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Valuing energy efficiency in the housing market

The Alaska Housing Finance Corporation recently released a tool that could boost the appraised value of energy efficient homes.

The AK Appraisal Tool, developed by AHFC, the Cold Climate Housing Research Center and Alaska Craftsman Home Program, allows appraisers to add value to a home that performs better than comparable homes. The tool could promote energy efficient housing through making efficient homes more affordable and increasing their resale value.

Appraisers typically look at factors like square footage, number of bedrooms and aesthetic features like granite counter tops. If a house was super-insulated or used alternative energy sources, there was no accepted way to factor that into the appraised value. This tool provides a way to value energy efficiency based on the energy bills of a house compared to other similar houses in the area.

Here’s how it works

You log onto the site  and enter basic information about a house, including the community, the energy bills and at least two of the five following pieces: street name, number of bedrooms, square feet, rating points and year built. Our 1,800-square-foot test house was located in Fairbanks and had $6,000 in annual energy costs, including heating oil and electricity. The program then searches AHFC’s database of 105,000 housing units to find all comparable homes in the same area — in this case 85 — and calculate their average utility bills — $8,150. You can enter up to 10 other comparable houses (based on other appraisals). The program crunches all this information into the “net present value,” or the energy savings of the test house versus an average house during a 5-year period — $9,058. The appraiser can add up to that amount to the value of a home (all appraisals must be reviewed and accepted by the lending institution).

The program also provides the impact to the mortgage payment. In this example, if $9,058 were added to the home’s appraised value, it would increase the monthly payment by $44 (based on a 30-year mortgage at 4.25 percent). But remember, the homeowner is saving $2,100 per year, or $180 per month, in energy compared to an average house, so the overall savings far outweighs the bump in the mortgage payment. Plus, the resale value of the energy efficient house is higher.

There are benefits to the lending institutions as well. The fact that homeowners are spending less on energy every month increases their chance of making their mortgage payments. This reduces the lender’s risk of default and foreclosure.

How will it be used?

AHFC is already training lending institutions, builders and realtors to use the tool.  Builders could also use it to show clients the potential energy savings and increased appraised value of an energy efficient house.