Energy Code and Home Affordability
by Flagstaff City Councilman Jeff Oravits
On Tuesday, July 2, 6:00PM at City Hall, Council will be voting to adopt the 2012 International Energy Code. Adoption of this code will make the upfront cost of building a home in Flagstaff more expensive. This is the indisputable fact that proponents of the code try and glaze over by focusing and touting energy savings over time.
The trouble with this argument is that projections on recouping your initial investment ranges from 9.6 years (best case) and NEVER (worst case). And the data varies greatly! What’s worse is that proponents fail to acknowledge those who will be shut out of an already high priced Flagstaff real estate market altogether through increased costs.
HERE’S SOME DATA ON THE 2012 INTERNATIONAL ENERGY CODE based on several studies and various assumptions.
√ COST OF FLAGSTAFF HOUSING IS GOING UP
INCREASED UP FRONT COSTS for a home in Flagstaff:
• $2,325 as per Department of Energy Study
• $5,872 as per Coconino County Study
√ MORTGAGE PAYMENTS GOING UP
EXTRA MONTHLY COSTS
• $12.48/mo ($149/yr) to finance $2,325 at 5% interest
• $31.52/mo ($378/yr) to finance $5,872 at 5% interest
One study claims that a homeowner in our region will save $391 per year in energy costs. So here’s how that breaks down based off of the upfront initial investment of $2,325, as per the DOE Study, and $5,872, as per a study released by Coconino County.
√ ESTIMATED BREAK EVEN PERIOD
YEARS TO GET BACK UP FRONT COSTS (ROI)
• 9.6 years if $2,325 is financed at 5%
• NEVER (or minimum of 30 years) if $5,872 is financed at 5%
So somewhere between 9.6 years and NEVER is what a homeowner can expect in order to make back their initial upfront investment. As you can see, slight changes in cost change the outcome dramatically.
BUT WHAT IF INTEREST RATES GO UP?
A serious flaw in the calculations on return on investment, how long it takes to make back the upfront cost, is that the interest rate is factored at 5%, which is near a historic low. The long term average for interest rates is 8.6%. A serious flaw that changes the numbers drastically. So here are the numbers at 8.6%.
√ MORTGAGE PAYMENTS REALLY GOING UP
EXTRA MONTHLY COSTS
• $18.04/mo ($216/yr) to finance $2,325 at 8.6% interest
• $45.57/mo ($546/yr) to finance $5,872 at 8.6% interest
√ ESTIMATED BREAK EVEN PERIOD**
YEARS TO PAYING BACK UP FRONT COSTS (ROI)
• 13 years if $2,325 is financed at 8.6%
• NEVER get your investment back if $5,872 is financed at 8.6%
BUT WHAT IF ESTIMATES ARE WRONG?
What if these studies are wrong? What if other variables are wrong? As shown above, just slight changes in data change the outcome dramatically.
ALL THESE COSTS ADD UP
You’ll often hear the argument that it’s only (inset number here) extra per month for (insert mandate, tax or cause here). In the case of the energy code “it’s only $12.48 per month” (or $45.57 or whatever). The reality is though that it’s the cumulative effect of all these “small” expenses that are adding up and financially hurting so many in Flagstaff. In fact Flagstaff is already 44% above the national average for housing. How much above the national average will Flagstaff be after adoption of the Energy Code?
An article by Joe Ferguson from December 5, 2007 states that the adoption of the 2006 Energy Code, which Council adopted in 2007, would add $1,050 to the cost of a home in Flagstaff. So we can add that “small” increase as well. But remember, it was “only” $1,050 back then. Here we are six years later “only” adding $2,325, or $5,872, depending on which study is used.
The bottom line is that every time you add a “small” cost increase to many other costs to build in Flagstaff, it all adds up. Many people who argue in favor of the energy code also argue for affordable housing. How in world could anyone arguing in favor of the adoption of the 2012 Energy Code ever be able to argue for “affordable housing” again?
