Targeted Incentives--Using Government Funds To Fill The Perception Gap

Yesterday, I wrote about Senator Merkley's new set of incentives to encourage green commercial building retrofits, and left you with the question of whether these new incentives will actually change behavior. An interesting article came out today on which highlights a barrier to incorporating green building technologies into building projects:

Appraisals for newly built green homes do not fully reflect the cost of green technology, and the lower appraisal values mean buyers often cannot get the full financing they need from banks.

In essence, according to this articel, the cost of incorporating the green features is not covered by a commensurate increase in the purchase price, causing homeowners to avoid incorporating costly green technologies, even if they represent savings in the long run. 

This is the perfect opportunity for designing a targeted grant or financing incentive.  The government agency could look at the difference in the appraisal of homes without green technologies, homes with green technologies, the cost of those technologies and the ultimate payback, and design an incentive to make up the difference.  A great example would be providing financing for green renovations at a lower rate than standard renovations.  Unfortunately, most incentives are not designed around barriers to entry and cost data, but are essentially throwing some non-targeted amount of money at the problem without analyzing would be the best amount and struture to really change behavior.

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John Stovall - March 10, 2010 12:21 PM

Two pieces of good news on this front. First, the Energy Star Mortgage program is beginning to roll out in a small number of select states at this time. In Colorado, the Governor's Energy Office is subsidizing a buydown of interest rates with the subsidy matched by a willing lender. The lower rate applies to the purchase of an energy efficient home or to the energy retrofit of an existing home. This is a rate buydown for the life of the loan, not cash at the closing table, so it doesn't do away with the larger potential downpayment problem.

The second movement is with a group of organizations working to "green" the MLS systems in a reasonably standardized way to include energy and environmental features in the listing and sold data. Since there are hundreds of independent MLS systems, this is not an exact science. This will create a database accessible to appraisers that can show a statistical correlation between the efficiency and the price paid by consumers. It will take a while to build a statistical model, but it is a start. As this is going forward, appraisers need to be reminded that a "non-green" property has measureable obsolescence and should be devalued accordingly. That process raises the relative value of the property being appraised.

Timothy R. Hughes - March 10, 2010 4:48 PM

Really, isn't the question whether the appraisals accurately reflect the real value of green homes? Or whether buyers are integrating those features into value decisions right now?

It might be a matter of semantics, but it seems like all the difference in the world regarding appraisal valuation. John's point about incorporation of these features into listings, and most importantly into MLS service information, could be a key component to value accurately reflecting these investments.

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