Thursday, October 13, 2011

Barrier to Green Building

The biggest barrier to growth in new green residential construction is not technological, and it's not even cost anymore, not directly anyway.  The existence of a green building and home energy rating industry to date have demonstrated that while there are plenty of customers who wistfully wish for a green home then complain about how much extra it will cost them, there are others who will pay for it, too, and those people can help bring the cost down enough to start encompassing more and more of the people in that first group.  It is very possible to build a moderately green home at a very modest 2% cost premium.  What's more, for all those builders who complain about the extra work or the hard sell of the extra cost, there are those whose livelihoods have been made on the differentiation of being green builders.

This industry drives jobs of it's own: from the energy raters, green consultants, and green architects, to the manufacturers and distributors of innovative products.  "Green" product lines bring in additional revenue streams for existing General Manufacturers, while the demand for better products allows niches for "sustainable" manufacturers to find a market for something innovative, well.  (As the world's only manufacturer of quality, panelized, green, round houses, my company falls in that niche category)

I posit that the industry could grow bigger still, be more substantive and more influential--but the way things are currently done in the financial services sector stands in the way. This is of course tied in to the housing bubble, the great recession, and a new and ultra-conservative view on lending.   Green building is a very smart, professional, and vibrant industry--yet by and large, it seems like the banks who provide the loans that drive construction really don't know or care much about that, and neither do their armies of appraisers.

The Housing Crisis and The Foreclosure Glut

It's not completely fair to just rail against the banks; in some ways their hands are tied by the terrible economics of the current housing market.  After the housing crisis and with new financial reform legislation banks are extra adverse to anything risky, and that means higher down-payments and better credit scores and loans only to people who can really afford to have a mortgage.  That squeezes things, yes, but even that's not the main problem getting in the way of greener homes.  The problem is that the value of "energy efficiency," which makes construction costs go up, looks to the untrained eye like a bad investment on an overly pricey house.  It doesn't matter much if the extra cost is 20% (net-zero home), 2% (energy star home) or 0.02%.

Appraisers are the ones who go out and assess value for the bank,and while they have the opportunity to learn about and report the value of green building practices, the current setup gives them little incentive to innovate.  Appraisers these days tend to be hired by a large, contract agency rather than be a salaried employee of the bank.  They are often infinitely replaceable, therefore having exactly negative infinity incentive to make any sort of waves when suggesting the value of a property.  They've got wiggle room on some extra expenses that give the house a recognized higher value because historically they have added to resale:  things like granite counter tops and nice interior finishes. But even though the gain for energy efficient features is in fact a revenue stream for the owner whose benefits are quite able to be documented, it's not easy to see from the curb and doesn't have much resale precident and is therefore a risk, in a market where risk is currently unacceptable.

It's important to note here, that it's resale precedent we're talking about, not the precedent for the effectiveness of the technology itself.  Many of the people who previously have been inclined to buy high performance homes have been affluent, building a custom home, and able to put lots of money down.  These houses have existed for decades, it's just that they end up being less likely to go on the market--in part because the owners don't want to let go of their high performing homes, but mostly because the pathways to a high performance home have historically favored buyers already in a financial position that means they won't have to.  Also, since resale is often based on houses in the vicinity, high performance homes are not generally close enough together in one place to make local comparisons easy. 

Additionally, banks have a metric ton of (generally not very green) property they've inherited from delinquent mortgage-payers that they must get rid of at rock-bottom prices.  Much of that is housing bubble stock, and much of what was built in the housing bubble was built fast and cheap and had ample corners cut--the exact opposite of even the most basic of "green" buildings, which focus on quality and getting details right.  Starting to assign extra value to "green" when you've still got to find buyers for so much decidedly un-green stock is kind of like shooting yourself in the foot.

There is a market for green buildings out there: there are people who demand them, and people who supply them, and while the vast majority of these are custom homes built by homeowners who never intend to sell them, large spec house makers are beginning to get in on the deal, hoping for a new way to survive, and even among the affluent things happen such that not every homeowner can stay in his or her dream house forever.  Yet even among people who really want green, if you know won't be able to get a loan for the entire cost nor sell your home for the higher value you put into it, it becomes that much harder to decide that taking the extra step is worth it. If you are doing okay and could otherwise afford to buy a house but aren't overly rich, then perhaps it isn't. 

