Efficient Windows Top List of Green Products Used by Remodelers

May 22, 2014

Energy efficient windows emerged as the leading green product among remodelers responding to NAHB’s Remodeling Market Index (RMI) survey for the first quarter of 2014, as nearly 9 out of 10 remodelers surveyed said they’d commonly used low-e windows during the past year.  Next on the list were high efficiency HVAC systems and programmable thermostats at 70 percent each, closely followed by ENERGY STAR appliances at 69 percent.

Green Remod

Although the features at the top of the list all involve energy eficiency, the term “green” is usually defined more broadly than that.  Moisture control, for example, is classified as green here, because it results in some components of the home needing to be replaced less often, reducing environmental impacts associated with manufacturing, transporting and installing those components over time. The list of 23 green products and practices used in the RMI survey is based on the major sections of the National Green Building Standard (which can and should be applied to remodeling as well as new construction).

Given the difference in cost, it’s perhaps surprising that use of program-mable thermostats is no more common than use of high efficiency HVAC among remodelers.  Anecdotally, several NAHB members have reported that a small but discernible share of their customers tend to resist devices that require programming.  A similar result was found in a survey on green products and practices used by single-family builders.

It’s also interesting that, across the two surveys, the same four green features appear at the top of the list and in the same order for both remodelers and builders.  The remodelers’ percentages tend to be a little lower, but this is natural, because not every remodeling project involves every home component. High efficiency HVAC systems, for example (the second ranked green feature for both builders and remodelers) are commonly used by 90 percent of builders, compared to 70 percent of remodelers.  But remodelers who specialized in projects like replacing windows or building decks in 2013 may have seldom if ever needed to install HVAC systems, while builders of new homes would have, at some point, dealt with every aspect of HVAC.


Number 1 Reason to Remodel: Simple Desire for New Amenities

May 7, 2014

According to remodelers who answered special questions on NAHB’s Remodeling Market Index (RMI) survey for the 1st quarter of 2014, a simple “desire for better/newer amenities” ranked as the number one reason customers choose to remodel their homes. On a scale of 1 to 5 (where 1 indicates never or almost never, and 5 is very often), the average remodeler’s response was 4.3.

“Desire for better/newer amenities” edged out the second place “need to repair/replace old components” by one tenth of a point. These traditional market drivers were the only reasons to remodel with an average rating above 4.0. Another fairly traditional reason, “desire/need for more space” came in third at 3.7.

Reasons to remodel that are of special interest to particular stakeholders—like aging in place and energy efficiency—were further down the list, with average responses near the 3.0 center of the scale. Relatively low average ratings for increasing the home’s investment value or preparing it for a sale continue to support the idea that owners are more likely to remodel for themselves than for future owners. Getting a property ready for a distressed sale scored a particularly low 1.3 (very near the minimum possible 1.0).Remodeling Reasons 2013At the margin, of course, less common reasons to remodel can still fuel an increase in activity if they are on the rise. However, this is only the second time we’ve asked the “reasons to remodel” question on the RMI survey (the first being in the first quarter of 2012), and most of the answers on average changed very little in the intervening two years. Indeed, the average rating for 9 of the 12 categories changed by one tenth of a point or less.

One exception was an increase from 2.8 to 3.0 in the “desire to be able to age in place,” something many observers were probably expecting given the aging population. “Desire/need for more space” also increased two tenths of a point. “Desire for better/newer amenities” posted the largest gain, going from 4.0 to 4.3. A rise in remodeling projects motivated by desire for more space or better amenities is consistent with the general housing market recovery that many experts expect to continue.

This is the second item we’ve posted in May in recognition of National Home Remodeling Month. The first was on the most common types of remodeling projects.


Energy Tax Credits: Large Impacts After 2010 Rule Changes

March 21, 2014

In 2005, Congress established a number of energy-efficiency tax incentives related to housing. These policies include the tax code section 45L credit for the construction of energy-efficient homes, the 25C credit for retrofitting existing homes, and the 25D credit for the installation of power production property in new and existing homes.

