The Capitalization of Energy Efficiency  in the Residential Housing Market     Nils Kok                        Matthew E. ...
Energy consumption and the built environmentSubstantial environmental externalities80%                                    ...
Total energy expenditures $166bln in 2010About 50% goes to space conditioning    How to reduce energy consumption in the r...
Related literature How energy literate are private consumers?• Current policies to reduce energy consumption assume ration...
The (in)famous EU energy label
This paperWhat is impact of “green” labels on the housing market?• Recent growth in labels attesting to energy efficiency ...
Model specification (II)Model expanded with interaction terms• Is the willingness to pay affected by climate, energy price...
“Green” homesEnergy Star (EPA), LEED (USGBC), and GreenPoint Rated• Green labels for homes: reflection of steady state eff...
Random example of a LEED certified home
DataDataQuick’s transaction database• DataQuick database of single-family home transactions in California  (2007 – 2012)  ...
The geography of green homesClustering in areas with significant construction activity
Descriptive statisticsSignificant fraction of “distressed” sales
ResultsHigh explanatory power of models – significant green premium• Green homes sell at a premium of 12%, ceteris paribus...
ResultsDecomposition of “green” labels• LEED and GreenPoint Rated insignificant   – Small sample bias (Eichholtz et al., 2...
More robustness checksRecently constructed homes• Analysis restricted to dwellings constructed < 5 years• Green homes sell...
Heterogeneity in capitalization of green labelsWeather and ideology matter, price and competition do not• Distinguish effe...
Discussion of resultsThe costs and benefits of green homes Ceteris paribus, green homes have higher selling prices by 9%...
Conclusions and implicationsEvidence comparable to Europe and US commercial market Durable building stock creates signifi...
Limitations and next steps We cannot disentangle (modeled) energy savings required to obtain   label from unobserved effe...
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The Value of Green Labels in the California Housing Market

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The residential sector accounts for 33 percent of electricity consumption in the U.S., with a total expenditure of $166 billion in 2010. Increasing the energy efficiency of the durable housing stock can thus provide significant cost savings for consumers. One promising trend is the rise of homes labeled by a third party as “green” or energy efficient. The modeled energy consumption of such homes is substantially lower as compared to conventional homes of the same vintage. This paper provides the first systematic evidence on the effects of providing information about the energy efficiency and “sustainability” of structures in affecting consumer choice. We conduct a hedonic pricing analysis of all single-family home sales in California over the time period 2007 to 2012, documenting that homes labeled with Energy Star, LEED or Greenpoint Rated, transact for a premium of nine percent relative to otherwise comparable, non-labeled homes. Given the large size of this effect, we explore its robustness and examine a number of different hypotheses, focusing on recovering heterogeneous effects. The results show that both environmental ideology and local climatic conditions play a role in explaining the variation in the green premium across geographies.

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  • Paper with Matt – I’m certainly not as funny (but I have more hair hehe).Fairly straightforward paper along the lines of work that I did with John and Piet on commercial real estate, and with Dirk Brounen on residential real estate in the EU. Basic question is: are labels that attest to energy efficiency and other “green” features of a home capitalized by home buyers? And if yes, is there heterogeneity in this effect, driven by local conditions such as weather, energy prices, ideology and competition.
  • Quite some variation in electricity price: 7 cents to 27 cents
  • The Value of Green Labels in the California Housing Market

