Home Energy Ratings: A Primer

Market Barriers to Residential Energy Efficiency

The tools for cost-effective, energy efficient housing exist now. Recent progress toward a comprehensive understanding of building science has been dramatic. Cost-effective, energy efficient, building techniques and technologies are available. Yet, America's housing stock is far less energy efficient than is economically justified. Consumer surveys show owning an energy efficient home is important to the majority of home buyers. However, this demand is, for the most part, latent. Why is this?

Currently, specific market barriers hinder the adoption of proven and cost-effective practices and materials. These barriers include:

  • NO CREDIBLE INFORMATION SOURCE ON A HOME'S ENERGY EFFICIENCY - Most of the energy efficient features of a home are hidden once the sheet rock is in place. Consumers are very hesitant to pay for things they cannot see. Home buyers are also wary of accepting the builder's claims regarding the homes they are trying to sell. Unlike cars or major appliances, there is no national system to test the efficiency of a new home and label it in understandable terms for prospective home buyers.
  • LACK OF INCENTIVES - Home builders find it difficult to recoup the added costs of energy efficient features. For the most part, these upgrades are not recognized or credited in either the appraisal or mortgage loan. The home builders stressing energy efficiency are at a disadvantage when competing with builders offering similar-looking, less efficient homes at lower prices. Generally, when upgrading a home, a builder invests in features a prospective buyer can easily see, such as landscaping or expensive cabinets.
  • FIRST COST BIAS - In the U.S., both builders and buyers tend to minimize the "up-front" costs of a home, even at the expense of long-term economic savings. This tendency is reinforced by current mortgage loan practices. The lower costs of owning an efficient home, figured when energy expenses are added to the mortgage, insurance and tax payments, are rarely considered. A number of initiatives, sponsored by government agencies and utilities, have attempted to address this first-cost bias through subsidies in the form of grants, rebates and interest rate reductions. However, the sheer size of the nation's housing market and economic realities have limited the effectiveness of these efforts and led to their reduction.
  • LACK OF A COMMON LANGUAGE - The housing industry's job is to build, sell, appraise and finance homes. Many of the terms associated with residential efficiency are technical and difficult for a buyer or lender to understand. Evaluating the home as a whole, in terms of its relative energy efficiency, is not usually done.

Across the nation, there is a growing realization that the states, in partnership with housing agencies and the housing industry, can be an effective force for eliminating these market barriers. State energy offices have traditionally taken the lead in addressing these issues through residential energy codes. In the current political climate, such efforts, seen as "unfunded mandates," are resisted. There is, however, a growing movement to use market-driven approaches to circumvent or eliminate the barriers.