Education is Another Piece

It is ludicrous to think that an industry that has shown it can deliver the goods to people who very much want them will possibly be able to be held up by the cold feet of lenders forever.  What banks fear is the unknown, the un-proven asset--but it's the un-proven asset only in the narrow terms of the marketplace, in a post-crisis marketplace that is clearly a very different place than it used to be and clearly needs something more sustainable to carry it forward.  Banks haven't proved themselves to be particulary interested in educating themselves about the actually relatively proven bet of green building--that much is clear.  It sure doesn't help that for just about every aspect of life these days there's some salesman or other promising you that his product really is "green."

The lack of education as to what really makes something "green" verses "greenwashed" is in fact societal--because just like anything technological and scientific and having to do with complex systems like the environment and society--it takes some work to grasp the subtleties.  Meanwhile the allure of the green market share makes it either too much work for companies as well or else too tempting to just advertise the heck out of false or misleading claims anyway because enough gullible hippies out there will believe you to make some new profit likely.

Yet bankers tend to be intelligent people and are charged with knowing enough about houses to make loans on them, so it should be possible and worthwhile to expand their knowledge of house systems into the green sector far more than they have willingly taken it on their own.  It is incumbent upon our industry to reach out to banks and appraisers and engage them in the importance of what we do--to enough level that they are confident they can tell the difference between an Energy Star home with a HERS score of 48 and a home that the desperate homeowner wants to sell as "green" 'cause the window salesman convinced him to put in those fancy new windows. Yet it takes two to tango, so it is also incumbent upon the banks and appraisers to make the effort to get with the sustainability program, already.

The Metrics Are In Place: Let's Use Them!

Home performance is an easily obtained number.  The industry is already set up to provide that information:  through the various voluntary certification programs, such as LEED, Energy Star, NAHB Green, state programs such as NC Healthy Built Homes, but also through the simple tool of a standardized energy audit and energy score, called the Home Energy Rating Services (HERS) score.  A home with a HERS or 0 is what we call a "net-zero" home, that consumes no energy from the grid (most likely by producing it's own with on-site renewable energy) while very old homes with little or no insulation score well above 100.  Third party energy raters provide this service:  it's an additional fee and not an insigificant one, but one that would probably come down (and put more enery raters to work!) if more houses needed the service.

HERS score currenlty doesn't even feature into the real-estate market: there's no place for it in the listing service or on the appraisers form, potential homebuyers who care about energy efficiency probably don't even know to ask, and even if they did, the average home seller probably doesn't want to do this test, because the score would be pretty alarming.  But it would benefit the people who do insulation improvements to their house without going as far as a green certification, and it benefits the ones with green certifications, too, in the sense that these homes by design will have lower scores.  It's not quite as easy to understand as "miles per gallon" in a car; you can't backwards engineer it to figure out what your fuel consumption will actually be.  But most people are able to understand a 0 to 100+ point scale, taking the information about home performance from the current "?" and onto something, anyway.

With the awareness that government intervention is always a risky proposition, I nonetheless assert that some requirement for HERS scores on houses for sale would move the housing market toward better houses, with acceptable adverse consequences. Homebuyers currently know little and have very little tools available to them to get the information or get the higher performing house, if that's what they want, while builders and owners of these houses have little way for the value of what they have to be heard by the people who define what value is in the housing market.  There are already regulations in (almost all) 50 states that mandate the energy efficiency that new houses should attain, but there's virtually no testing of the performance of these measures, spotty enforcement, and no way for the average buyer to have any idea what happened and what didn't.

Opponents of regulation may argue that this creates more burdens for job-creators (house builders) and unfairly rewards one type of practice while punishing another.  As to the latter, that's the point, as the pre-housing-crisis system did too but happened to reward the kind of practice that created a poor quality product for inflated prices that folks could not actually afford, and as to the former, it creates a burden for some job-creators while creating an opportunity for others, yet notably for others in an industry that has matured rapidly and is in place to continue to grow if given the right kind of environment. We've seen that the old way of doing houses and housing finance has not worked, and the housing market is in the toilet.  The time for the changes that could make that market produce higher quality houses that more people can afford might as well be now.

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