Using earlier IRS data for tax year 2009, we previously examined who benefitted from the 25C and 25D credits, as well as how homeowners used the credits. Last year, we examined the 2010 data for these credits.

With the publication of the tax year 2011 IRS data for 25C and 25D, significant reductions in use are clearly seen due to the rule changes that occurred at the end of 2010.

For example, from 2009 through the end of 2010, the 25C credit for existing homes was available as a 30% credit and $1,500 limit. After the extension of the “tax extenders” legislation at the end of 2010, those rules were pared back and retained when the credit was extended again as part of the Fiscal Cliff deal. Among those rule changes, the credit was reduced to a 10% rate and a $500 lifetime cap was imposed. It is worth noting that this version of the credit, along with many other tax extenders, expired at the end of 2013.

25C_2011

The 2011 IRS data show significant declines in 25C use as a result of the 2010 changes. The largest impact came from energy-efficient windows, for which the total dollar volume of installed qualified property fell from about $7.8 billion to approximately $1.4 billion. Qualified furnace installations declined by more than $5 billion, reaching a 2011 total of about $180 million.

Tax credit qualified insulation installations fell by more than $1.5 billion but was the largest category in 2011 at a total of $1.87 billion. Roofing retrofits were second with a tally of $1.4 billion.

In total, more than $6 billion of qualified improvements were made in 2011 in connection with the 25C credit. These expenditures resulted in more than $750 million in tax credits for just shy of 3.5 million homeowners.

25D_2011

 

In contrast, tax credit use under section 25D of the code expanded in 2011 from 2010 levels. The 25D credit is for installation of qualified power production property in both new and existing homes. The credit is equal to 30% of expenditures, including certain labor costs and is claimed by the homeowner. Unlike the 25C credit, the 25D program remains in law and is scheduled to sunset at the end of 2016.

The most popular 25D investment in 2011 was the installation of residential solar panels. 25D qualified solar electric property investments totaled almost $1.5 billion in 2011 for more than 100,000 taxpayers. It is worth noting that these solar installations reflect credits claimed for electrical system integrated panels that provide power for the home, as well as panels used to power stand-alone property like attic fans.

The second largest category was geothermal heat pumps, with $1.2 billion of installations claimed by more than 70,000 homeowners. The geothermal category experienced the largest growth in 2011 in terms of tax credit claims, up almost $300 million in total installations over 2010 totals.

In total, for 2011 there were $3.03 billion of qualified power production investments yielding about $921 million in 25D credits.

Given the rising popularity of items like solar panels, builders are well advised to examine the 25D program for prospective homeowners. The 25D credit can be awarded in new construction by providing the eventual homeowner an itemized breakout of material and labor costs associated with qualified property installation, so that the homeowner can claim the credit on their income tax return. An IRS Q&A on 25D and 25C can be found here.


Senate Finance Staff Discussion Draft: Energy Tax Incentives

December 23, 2013

Last week saw the release of yet another discussion draft from the staff of the Senate Finance Committee concerning tax reform. Following draft proposals concerning depreciation/accounting and other business expenses (such as advertising), the most recent draft proposes changes to the tax code’s rules concerning energy production and energy-efficient improvements.

Under the draft proposal, most existing energy tax incentives would be eliminated or otherwise allowed to sunset and replaced by two credits.

The first would be a tax credit for the production of clean energy, with the value of the credit determined by the amount of greenhouse gases produced during production – greener production, more credit. The credit could be claimed either as an energy production credit or an investment credit of up to 20% based on installed qualified equipment. The credit would become effective for new power production facilities after January 1, 2017, although after 2016 a 20% credit would be available for existing facilities that retrofit to capture at least 50% of carbon dioxide emissions. The credit would phase out when U.S. electricity production emits 25% less in greenhouse emissions.

The second credit would reward the production of any transportation fuel that is 25% cleaner than conventional gasoline. The maximum credit would be $1 per gallon, with the actual credit determined for the fuel relative to gasoline. The credit would begin in 2017. Alternatively, an investment credit would be available based on 20% of the value new, qualified production facilities.

