Illuminating the financial benefits of green homes: Katie Weeks, Institute for Market Transformation

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23 May 2016

Katie Weeks, Director of Communications at the Institute for Market Transformation (IMT), talks about the business case for green homes. The IMT is a Washington, D.C.-based non-profit organization promoting energy efficiency, green building and environmental protection in the US and abroad. This is part of The Climate Group's project Home2025.

American households spend around US$230 billion each year on energy, not including transportation – and the residential sector accounts for 20% of the total energy consumed in the US.

With this in mind, it’s clear to see that increasing a home’s performance doesn’t just benefit the climate. Consider the following:

Meeting Building Energy Codes Saves Money and Energy

Let’s start at the beginning, with construction. We take it for granted that our homes meet basic health and safety requirements, thanks to building codes. But do they meet energy codes?

Compliance with strong building energy codes are one of the most fundamental, affordable and effective mechanisms for increasing the long-term efficiency of our buildings by requiring a minimum level of cost-effective and energy-efficient technologies.

For example, the average American household spends US$2,150 each year on home energy bills. Meeting the energy standards in building codes typically cut such costs by 15% or more, saving the average household more than US$300 each year.

Our research has found that allocating just a fraction of 1% of the value of construction projects to code compliance and enforcement initiatives would provide sufficient resources to achieve 90% compliance with energy codes.

This level of effort would leverage each dollar spent into a six-fold payoff in energy savings – and full compliance funding would eventually save American consumers US$10.2 billion annually while improving air quality and home comfort.

By enhancing budgets for building departments and through promotion of codes and standards, policymakers can help to increase code compliance and ensure that green practices are implemented from the very beginning of a home, paving the way for great savings in the future.

High-Performance Homes Sell at a Premium

Next, let’s look at buying and selling homes. In 2015, a peer-reviewed study found that high-performance homes (HPHs, or homes marketed with green features such as a LEED certification from the U.S. Green Building Council of a solar photovoltaic array) sell for a premium in Washington, D.C., compared to similar homes without energy-saving features.

In our study, “What Is Green Worth? Unveiling High-Performance Home Premiums in Washington, D.C.”, nationally recognized residential appraiser Sandra Adomatis examined 40 home sales in the District of Columbia – where there are more than 450 LEED-certified homes and more than 325 ENERGY STAR-labeled homes – and found HPHs sell for a mean premium of 3.46%.

This is great news for home builders and sellers. However, our study also found that current real estate listings in the multiple listing services (MLSs) do not contain sufficient information to market these homes accordingly – meaning that sellers are essentially leaving money on the table.

In a related report, Greening the MLS; Bringing High-Performance Homes to Light in the District of Columbia, we found that only 14.8% of expected certified HPHs were using the available green fields in the Metropolitan Regional Information Systems (the local MLS).

This lack of information not only hampers buyers seeking green homes, but it also increases the time home appraisers need to research the homes and limits their ability to develop a credible opinion of the value green features can add to a home.

However as the evidence grows that HPHs sell for a premium, IMT anticipates that builders will become more incentivized to construct HPHs, more homeowners will upgrade their homes with green features, and real estate agents will more likely market HPHs.

High-Performance Homes Reduce Mortgage Risk

Finally, consider the energy costs of long-term home ownership. While the savings potential of energy-efficient homes is increasingly documented, obstacles remain in terms of accurately financing such homes. One of the biggest opportunities for overcoming these obstacles lies in changing our mortgage processes so that mortgage pricing reflects the cost savings of owning a green home.

In 2013, we assessed the relationship between energy-efficient homes and mortgage repayments, and found that energy-efficient, single-family homes have a much lower and statistically significant, mortgage default rate – a factor lenders should be considering when making mortgage loans and policies.

In Home Energy Efficient and Mortgage Risks, a national sample of 71,000 ENERGY STAR and non-ENERGY STAR-rated single-family home mortgages was gathered accounting for various situational characteristics – and the findings were striking. Default risks were found to be, on average, 32% lower in energy efficient homes.

In fact, we found that the more efficient the house, the lower the default risk, and these findings have significant policy implications together with the potential to transform the lending market.

On the national front, legislative changes such as those proposed in the Sensible Accounting to Value Energy (or SAVE) Act, recently included in the US Senate energy bill passed in late April 2016, aims to improve the accuracy of mortgage underwriting used by federal mortgage agencies to include a home’s expected energy-cost savings when determining the value and affordability of energy-efficient homes. Research has found that this legislation could not only save US$1.1 billion in consumer energy bills, but could also generate 83,000 jobs.

Taking all of the above into consideration, it’s clear that the business case for homes with high-performance green homes continues to grow, as does the market demand.

How will your company respond?

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