the cash price of a house, although important, is a misleading indicator of the true value of a home. To illustrate, consider two houses, side by side. For simplicity’s sake both are in the same neighborhood and have a floor area of 2,000 square feet. House A has a price tag of $230,000, house B $264,000 (15% more), with mortgage payments to match: $877 per month for House A and $1,007 for House B. Annual insurance premiums add $496 per year for both houses ($41.33 per month), and property taxes round out the picture at $2,200 per year ($183.33 per month). Other costs could be added as well, e.g. snow removal, trash collection, various maintenance costs, even the cost of commuting to work. But let’s keep things simple.

House A, a typical older home, has an annual heating load of 150 million BTUs and burns 1,003 gallons of oil. At $3.00 per gallon that’s $3,009 per year ($250.75 per month). House B, on the other hand, is a new super-low energy structure with an annual heating demand of only 1,500,000 Btus, met by a “mini split” electric heat pump at a cost of $292 per year ($24.33 per month).

Adding it all up, the monthly cost of living is $1352.41 for house A and $1,255.99 for house B. So House A, the lower priced house, is $96.42 per month more expensive to live in, in spite of its $34,000 lower cash price and $130 lower monthly mortgage payment. As long as House B exists it will cost $96.42 less per month to live in it. This monthly saving adds up to $1,157.04 per year, assuming fuel prices stay level. (it will increase as energy prices rise). And, over the 30 year mortgage term, occupants of House B will end up ahead by at least $34,711.

A home buyer with a conventional mindset, comparing houses on the basis of the cash price, will miss this important information. He/she will be losing money each month, year after year, living in the “cheaper” house. In short, the cash price does not determine housing affordability, the cost of monthly occupancy does.

OK, so the real value of a house lies in the overall monthly cost of the comfort and security it offers. Yet, as prospective buyers, we seldom have access to all the information needed to make an informed decision about this cost. This is why I would like to see the law require every house offered for sale – newly built or older -- to come with an independent energy audit report, much the same way as foods come with labels detailing their nutrient, fat and sugar content.

Not only would such a law assist home buyers in making informed decisions; it would also encourage everyone contemplating building or selling a house to maximize its energy efficiency. No other “incentives” would be required. The same law would also protect the interest of renters.

Absent such a law, smart home buyers can still specify an independent energy audit report (and time to review it) as a contingency when making an offer on a house or taking delivery of one freshly built. That report (provided the audit is truly independent and not a mere marketing ploy to land a home improvement contract) will give an honest picture of not only how a given house performs, but also of what it will cost to live in or to upgrade to a state of energy efficiency acceptable to the buyer.

No one should object, unless they have something to hide.