New Study Examines Relationship Between Energy-Efficient Homes, Sales Price and Loan Performance

Filed in Sustainability and Green Building by on October 28, 2019 8 Comments

Last week, Freddie Mac released a new study, entitled “Energy Efficiency: Value Added to Properties & Loan Performance,” to provide insight on how lenders may be able to factor energy-efficiency rating systems into the mortgage underwriting process. The study tracked property sale prices and loan default rates to explore if energy-efficient features could increase home value and provide less financial stress to owners based on decreased utility costs.

The study focused on homes that utilized two different energy-efficiency rating systems: the Home Energy Rating System (HERS) Index by the Residential Energy Services Network (RESNET), and the Home Energy Score (HES) by the Department of Energy (DOE). The HERS-rated homes represented primarily new construction, while the HES-rated homes were more likely existing homes. Each rating system provided Freddie Mac a list of homes rated between 2013 and 2017. Approximately 10% of those homes were used for Freddie Mac’s national random sampling.

Freddie Mac partnered with a major credit bureau to obtain information on unrated homes for comparison on home performance and sales prices, as well as anonymous financial data to compare borrower characteristics and default rates for loan performance. Researchers took into account factors such as the square footage of the home, age of the home, and geographic location to ensure good comparisons were made. For buyers, characteristics included age, education level, income based on local area median income, and debt-to-income (DTI) ratio.

Key findings from the report included:

  • Property value analysis rated homes sold for 2.7% more than comparable unrated homes.
  • Better-rated homes sold for 3-5% more than lesser-rated homes.
  • From the loan performance analysis, the default risk of rated homes is equivalent to unrated homes, once borrower and underwriting characteristics are considered.
  • Loans in the high debt-to-income (DTI) bucket (45% and above) with ratings, however, appear to have a lower delinquency rate than unrated homes.

The full report is available online through Freddie Mac.

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Comments (8)

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  1. Since energy efficient rated homes sold for 3-5% more than non rated the cost to make them more efficient produces a reasonable payback for the owner. Will Fannie & Freddie give the buyer the credit for the monthly energy savings so they can pay for the cost of the energy increasing items? The more efficient use of energy can have a direct impact on the carbon footprint of the house.

    If a buyer saved $50 a month on their utility bill with a 30 year loan at 5% that would equate to $9,300 in house value, easily pay for the energy savings installed in the residence.

    • NAHB Now says:

      Skip: At present, there are no loan programs that will offer “credit” for purchasing energy-efficient homes; however, this is an option the GSEs – particularly Fannie Mae – is currently working on.

  2. There are two options available to buyers interested in financing EE features:

    1. Complete the Appraisal Institute’s Energy Efficient Addendum and post it to MLS. The AI has a list of appraisers who are trained to add value, typically based upon a present value calculation of projected utility bill savings. Some use the interest rate of the permanent mortgage for the discount rate and 7-9 years for the term.

    2. If you have no qualified appraisers in your area, perhaps there are lenders who will spread your buyer’s ratios, allowing the buyer to qualify for a larger loan. Our preferred lender spreads both ratios by 2 points. Depending on your buyer’s income and the cost of the home, that may get you there.

    The Freddie study should be helpful in marketing the value of your features if you want your buyers to pay for all of them. We place the EE features, educate our clients, remain firm on our “priced to sell” philosophy and seem to have good luck.

    • NAHB Now says:

      Thanks for your comments, Noble. To add to your comments, rather than adding value, appraisers are trained to correctly identify and value high-performance features as appropriate.

      Perhaps you could clarify further what spread ratios can entail?

  3. noble sokolosky says:

    Thank you. I’m happy to clarify because this is an issue all EE builders face. The addendum was created by Sandy Adomatis. She “wrote the book” on appraising EE homes and it may be purchased at

    Of course, appraisers don’t “create” value. However, they certainly are specifically instructed to “add” such value to the subject property as they can identify. Page two of the Universal Residential Appraisal Report requires appraisers to make “Value Adjustments” to the subject home relative to the comparable homes.

    Thus, they either “add” or “subtract” value to the subject based upon the listed features, one of which is “energy efficient items”. The problem Sandy seeks to solve with her energy efficiency addendum is that many appraisers don’t know how to identify those features, much less value them so that they can “add” the value in column one of their report.

    As Sandy explains in her book, it is “impossible” to value some of the major elements of green homes (I think she cited IAQ as an example). Appraisers must document true value in order to “add” it and they can’t add value simply because a home is “green certified”. Thus, if there are no available EE comparables, it all comes down to the HERS certificate.

    That’s why the Freddie Mac “lender” study, which confirms Sandy’s 3 earlier studies, is such glorious news (along with Sandy’s addendum, it should be linked to every MLS listing). The “added” value is derived from the HERS rater’s estimated savings, as Sandy’s book explains. Those estimated savings relate to lenders “spreading” the buyers’ ratios.

    Like principal, interest, taxes and insurance, utility bills affect a borrower’s total expenses and debt ratios. Absent an appraisal that “adds” home value for EE features, some lenders use ratios as an easy, short-hand method to account for savings due to EE features. They simply increase the ratio limits 2 points. Although that practice doesn’t increase the value of the home, per se, it does allow borrowers to qualify for a larger loan, which may allow them to finance the cost of the EE features.

  4. noble sokolosky says:

    Here’s an old post that discusses the concept of spreading the borrow’s ratios:

    It relates the spread that FHA applied at that time (2 points each), which is the theory and number that out lender applies in our clients’ conventional mortgages.

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