Why Increasing Information on a Home’s Energy Use Will Help Homebuyers Make Smarter Decisions

What if people could have access to a piece of valuable information that they don’t currently receive about the house they are considering for purchase?  What if this could happen with very little bureaucracy and limited program implementation costs? Sound appealing? While home inspections to ensure safety and structural soundness have long been part of the home buying process, and while real estate taxes and home insurance costs have been regularly accounted for in mortgage underwriting calculations, one major cost to homeowners has been left in the dark at the time of sale---the cost of the energy needed to “run” your new home.  

In a new report by ACEEE, Residential Energy Use Disclosure: A Review of Existing Policies, fourteen U.S. residential energy use disclosure laws were examined in order to shed light on how residential energy disclosure policies can most effectively reach homebuyers and renters in single-family homes and multifamily buildings. While commercial benchmarking is quickly becoming a hot policy in many major U.S. cities, residential policies have popped up in a remarkably diverse spread of jurisdictions---some of which have few, if any, other energy efficiency policies on the books.  

Increasing the transparency of information around the home buying process and increasing consumer awareness of the real costs of home ownership is crucial in a post-mortgage crisis environment. The average homeowner spends approximately $2,000 every year on energy used in their home, a considerable sum that is greater than the cost of the average home insurance policy and property tax combined. Yet this cost is not often realized—conventional mortgage underwriting ignores the amount of money a homeowner will spend on energy every year. For someone carefully determining manageable monthly mortgage payments, an unexpected extra $100-200 a month in energy costs can be a significant burden. A recent study by the Institute for Market Transformation found that the less energy a home consumes, the lower the chance of defaulting on a mortgage. A sample of 71,000 ENERGY STAR and non-ENERGY STAR single-family home mortgages revealed that default risks are 32 percent lower on average in energy-efficient homes. Residential energy use disclosure serves to provide that valuable cost information when a home is placed on the market.       

Initial experimentation with residential energy disclosure policies around the country highlights potential challenges, but also helps to provide examples of how to work past these barriers.  While much of the pushback against disclosure policies has come from realtors in the past, examples of smart collaboration efforts in Austin, Texas and Chicago Illinois, suggest how mutual design and implementation of policies can lead to more robust and useful energy disclosure. In Santa Fe, New Mexico, a residential disclosure ordinance requiring all new homes to post Home Energy Rating System (HERS) index ratings (a measure of a home’s energy performance based on an onsite inspection of the home’s features) took effect in 2008. After substantial discussions with interested stakeholders, the City Council adopted a more stringent policy, requiring homes to meet a specific HERS index score. Our review of the ordinance’s implementation indicates that because enforcement is tied to the existing building code, all new homes in the first 1.5 years the policy was in place had a HERS rating performed. 

To support these initial efforts, further evaluation is needed to reveal the most effective ways to design and implement policies that disclose home energy use to renters and buyers. As legislators across the country continue to pursue this promising policy option, partnerships with local stakeholders combined with well-designed policies will be crucial to the success of residential energy disclosure laws.