Published in the October, 1998 issue of The Appraisal Journal
Many people are reluctant to improve the energy efficiency of their home when they might be moving out in just a few years. But the evidence is clear that investments in energy efficiency lead to higher home resale values. A recent study published in The Appraisal Journal shows that the market value of a home increases by $10 - $25 for every $1 decrease in annual fuel bills. The study confirms what many have believed for years: Energy efficiency substantially increases the market value of owner-occupied homes.
The study was conducted by ICF Consulting with funding from the Environmental Protection Agency. It involved extensive statistical analysis of American Housing Survey data collected by the Department of Housing and Urban Development between 1991 and 1996. The research was based on detailed interviews (including a review of energy bills) that are conducted every other year at a sample of over 16,000 housing units all across the nation. Even taking many other correlated home features into account, the study confirmed energy efficiency improvements do result in higher home values:
"With after-tax interest rates between 4% -10% and stable fuel price expectations, home buyers should pay $10 – $25 more for every dollar reduction in annual fuel bills resulting from energy efficiency1"
If home buyers expect stable fuel prices, and after-tax mortgage interest rates are in the 4-10% range, then the logic is straightforward. Paying $10 up front to save $1 on your annual fuel bill is like making an energy efficiency investment having a 10% return. Paying $25 up front to get the same $1 in annual savings yields a 4% return. ICF’s study confirms that the housing market really does reward those who invest in energy efficiency with a higher price at resale.
The most important conclusion from this research is that homeowners can profit by investing in energy efficiency, even if they don’t know how long they will be staying in the home. “If their reduction in monthly fuel bills exceeds the after-tax mortgage interest paid to finance energy efficiency investments, then they will enjoy positive cash flow for as long as they live in their home and can also expect to recover their investment in energy efficiency when they sell their home."
These findings are backed up by seven other studies conducted since 1981, all of which found higher home values associated with energy efficiency. The three most recent of these report home value increases of between $11 and $21 for every dollar saved through reductions in annual fuel bills.But why do some homeowners still hesitate to increase their insulation levels or replace those old windows? Many are concerned that appraisers won’t take their improvements into account and that therefore they won’t get credit for these investments. But these studies show that even if an appraiser fails to cite these improvements, home buyers do notice and are willing to pay more.
What can you do?
Make sure your appraiser and your real
estate agent know you made the energy efficiency
improvements and let them know about this important research.
Estimated Increase in Resale Value for Energy Efficiency Upgrades* |
|||||
Recommended Energy Efficiency Upgrade |
Annual Savings |
Projected Home Value Increase |
|||
Replace old single pane windows with energy efficient double pane windows |
$350 |
$7,000 |
|||
Replace old central air conditioning unit with new energy efficient system. (hot climates) |
$300 |
$6,000 |
|||
Replace old furnace with new energy efficient furnace (cold climates) |
$300 |
$6,000 |
|||
Seal and insulate duct system |
$250 |
$5,000 |
|||
Install Programmable Thermostat |
$80 |
$1,600 |
|||
Added to the article for reference
*Savings shown are rough estimates for typical homes built before 1980. Actual savings will vary depending on climate, current equipment characteristics, fuel prices, and occupant behavior. Projected Home Value Increases are based on the study, "Evidence of Rational Market Valuations for Home Energy Efficiency" by Rick Nevin and Gregory Watson, published in the October, 1998 issue of The Appraisal Journal. | |||||