COST FOR COMMERCIAL CONSTRUCTION, GOING UP!
The Energy Code won’t just affect the cost of housing in Flagstaff. It will also increase the cost for businesses through increased construction cost for commercial buildings. How is this going to help our economy grow?
How much will commercial construction incresase? No studies have been presented with any cost estimate whatsoever on estimated additional costs. Zero, nada, not one! How can anyone responsibly argue in favor of new codes without cost estimates for commercial applications? How could anyone in favor of this code not knowing its impact on businesses ever argue again that they want to grow our economy and make it easier to do business in Flagstaff?
DO THEY REALLY WANT AFFORDABLE HOUSING?
I’ve spoken with many of Flagstaff’s banks and mortgage brokers. The reality proponents of the energy code won’t admit to is that the majority of lenders do not look at energy costs when factoring in whether or not someone qualifies for a mortgage. That’s not to say there are not a few banks offering specialty loans that take into account energy savings. Problem is this is currently a niche market and many buyers may not qualify for these loans.
There is a potential that these increased costs may cut what I call ‘bubble buyers’, those that are right on the line, in qualifying for a home loan, out of the market. Isn’t it already hard enough to buy a home in Flagstaff?
The industry standard in lending is based off of a loan to value (LTV) ratio and do not factor in energy savings. Put simply, if someone qualifies for a $200,000 loan and you add $1 to that, they no longer qualify. Put another way, if you qualify for a $1,000 a month mortgage and if you add $12 a month to a mortgage payment due to increased construction costs due to the energy code, you no longer qualify, despite projected energy savings. It’s just the financial and mathematical reality.
EXISTING HOMES WILL INCREASE IN PRICE
These increased costs will eventually trickle down to the existing housing market (used homes) as well. Let me explain. Let’s say you live in a 2,000 square foot house built in 1986. Next door is a vacant lot, same size as your lot. Someone buys that lot and builds a new 2,000 square foot home with similar layout and features as your home and uses the 2012 Energy Code.
The following year they sell that house for $300,000. So you decide to sell your house a few months later and you list it at $310,000 and someone offers you $300,000 and you take it. An appraiser determines if that value is fair. What does the appraiser use to determine this? They use the house right next door that recently sold for $300,000. It’s the best comp available.
Location and square footage is what they look at in determining value. Sure other factors come into play such as condition and upgrade (hot tub, etc) but the main determination is location and square footage in determining value. I have yet to see the thickness of insulation as a determining factor in appraised value. Just look at historic downtown houses as an example. They were built to standards from the early 1900’s and are some of the highest priced real estate in town despite minimal to no building codes from that period. Why? Because people pay based off of location and square footage among other factors.
RENTS GOING UP
If you rent your home or apartment, this will effect you as well. For the same reasons listed above, as overall values go up due to market and or fixed costs due to regulation and other factors, rents will slowly creep up. This is simply how the market works and those that dispute this simply are not knowledgable in terms of economics or have another agenda.
The new code and the many other “small” extra monthly expenses have slowly added up and continues to push people out of the market and many times out of Flagstaff altogether. It’s easy for those who are already in a home or those that a few extra dollars on a loan mean little to balk at these “small” increases, but for those buyers already priced out of the Flagstaff market, this is just another increased expense among many that ultimately will deter people from owning a home in Flagstaff.
While I’m not opposed to homes being built using the 2012 standards, I believe it should be an option and not mandatory. Using the 2006 energy codes, which Flagstaff currently uses seems to be a fair balance between energy savings and upfront construction costs.
I’ll continue to be a proponent for less up front expenses and more affordability in Flagstaff and for expanding the opportunity of homeownership to as many of Flagstaff’s residents as possible.
*According to YCharts.com: “US 30 Year Mortgage Rate is at 3.93%, compared to 3.98% last week and 3.71% last year. This is lower than the long term average of 8.65%”
**Estimated energy savings of $391 per year (DOE study).