Builders often say that they want to build the best possible home for consumers. In many locations, they now have a new way to display that quality. Like automobile stickers, home energy ratings give homebuyers a “miles per gallon” type of number which they can use to compare home energy performance. Builders, too, often use the number as an indicator of quality. The most aggressive of them even compete to capture the best possible rating.

Energy ratings are used in three important ways. First, homes can receive ratings when they are placed on the market so that consumers see an indication of the home’s energy performance. Second, builders strive to hit a rating target to demonstrate compliance with the energy provisions of a building code. Finally, ratings are used to document the impact of energy improvements for loan applications.


Ratings Drive the Market

Home energy ratings make energy performance more visible to buyers. While there are many considerations in the decision to buy a home, these ratings give consumers a clear indication of the costs required to operate the home. Since consumers consistently declare their preference for energy-efficient homes, this market-centric approach promises to  facilitate the growth of higher-performance homes.

Some in the real estate industry fear that this approach may impede sales. That seems unlikely given the example of automobile MPG stickers. Sales of gas-guzzlers are still robust despite the daunting information on their fuel economy stickers. Like auto consumers, home buyers have many needs. Few buyers will let a single factor dictate a purchase choice. Home buyers who need large homes will shop for large homes, comparing them to homes of a similar size. If a free market economy functions on accurate information, then energy ratings are essential to making smart consumer decisions. They allow greater accuracy in household budgeting and they support a higher resale value.

With that in mind, several local governments around the U.S. now mandate some type of energy rating when a home is placed on the market. The City of Portland, Oregon, is the most recent local government to require that home energy ratings be determined and the results communicated to potential buyers.

“Most houses are sold without consideration of the home’s energy performance,” said David Heslam, the Executive Director of Earth Advantage, a Portland-based nonprofit organization that helped draft the policy. “The scale of this policy represents a great opportunity for local real estate and lending professionals to consider it every time a home is put on the market, make it part of their daily activities, and allow home buyers and sellers to make the most out of home performance.”

In addition to Portland, home energy disclosures of some kind are required at the time of sale by many local governments, including Austin, Texas; Berkeley, California; and the State of Kansas; Voluntary disclosure is formally encouraged in California, Florida, and many other states.


Ratings Offer Building Code Options

Codes generally prescribe specific details for builders to follow. For example, they might say that walls must contain R-21 insulation, furnaces must be rated at 90% efficiency, or that the maximum flow of a showerhead is 1.5 gallons per minute. While prescriptive codes are easy to follow, they tend to limit creativity and can sometimes result in higher costs.

Energy ratings offer a “performance-based” alternative to prescriptive codes that set an overall energy use target for a building. Many variables affect building performance, including climate, orientation, size, shape, window area and many others. By focusing on overall performance and operating cost, energy ratings help designers optimize building features. Thoughtful use of ratings and the underlying energy calculations will help builders optimize performance and operating cost as the construction industry moves toward zero energy building standards.

Energy ratings were introduced as a pathway to code compliance in the 2015 International Energy Efficiency Code, which many areas use as a model for local codes. Utah is the most recent state to adopt this approach. Linked to the Home Energy Ratings System (HERS), Utah considers a score of 70 to meet energy code requirements. That’s about 39% better than a home built in 2006. (Lower scores use less energy with zero meaning a zero energy home.)

Altogether, 10 states have adopted the Energy Rating Index option as a compliance path to their state energy codes: Alabama, Florida, Illinois, Maryland, Michigan, New Jersey, New York, Texas, Utah, and Vermont.


Ratings Support Energy Improvement Financing

Ratings are often required to receive special loans intended for energy improvements in both new and existing buildings. These include PACE loans, Veteran’s Administration Loans and FHA’s Energy Efficient Mortgages. Fannie Mae’s new Homestyle Energy Loans allow up to $3,500 of improvements without an energy rating, but with an energy rating that limit jumps to 15% of the appraised property value.

These programs often come into play when a property changes hands, which fits nicely with the time of sale requirements mentioned above. For example, a buyer can request an energy rating as part of the sales contract, much like a typical home inspection. The result of the rating (sometimes called an “energy assessment”) can be used to select energy-saving improvements. The cost of the improvements can then be rolled into the buyer’s mortgage. Long-term financing means more buying power. The additional monthly loan payment can be lower than the monthly energy savings created by the improvements. The total monthly cost could be the same or less, but the new owners enjoy all the benefits of greater energy efficiency. With careful feature selections, it’s even possible to bring the home to a zero energy state.


Energy Rating Systems

While the technical details vary among rating systems, they share a similar purpose. They reflect the energy performance of a building. Three major ratings are available. The Home Energy Rating Index (HERS) is the most well-established and broadly accepted system. Home Energy Score (HES) was recently developed by the U.S. Department of Energy.  Energy Performance Score (EPS) is used by Energy Trust of Oregon as a part of their New Homes Program. This is the only rating system that simply shows energy use without converting the value to an index number.

Energy ratings are gaining momentum around the country. They offer an easy and direct way for everyone involved to see and communicate energy performance. That’s useful whether you design or build, sell or finance, or simply want to live in an efficient home.