In my last blog I pointed out that the return on investment for a homeowner in Flagstaff if the energy code passes this Tuesday is poor to say the least. I cited data that shows a return on investment between 9.6 and 451 years.
I have to be honest, I have been utterly mortified by the amount of people that just don’t understand return on investment. I even received an email from a “wealth advisor” encouraging me to vote for the energy code. I replied, “have you done the math on this investment?” I have not received a response to date.
Someone was also kind enough to point out to me that there are not 451 year mortgages. I’d point out the real issue is that people don’t live to be 451 years old.
All kidding aside, I must fess up, there are not 451 year mortgages! And to this person’s credit, in the absence of perpetual mortgages, the loan should be paid off in 30 years. That is of course assuming you stay in your house 30 years and do not refinance the mortgage. Statistically though, 67% of Americans have a mortgage and many never pay it off, going from mortgage to mortgage or from refinance to refinance.
But let’s assume a homeowner pays off their mortgage in 30 years. They should expect to recoup their $5,872 initial investment due to the energy code after 30 years in this example? Not exactly.
Even in this scenario after 30 years a homeowner would recoup $13 per year for a grand total of $390 recouped by year 30. So that would leave $5,482 of your original $5,872 investment left to recoup. With an estimated $391 a year in energy savings* it would take another 14 years to make back your investment.
So in this case, 44 years to make back your “investment”. I would worry about someone’s financial future if they think putting up (through financing) $5,872 to get back $13 a year was a good investment.
If you think this is a good investment, I’ve got a bridge I want to sell you and if you are a politician and think this is a good investment I fear for our nation’s future.
$391 (annual energy savings as per DOE study) –
$378 (annual increased mortgage, based off of $5,872 financed at 5% for 30 years) =
$13 (savings per year)
$13 x 30 years = $390.
$5,872 (initial investment) – $390(30 year savings) = $5,482 (remaining investment to recoup)
$5482 / $391 (annual energy savings) = 14.02 years.
30 years + 14 years = 44 years.
* I anticipate an email stating that over time energy savings per year will go up due to energy price increases. I did not factor inflationary pricing and all figures are in today’s dollars. It would take an entire book on finance, inflation and investment to delve into that subject.