    1. 1. The Capitalization of Energy Efficiency in the Residential Housing Market Nils Kok Matthew E. KahnMaastricht University UCLA Energy & Cities Conference Boston, October 22 2012
    2. 2. Energy consumption and the built environmentSubstantial environmental externalities80% 52%70% 50%60% 48%50% 46%40% 44%30% 42%20%10% 40% 0% 38% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Energy Consumption in Buildings (LHS) Of Which Commercial (RHS)
    3. 3. Total energy expenditures $166bln in 2010About 50% goes to space conditioning How to reduce energy consumption in the residential housing market?0. Raise energy prices1. Stricter building codes and subsidizing retrofits – Works, but mostly for new construction, and effects are small  Building codes are effective at saving energy (Jacobsen and Kotchen, in press) – Fiscal tight-belting constrains subsidies1. Stimulating market efficiency through energy labels – Energy efficiency gap (Jaffe and Stavins, 1994) – Investments in energy efficiency may lead to: • Save on current resources, insure against future price increases • Higher transaction prices2. Change occupant behavior, for example through nudges (Alcott, 2011)
    4. 4. Related literature How energy literate are private consumers?• Current policies to reduce energy consumption assume rational decision- making by informed investors• That seems to hold for sophisticated investors in commercial property… – Labels have financial implications (Eichholtz et al., 2010, Fuerst and McAllister, 2011, etc.) – Efficient capitalization of energy bill (Eichholtz et al., 2012) …but not necessarily for private consumers – Residential “energy literacy” is low (Brounen et al., 2012)• Solar is capitalized into home prices (Dastrup et al., 2012)• Labeling programs in Europe seem to have the desired effect – Mandatory disclosure of EU energy label – Price differentiation based on energy label (Brounen and Kok, 2011)
    5. 5. The (in)famous EU energy label
    6. 6. This paperWhat is impact of “green” labels on the housing market?• Recent growth in labels attesting to energy efficiency and other “green” attributes in housing market• What are the market implications of “green” certification for residential dwellings? (1) log(Rijt ) = a greenit + b Xi + g jt + eijt – Rijt is the home’s sales price commanded by dwelling i in cluster j in quarter t – Xi is a vector of hedonic characteristics  Size, vintage (since renovation), swimming pool, etc. – Zip code fixed effects to control for cross-area differences in local public goods, interacted with year/month indicators to capture price dynamics – Standard errors clustered at the zip code level
    7. 7. Model specification (II)Model expanded with interaction terms• Is the willingness to pay affected by climate, energy prices? But also: role of ideology and competition?• Recover heterogeneous effects of green home labels: (2) log(Rijt ) = a0 greenit + a1 Ngreenit + b Xi + g jt + eijt – N is an interaction term that reflects:  Local climatic conditions  Local electricity prices  Consumer ideology  Green density• Caveat – Green homes are mostly production homes, not high-end custom homes, but…we have no information about the developer – possibility of bundling valuable amenities with green attributes (appliances, etc.)
    8. 8. “Green” homesEnergy Star (EPA), LEED (USGBC), and GreenPoint Rated• Green labels for homes: reflection of steady state efficiency – EPAs Energy Star for Homes (1995)  Asset rating (i.e., does not account for actual performance)  For new construction only  Changed in 2006 and 2012  Certified by professional engineer – USGBCs LEED for Homes (2005)  Scoring systems based on 6 components of “sustainability”  Energy efficiency is just one component  Based on design stage (and now verified after construction) – GreenPoint Rated  Comparable to LEED for Homes  Primarily marketed in California  Also for existing homes• Diffusion of green home labels substantially lags the commercial sector
    9. 9. Random example of a LEED certified home
    10. 10. DataDataQuick’s transaction database• DataQuick database of single-family home transactions in California (2007 – 2012) – 4,231 green homes transacted (out of 10,348 green homes) – 1.6mln control homes• Standard hedonics (vintage, size, swimming pool, view, …) – Flag for “distressed” sale (foreclosure or mortgage delinquency)• Environmental ideology proxied by Prius registration share at zip code level (R.L. Polk) – Model (2) includes country-fixed effects, Census variables and distance to CBD and closest train station• Local climatic conditions measured by annual cooling degree days during year of sale at nearest weather station (NOAA)• Consumer electricity prices measured at zip code level
    11. 11. The geography of green homesClustering in areas with significant construction activity
    12. 12. Descriptive statisticsSignificant fraction of “distressed” sales
    13. 13. ResultsHigh explanatory power of models – significant green premium• Green homes sell at a premium of 12%, ceteris paribus – Commercial office buildings: 16% (Eichholtz et al., 2010) – Label “A” homes in Europe: 10% (Brounen and Kok, 2011)
    14. 14. ResultsDecomposition of “green” labels• LEED and GreenPoint Rated insignificant – Small sample bias (Eichholtz et al., 2010) – Limited brand recognition
    15. 15. More robustness checksRecently constructed homes• Analysis restricted to dwellings constructed < 5 years• Green homes sell at a premium of 8.7%, ceteris paribus – Coefficient on LEED comparable, but insignificant
    16. 16. Heterogeneity in capitalization of green labelsWeather and ideology matter, price and competition do not• Distinguish effects of energy-savings aspect of rating from other, intangible effects of label itself
    17. 17. Discussion of resultsThe costs and benefits of green homes Ceteris paribus, green homes have higher selling prices by 9% The average non-green home in the sample would be worth $34,800 more if it were converted to green What about relative input costs?  Anecdotal evidence shows cost is $10,000 higher (at most), to construct a dwelling that is 35 percent more efficient than code What about the value of energy savings?  30 percent savings on a typical $200/month energy bill translate in a simple payback period of 48 years for the green increment Other features seem to add value  Unobservables – savings on resources other than energy, but also: advanced ventilation systems, higher comfort, better IEQ  Some homeowners attribute non-financial utility to a green label (comparable to heterogeneity in solar premium)
    18. 18. Conclusions and implicationsEvidence comparable to Europe and US commercial market Durable building stock creates significant environmental externality Certification can help market transformation through transparency  Private consumers are generally “energy illiterate” Homes in California that have a green label transact at a premium  Premium seems to outweigh costs  Developers will reap the opportunity and drive down the marginal effect Labeling programs by government and non-profit institutes seem to be effective and are incorporated by market participants  Cost of the labeling programs is small  Does this directly affect energy consumption (and emissions)?  More aggressive policies through mandatory disclosure (e.g., Seattle)?  Standards versus labels
    19. 19. Limitations and next steps We cannot disentangle (modeled) energy savings required to obtain label from unobserved effects of label itself – are labels necessary?  Incorporate information on thermal efficiency of non-rated homes  Incorporate realized energy consumption in green homes and conventional homes Repeat sales would allow for further studying the value persistence, and filtering out the effect of developer quality Focus on owner-occupied single-family dwellings only – the rental housing market offers an interesting experiment on the value of “green” labels (with landlords often facing principal-agent problem) Green home diffusion – how do owners sort into green homes? Co- ordination device?
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