Emily Badger is a former staff writer at CityLab. Her work has previously appeared in Pacific Standard, GOOD, The Christian Science Monitor, and The New York Times. She lives in the Washington, D.C. area.
Should federal mortgage guidelines take this into account?
Green builders and environmental advocates have long suspected it to be true that families living in energy-efficient homes might be less likely to get in trouble making their monthly mortgage payments. Their energy bills are lower and more predictable, without those wild swings between summer’s air conditioning costs and winter’s heating oil delivery. It also seems plausible that a homeowner who has weighed the up-front costs of energy improvements over the long-term payoff in lower utility bills might be equally conscientious in sizing up the risks of a 30-year mortgage.
But there’s never been hard data to support any of this – let alone to help make the case that energy efficiency should be baked into how we underwrite mortgages.
A new study released today attempts for the first time to quantify the connection between energy efficiency and default risk. The research, funded by the Institute for Market Transformation and led by University of North Carolina researcher Nikhil Kaza, looked at 71,000 nationally representative owner-occupied single-family homes, 21,000 of them with Energy Star certifications. And it turns out the energy-efficient houses were 32 percent less likely to go into default when sized up against comparable homes without that rating.
The study looked at loans that originated between 2002 and 2012, spanning the mortgage crisis. And it also found that the more energy-efficient the house, the lower the default risk.
The researchers controlled for the size and age of the houses, neighborhood income, climate, home value, local unemployment rates, utility prices and borrower credit scores, among other variables. And so this is not a snapshot of pricey solar-powered homes compared to 1950s-era bungalows.
“We’re going to similar homes in the same neighborhoods, with the same price, with the same credit scores of the borrowers,” says Robert Sahidi, a co-author of the report’s executive summary and the director of the Energy Efficiency Finance Policy program at IMT. “It’s not like were picking somebody making $100,000 and comparing it to somebody making $50,000 with a lower credit score and a lower home price.”
The average sale price of the non-Energy Star homes in the study was $218,461 (for 2,183 square feet), and $221,919 for the Energy Star homes (for 2,283 square feet). The homes also came from fairly prosperous zipcodes with average income of about $73,000 and an unemployment rate of 6.4 percent. On this map, the Energy-Star homes studied in the paper are noted in red and the control homes in blue (data was unavailable for states like California that aren’t represented):
As best as the researchers can tell in their data, there’s little visible difference between the two groups that might explain their varying default rates, other than the efficiency of their homes.
“There’s always going to be some portion of unobserved variables that might explain some of this result,” says Kaza, who’s a researcher with the UNC-Chapel Hill Center for Community Capital. “But we tried as much as we can to make sure control and treatment groups are roughly similar.”
He can’t say, though, exactly why the default rates are significantly different. Does the added cost of all those utility bills really add up to the difference between defaulting on a mortgage or staying on top of it? Or is there some other explanation at play – that, for instance, the owners of energy-efficient homes are happier with where they live and more likely to try hard to stay there? Green homes can also be healthier ones, meaning that the families who live there may have lower medical expenses tugging at the family budget from another direction.
“But under certain circumstances,” says Cliff Majersik, the executive director of IMT, “you can act on data like this without knowing which portion comes from lower utility bills, which portion comes from healthier homes, which portion comes from happier homeowners.”
This evidence is enough, he argues, to justify adjusting federal mortgage guidelines to take into account the fact that would-be owners of energy-efficient homes pose a lower risk of default. A similar argument has been made about “location-efficient” homes, where homeowners arguably have more money to spend on housing as a result of their lower transportation costs. One day, it’s possible that federal mortgage guidelines could pursue these two ideas in tandem, weighting the benefits of housing that comes with both lower utility and transportation costs – and, in the process, increasing market demand for it.