Our market-based economy rewards innovation and economic growth. It provides multiple benefits for consumers and society while rewarding individual initiative through enlightened self-interest. But the market doesn’t function in a vacuum. Accurate and timely information is required. For consumers in the market to grasp the best course of action, they must have the right information at the right time so they can make sensible decisions.
Before consumers purchase a home, they need to know how much they will be paying each month to live there, including the cost of the energy that will be consumed each month. Today, this critical information is systematically hidden from consumers, so they continue to buy energy wasting homes instead of energy efficient ones that will cost less to own. One simple remedy will provide buyers with the information they need to make a wise home purchase and will rapidly move the housing stock toward greater energy efficiency. That remedy is to require pre-purchase energy use disclosure for each home offered for sale.
An example of providing timely pre-purchase consumer information is the miles per gallon (MPG) sticker on every new car and truck. The MPG sticker on a vehicle doesn’t dictate a purchase. In fact, some consumers routinely buy vehicles that consume large amounts of fuel. But the MPG sticker ensures that they have the reliable information at the right time and are making an informed choice. This is not the case with real estate.
Mortgage lenders have long been required to disclose key monthly housing costs before a purchase is made. This includes mortgage principal, loan interest, real estate taxes and hazard insurance. This quartet is commonly called PITI. But there is an almost universal gap in this disclosure requirement — the annual cost of energy.
Energy bills are currently a hidden cost — occurring every month — that often exceed two of the standard PITI factors. Most buyers don’t discover the size of this cost until months after purchasing a home. This can wreak havoc on a monthly budget, causing financial stress and the potential for missed payments and even foreclosures. An energy disclosure during the real estate sales process protects everyone from surprises, reduces the number of mortgage defaults and is especially valuable for those on the financial margin.
Energy cost transparency is needed to allow the free market to work effectively. A standard energy use disclosure empowers home buyers to make wise decisions about the biggest purchase of their lives. It also encourages home sellers to improve the energy performance, and value, of their homes before selling them, much like they replace carpets, refresh paint, and generally spruce up the home. Builders, mortgage lenders, and real estate professionals all stand to gain by supporting these improvements which increase property value and reduce time on the market.
And of course, disclosure serves homebuyers. They need to know how much money they would spend each month. Equally important, once armed with the energy rating, purchasers have the option of exercising their buying power to make energy improvements through a long-term, low-interest mortgage that covers these costs. Wrapping the cost of insulation, air sealing, efficient equipment and solar panels into the initial financing can easily bring the monthly payments down to the same level as the monthly earnings from energy savings. This option evaporates once the mortgage is approved, leaving borrowers only with home improvement loans that carry higher interest rates, lower borrowing limits, and shorter terms. The best time to finance energy improvements is when the home is purchased — and to finance them at that time requires buyers have the information provided by energy ratings.
Currently, home sellers can have their home energy efficiency evaluated and receive an energy report through long-standing energy rating systems, such as Home Energy Score, Home Energy Rating Index or Energy Performance Score. Unfortunately, voluntary disclosure falls short.
Imagine walking onto a car lot and seeing MPG stickers on only half the inventory. A direct comparison would be impossible. Voluntary home energy disclosure, sounds good, but just doesn’t make an impact — since energy disclosure is helpful only if buyers can compare the energy use of every home they are considering. For buyers to make meaningful choices in their own best interest, the market needs to provide all the relevant information. This means that all homes on the market must issue a disclosure with a standard energy score that can be easily compared to all the other homes a buyer is considering. In other words an “E” for energy expenses needs to be added to the PITI, so that all homes will disclose their PITI+E.
Disclosures are not new. They are a common element in real estate transactions created to protect consumers. Mortgage cost estimates are required by federal law. In rural areas, homes served by well water must have a flow test. Similarly, energy performance should be disclosed to all potential buyers at the time of sale. For less than the cost of a well test or a structural inspection, every home seller should be required to provide an energy disclosure with a standard energy score to provide fairness and transparency for consumers and promote the shift to greater energy efficiency in the housing stock.
A number of cities around the US have already implemented mandatory disclosures and many others are considering it. Earth Advantage and the Rocky Mountain Institute have developed information resources and tools as well as a discussion forum to support local governments wishing to develop mandatory disclosure policies.
Some citizens and political leaders may hesitate about a mandatory requirement. They should keep in mind that home energy disclosure does not require actual improvements to be made on homes. It’s about transparency. It’s about local governments establishing a level playing field where consumers have vital information they need to make wise choices. It’s about providing the information needed for the market to work properly and to encourage energy conservation.