Home Builders Need One More Unifying Issue — Why Not Energy Efficient Home Loans?
Two years ago at this time of year, the new housing industry had a rallying, unifying issue, complete with its own misnomer slogan, “Fix Housing First.”
The theory went that if you stimulated the demand side of the home purchase equation, many good things would happen.
What took place during the months leading up to the February 2009 Congressional vote and enactment of the American Recovery and Reinvestment Act was a show of solidarity we’ve rarely seen at work across an industry sector–the tax credit for home buyers was in, and it would be extended and expanded in November to stay in force for contracts through less than two weeks ago.
Perhaps it was desperation that brought home builders and building materials suppliers of all sizes, shapes, and business models together behind the measure that aimed to stimulate home purchases, both to reduce the count of available homes on the market and to keep people in jobs who were building new homes.
Across two administrations and across sharp partisan differences, the initiative gained traction because it would help stanch the free-fall in home prices that was set in motion as the leverage underpinning homeownership came undone from all directions at one time.
Arguably, the stimulative tactic did what it was supposed to have done. Did it “fix” housing? No, of course it didn’t fix housing. There’s still too much on the debt side of every balance sheet you look at, and not enough coming in to pay for it all. To fix housing, you’ve got to fix jobs and household formations, which means fixing consumers’ capacity to spend money on goods and services, which means fixing debt and income, which leads back to jobs.
What the program did–especially for those who make and sell new homes–was to kick the can down the road. This sounds like a bad thing. But is it?
“Sometimes, kicking the can down the road is more than kicking the can down the road.” Joe Kernen, the CNBC Squawk Box co-anchor who would argue he’s the “real” morning Joe, said that today during his early morning program. “Sometimes it really gets something done.”
Meaning that bail-outs are not all bad if they provide time for markets to regain their legs and start working the way they should.
He was referring in this case to the European Union’s Trillion-Dollar bailout of its troubled economies in Greece, Portugal, Ireland, Italy, and Spain, which could be said to have averted a global liquidity lock-up the likes of which we’re only too familiar with in spite of our short memories.
The Euro bail-out reminds one and all of the reality of the era we’re stuck in for at least as long as it takes household balance sheets to draw back into their norms and for both private and public debt to reach equilibrium with the capacity to service it–the era of pain management.
Home builders–and remodelers–know all about pain management by now. After months of privatized profits, a ton of losses on the backs of the public, the price for fantasy-cheap capital, and the consequence of three or four years of 300,000 to 400,000 new homes a year beyond the market need.
Still, home builders and their partners need to seize on another common rallying point. What the tax credit stimulus did or didn’t do for the housing economy and the broader economy will only really be known from a future vantage point. What large and small companies who are in new-home construction need is a focal point to align and coordinate their efforts around.
And there is at least one: energy efficient mortgages. Or if you prefer another misnomer slogan: green mortgages. Plus, energy efficient appraisals.
What this could do, if home builders and their partners would seriously align behind the issue, would be to kick the can down the road in a good way.
It’s all about household check-book management. Instead of only looking at principal, interest, taxes, and insurance as the key building block of underwriting a mortgage and the ability to pay it back, energy efficient mortgages and appraisals would presume adding an “E” to the PITA, to factor in what people pay for utility costs.
Together with a pervasively accepted third-party energy efficiency ratings mechanism, homes with greater monthly utility bill efficiency would be worth a premium in appraisals, and would enable the borrower to carry a loan beyond what the current finance-ability ceiling would be.
This means a buyer could opt in at no penalty for greater levels of energy efficiency in their home, and pay off the cost of the often optional “energy package” of upgraded windows, heating and ventilation system, and hot water heater with credit that would cost the same as a less expensive home without the energy package.
This would be good for home builders, because it would give them an even greater edge over resales–and the foreclosure tsunami–in a market that will only gradually improve for several years to come.
So, home builders and their supplier partners should rally around this issue, even as the dozens of proposed energy bills gather and lose steam in the current legislative session. Once financial and immigration reform get checked off on the Obama Administration’s extraordinary agenda, energy and climate measures will get their turn in the spotlight.
We think it would be a worthwhile issue to push a unified call to action, because sooner or later, the financial ramifications of climate change and energy independence will be huge for the sector.
Consider it part of your pain management strategy for the next six to 12 months.
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