Freddie Mac Study: HERS® Homes Sell for More, Have Better Loan Performance and Have Better Mortgage Profile Studies Than Comparable Unrated Homes

A new study conducted by Freddie Mac found that homes that were HERS® rated sold on an average 2.7% more than comparable unrated homes. In addition, homes that received lower HERS® Index Scores sold for 3 – 5% more than homes with higher HERS® Index Scores. The study also found that buyers of HERS® rated homes also have more desirable mortgage profiles.

The study “Energy Efficiency: Value Added to Properties & Loan Performance” looked at homes rated under RESNET’s Home Energy Rating System (HERS) between 2013 and 2017. The report states “[Freddie Mac] conducted this analysis to understand the value and the loan performance associated with energy-efficient homes to support the consideration of energy efficiency in mortgage underwriting practices.” The findings include analysis on property value, loan performance, default risk, borrower characteristics, and demographics.

Freddie Mac used data provided by RESNET on HERS® rated homes from 2013 to 2017 to select a random sampling of about 70,000 HERS® rated homes. Working with a major credit bureau, Freddie Mac obtained data on each of these homes plus five comparable unrated homes for each rated home for a total of about 450,000 properties.

The analysis of this data concluded:

  • From the property value analysis, HERS® rated homes are sold for, on average, 2.7% more than comparable unrated homes.
  • Homes with lower HERS® Index Scores are sold for 3-5% more than homes with higher HERS® Index Scores.
  • From an underwriting perspective, there are notable differences between HERS® rated and unrated homes.
  • RESNET-rated homes have lower delinquency rates than unrated homes, both in terms of becoming ever 60 days and over 90 days delinquent.
  • Homes with lower HERS® Index Scores had even lower delinquency rates.
  • Homes with lower HERS® Index Scores also had better mortgage profiles in general: owners with higher average credit scores (FICO), lower Loan To Values (LTV) ratios at origination, higher origination unpaid principal balances (UPB), higher owner incomes, and higher neighborhood incomes at the census tract level.
  • The lower delinquency rates remain for HERS® rated versus unrated homes even for homeowners with higher debt-to-income ratios of 45% or more.

The study was not able to conclude, however, whether the HERS® Index Scores were responsible for the loan performance over the better mortgage profiles of those who bought HERS® rated homes.

Freddie Mac also looked at homes from the U.S. Department of Energy (DOE) Home Energy Score program with data provided by DOE. The study found that homeowners requesting Home Energy Score were not seeking a rating for purposes of an immediate sale after a rating but are interested in energy retrofits. Freddie Mac concluded, “Therefore, the DOE dataset may be less appropriate for sale price analysis given the absence of price information after rating.”

Aside from property value and loan performance, Freddie Mac also looked at the demographics of HERS® rated homeowners. The study found some interesting trends of families who purchased HERS® rated homes. This provides valuable insight into the demographics of those who purchase homes that are HERS® rated.

One attribute they looked at was homeowner income. When homeowner income was converted to Area Median Income (AMI) at the county level, it showed that about 45% of HERS® rated home buyers made more than 120% of the AMI. Using 2016 Home Mortgage Disclosure Act (HMDA) data, the income distributions for HERS® rated homes showed fewer high-income households (>120% AMI) and more very low-income households (≤50% AMI) compared to the general mortgage origination market.