In turn, the draft proposal would eliminate or phase out almost all existing energy tax incentives. For housing, this means:

  • The section 25C tax credit for energy-efficient improvements to existing homes would sunset permanently at the end of 2013
  • The section 45L $2000 tax credit for the construction of new energy-efficient homes would sunset permanently at the end of 2013
  • The section 179D credit for commercial and multifamily energy-efficient improvements, as proposed in the cost recovery draft, would be eliminated

The section 25D 30% tax credit for residential solar, geothermal, wind turbines, and fuel cells would remain under present law, but the December 31, 2016 sunset would be enforced.

It is estimated that these changes on net could raise $75 billion in tax revenue over ten years.

A number of general principles are embodied in this proposal, with negative consequences for housing and real estate measured against present policy.

First, the proposed approach would clearly favor energy production over energy conservation and retrofitting. Improving existing buildings, or constructing energy-efficient properties with long-run benefits for potential future owners, is an approach that is rewarded under the existing tax credit system.

Second, the proposed tax benefits for energy production appear to exclude homeowners and perhaps some rental housing and commercial real estate owners. The proposed legislative drafts indicate that for a taxpayer to qualify for the investment credit (as homeowners can do now under the 25D credit), the installed property must be eligible for depreciation. Homeowners do not claim depreciation deductions, so it appears power produced by an owner-occupied home would not be eligible. Furthermore, to qualify for the first tax credit noted above, any electricity produced on site must be sold to either an unrelated party or metered and monitored by a third-party. This rule may exclude some apartment and commercial real estate owners from the proposed tax rule for on site power production.

If this preliminary analysis is correct, excluding on-site power production is a policy mistake given such production does not suffer from transmission losses. According to the Department of Energy’s Energy Information Administration (EIA), “annual electricity transmission and distribution losses average about 7% of the electricity that is transmitted in the United States.”

NAHB will continue to review the proposal, which could be included in future comprehensive tax reform proposals, and submit comments to the Senate Finance Committee in January. In meantime, discussion is beginning to pick up concerning energy tax extender items, including the section 25C and 45L credits, which expire at the end of 2013.


Average Monthly Electric Bill by State

December 2, 2013

The average monthly electric bill for residential properties in Hawaii was $203.15, the highest in the nation for 2012, according to recently released data from the U.S. Energy Information Administration (EIA). The average residential electric bill, by contrast, in New Mexico was $74.62, the lowest in the nation. In the contiguous United States, the South Atlantic region had the highest average monthly electric bill at $122.71, while the Pacific region (California, Oregon, and Washington) had the lowest.

Map6

The EIA is the government agency responsible for the collection and dissemination of energy information. EIA conducts an annual survey of the electric power industry. Results from the survey are used to estimate the average residential monthly electric bill by state.

The four categories of electric industry consumers tracked by the EIA are residential, commercial, industrial, and transportation. Residential consumers account for the largest share of electric industry sales at 37.2% with commercial consumers a close second at 35.9%. Industrial consumers account for 26.7% of sales.

Chart1

In addition to being the largest category of consumers, residential consumers generally pay the highest prices. The average retail price paid by U.S. residential consumers in 2012 was 11.88 cents/kWh. The average retail price paid by commercial consumers was 10.09 cents/kWh while industrial consumers paid 6.67 cents/kWh.

The EIA also provides estimates of average residential monthly consumption and price by state. The average residential monthly price is given cents per kilowatt hour. A direct link to the 2012 statistics is provided below.

2012 Average Monthly Bill – Residential Electric

In 2012, the state with highest average monthly consumption was Louisiana at 1,254 kilowatt hours. The state with the lowest average monthly consumption was Maine at 531 kilowatt hours. The New England region had the lowest average monthly consumption. According to the EIA, over 80% of the homes in the Northeast rely on heating oil for space heating instead of electricity.

Chart2

In 2012, the state with the highest average retail price was Hawaii at 37.34 cents/kWh. The state with the lowest average retail price was Louisiana at 8.37 cents/kWh.

