California “green homes” sell for 9 per cent extra

August 23, 2012 | 3 min read

In their study “The Value of Green Labels in the California Housing Market”, examined all of the 1.6 million single-family homes sold between 2007 and 2012 in California. Of those homes, 4,321 were certified under Energy Star Version 2, GreenPoint Rated, or LEED for Homes. Seventy percent of the homes with a green label that were sold during this time period were new construction. Kok and Kahn used a “hedonic pricing analysis,” controlling for a large number of variables that affect real estate pricing, such as vintage, size, location (by zip code) and the presence of major amenities such as a swimming pool, views, and air conditioning. Considering that the average sales price of a non-labeled home in California is $400,000, the price premium for a certified green home translates into some $34,800 more than the value of a comparable home nearby.

‘Hip’ and hot influences

Their results show that the resale premium associated with a green label varies considerably from region to region in California, and is highest in the areas with hotter climates. It is plausible that residents in these areas value green labels more due to the increased cost of keeping a home cool.The premium is also positively correlated to the “environmental ideology” of the area, which was measured by the rate of registration of hybrid vehicles. In line with previous evidence on the private value of green product attributes, this correlation suggests that some homeowners may attribute value to intangible qualities associated with owning a green home, such as pride or perceived status.

Green benefits

These study results are in line with previous research (Eicholtz, Kok, Quigley, 2009)^[1] in the commercial real estate sector in the U.S., which has found that green labels positively affect rents, vacancy rates and transaction prices for office buildings. A study in the Netherlands, by Dirk Brounen and Nils Kok (2011)^[2] found that “A”-grade green homes sell more quickly and for a 10 percent price premium. Considering the residential sector accounts for 33 percent of electricity consumption in the U.S., increasing the energy efficiency of the durable housing stock has gained public attention.

For individual consumers, it can help lower energy bills. The typical utility bill for single-family homes in California equals approximately $200 per month, and a greener home can lead to a 30 percent reduction in energy costs ($720 annually), Kok and Kahn calculate. “Green homes also provide benefits such as more stable indoor temperatures and healthier indoor air quality. LEED and GreenPoint Rated homes also feature efficient water use; sustainable, non-toxic building materials; and other attributes that reduce environmental impact, such as proximity to parks, shops and transit.

Relative input

The increased value of 9 per cent for a green-labeled home, raises the issue of relative input costs. “The increment in construction costs of more efficient, green homes is open to popular debate, and there is a lack of consistent and systematic evidence,” the authors acknowledge. According to the authors, a recent industry report shows “that estimated cost to reach a modeled energy efficiency level of 15 percent above California’s 2008 energy code is between $1,600 and $2,400 for a typical 2,000 sq.ft. dwelling, depending on the climate zone. To reach a modeled energy efficiency level of some 35 percent above the 2008 code, estimated costs range from $4,100 to $10,000 for a typical 2,000 sq. ft. dwelling, again depending on the climate zone. These admittedly rough estimates suggest that the capitalization of energy efficiency features in the transaction price (about $35,000) far exceeds the input cost for the developer (about $10,000, at most).”

Development scale

The authors note that the green homes they examined are not high-end, custom homes, but rather “production homes” built by large developers. They believe the price premium could stimulate for-profit developers to produce green homes, especially since they can enjoy cost savings from producing multiple homes featuring similar attributes. “This has implications for the green premium, as the marginal effect relative to other green homes becomes smaller,” they write.

“An effective and cheap market signal may trigger investments in the efficiency of the building stock, with positive externality effects as a result. Of course, we cannot disentangle the energy savings required to obtain a label from the unobserved effects of the label itself, which could serve as a signaling measure of environmental ideology and other non-financial benefits from occupying a green home.” They also recommend future research should incorporate the realized energy consumption in green homes and conventional homes to further disentangle these effects.

References

Eichholtz, Piet, Nils Kok, and John M. Quigley. “Doing Well by Doing Good? Green Office Buildings” (September 1, 2009). http://escholarship.org/uc/item/507394s4.
Brounen, Dirk and Kok, Nils. “The energy label on the residential property market.” (April 12, 2011).

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “California “green homes” sell for 9 per cent extra”, Nils Kok, Matthew Kahn, www.tias.edu, August 23, 2012.

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