More Evidence of Rational Market Values for Home Energy Efficiency.

The article, "Evidence of Rational Market Values for Home Energy Efficiency," which appeared in the October 1998 issue of The Appraisal Journal, presented the results of research indicating that market values for energy-efficient homes reflect a rational tradeoff between homebuyers' fuel savings and their after-tax mortgage interest costs. This research estimated implicit values for the number of rooms in a house, the square footage of living space, lot size, location, and other home characteristics, including the annual utility bill. We performed separate regression analyses for attached and detached homes based on the 1991, 1993, and 1995 American Housing Survey (AHS) national data and AHS metropolitan statistical area (MSA) data for 1992 through 1996. Table 1 shows that the results of these separate regression analyses were remarkably consistent, indicating that home value increases by about $20 for every $1 reduction in annual utility bills, reflecting after-tax mortgage interest rates of about 5% from 1991 through 1996.

To demonstrate the "real world" validity of this research, the regression results have been compared with the collective judgment of real estate agents participating in "cost versus value" surveys conducted by Remodeling Magazine (RM). Each year, the RM survey asks agents throughout the United States to estimate the amount that popular remodeling projects would add to the value of a home in their area if the home were sold within a year of project completion. This survey reflects estimates from about 300 agents familiar with diverse neighborhoods in 60 metropolitan areas. (Between three and seven agents are surveyed in each area.) The remodeled home for which these estimates are made is a "mid-priced house in an established neighborhood in each city." These value estimates are then compared with cost estimates for each MSA (derived from estimating manuals and from experts in unit cost analysis).

 
TABLE 1 Reduction in Home Value per One-Dollar Increase in Annual 
Utility Bill 
 
                    National AHS          MSA AHS 
                   1995     1993     1991      1992-1996 
 
Detached homes      $24      $20      $21         $18 
Attached homes      $20      $12      $19         $23 

As will be explained, the RM survey value estimates for home additions are consistent with the overall ICF regression model for home value. A window replacement project in the 1993 RM survey(1) also supports the estimate for the value of energy efficiency, and further analysis of the RM cost and value estimates suggests that increased home value can fully recover the cost of window replacement in many existing homes. Detailed calculations of home additions, the assumptions on which the window replacement analysis was based, and the results obtained for individual cities are available from the authors.

RM Home Additions Survey

Table 2 compares value estimates for four home additions from the 1992 through 1996 RM survey with the regression model estimates. In particular, the regression values from the MSA detached home sample were used in the comparison because this regression was taken of the largest AHS sample and showed the highest measures of statistical significance in our study. The value estimates in table 2 reflect changes in the following regression variables:

* The number of rooms and square footage of living space (as specified in the RM survey);

* The estimated change in …