Chart3

The electric bill is a large part of the residential energy expenditures. Understanding differences in electric consumption and price by state is useful for home builders as energy efficiency is becoming a more desired feature. However, homeowners do expect a reasonable period of payback. A recent NAHB study examining home buyer preferences found that nine out of ten buyers would pay a 2 percent to 3 percent premium for a home with energy-efficient features and permanently lower utility bills. Homeowners in states with higher electrical prices are more likely to be interested in residential power production, like solar.

 


Rise of Solar Powered Homes

October 24, 2013

The count of homes powered by photovoltaic (PV) systems is rising. And while solar-powered homes remain a small share of the total housing stock, that share is growing through a combination of policy incentives and homebuyer preferences.

Among the top features homebuyers are seeking in a home is energy-efficiency. In fact, in a 2012 NAHB study of homebuyer preferences, energy-efficiency elements ranked as top items sought in a home.

Helping to encourage such market preferences, state/local governments, along with the federal government, offer a number of tax and rebate incentives that reward investment in energy-related residential features. For example, in 2005 Congress established a 30% tax credit for power production property installed in a home, including solar panels. Also known as the section 25D tax credit, this program promoted a total of $1.5 billion in solar property in approximately 100,000 homes in 2010, according to IRS data.

And thanks to data from two studies from the Lawrence Berkeley National Laboratory (“Tracking the Sun VI” and “SEIA/GTM Research U.S. Solar Market Insight 2012 Year in Review”), we can examine the state-level counts of solar-powered single-family homes.

Share_Solar_Map3

The map above charts the share of the single-family housing stock in each state that possessed PV systems as of 2012. States in white did not have a specific breakout, but in general these states represent small totals – no more than 3% of the national total of solar-powered homes.

The largest count of solar-power homes is in California, with a total of more than 143,000 houses. Arizona is second with almost 24,000, and both Hawaii and New Jersey have more than 15,000 homes with PV systems.

Clearly, homes in states located in the West are more likely to have installed PV systems. Interestingly, another concentration lies in the Northeast and Mid-Atlantic regions, where perhaps higher average incomes allow homebuyers to achieve the housing preferences identified above. Additionally, the state of New Jersey is worth noting as having higher share due to the combination of state renewable energy rules and monetary incentives.

Another factor determining regional patterns is the local cost of power. Areas of the nation with relatively higher power costs, such as the Northeast, make solar and other residential power production property a more attractive option.

The future of solar power for housing remains bright in the short-run. The section 25D credit is scheduled to remain in law until the end of 2016. And increasingly builders are selling homes with solar power features or the infrastructure required for future installation.


Energy Efficiency Should Yield 10 Percent-Plus Return, Study Says

June 28, 2013

A study published in June  presents evidence in support of NAHB’s policy, which classifies a change in building codes as cost effective if it returns at least 10 percent in energy savings the first year.

The study argues that a common alternative to NAHB’s policy, using the current mortgage rate to evaluate energy efficiency, is an unrealistic assumption and produces unrealistic results.  In particular, taking the mortgage rate to be representative of the rate of return home buyers require fails to capture borrowing constraints and doesn’t reflect the way buyers actually evaluate alternatives when deciding on which features to include in a new house.

The study presents evidence from three different sources indicating that the rate of return that drives most home buyer decisions is much higher (summarized in the chart below).

Avg Rates in Housing

Notice that the 10 percent return in NAHB’s policy is slightly below the rates from these three sources, but is at least in the general neighborhood.  The current mortgage rate, on the other hand, is far too low at under 4 percent.  Using a rate this low to evaluate savings on utility bills will classify as cost effective some features that are clearly priced higher than the market will bear.

This doesn’t mean that home buyers are apathetic about energy efficiency or are unwilling to pay for it.  NAHB’s latest consumer survey provides clear evidence that home buyers care about energy efficiency and are willing to pay for it.  But there are limits on how much they will pay up front relative to the annual savings they can expect.

The study also shows that rates of return should be higher at the affordable end of the housing spectrum—where first-time buyers and buyers with modest incomes are likely to be living paycheck to paycheck and therefore need a higher return in exchange for an immediate sacrifice.  Further details, including documentation of data sources, are available in the full study.