It’s no secret that the 2008 stock market tumble and ensuing recession threw the real estate market for a serious loop. Foreclosure rates shot through the roof, and thousands of homes across the country fell into disrepair or sat abandoned. While property values have begun to rebound, many homeowners still find themselves in an upside down mortgage, and fewer people can afford to buy than before, regardless of the low interest rates. That means banks and other lenders have to approach financing deals very carefully, which makes securing a home loan incredibly difficult. But there may be a new determining factor that can help all parties hedge their bets. According to a recent study, mortgage holders with energy efficient homes are far less likely to default on their loan.
The study was conducted by the Center for Community Capital out of the University of North Carolina. With funding granted by the Institute for Market Transformation, the study is the very first one that attempts to tie the energy efficiency of a home with the risk of homeowner loan default. The study is entitled “Home Energy Efficiency and Mortgage Risks”, and the surprising results were first reported by The Atlantic City.
The study checked in on more than 70,000 mortgages, with a mix of both traditional and Energy Star-rated homes. These single family units all had mortgages taken out, and the loan data came direct from CoreLogic, a trusted provider of financial facts and figures. Controls were put in place that corrected for the income in each neighborhood, the specific size and age of each home, the regional unemployment rate, the loan type, the credit score of the borrower, the value of the house compared to median values in each region and the local electrical costs. And the findings were statistically significant. Apparently, if you live in an energy efficient home you are 32% less likely to default on your mortgage.
And that percentage scales based on your energy efficiency. The higher the Energy Star rating, the lower the risk of a mortgage default. They study organizers used the Home Energy Rating System, known as HERS, to gauge the efficiency of each property. For each point lower on the HERS index, the default risk would similarly reduce by 4%. The most amazing thing was that the various homes averaged out to the same general expense. The average traditional home polled in the study cost a bit over $218,000, while the average efficient home was just under $222,000. The square footage, unemployment rates and average earnings in each region were also consistent.
65% of the houses in the study were traditional homes, delineated as the control group. The remainder were rated by Energy Star. So why is the owner of an Energy Star property one-third less likely to default than an owner of a home in the control group? One obvious reason is that the energy efficient homes required less money each month in utility payments. That money adds up over time, and can go directly to a mortgage. People are already investing in attic insulation for heating and cooling savings, and other efficient upgrades are proving just as valuable. There may be some amount of self-selection going on as well, and homeowners who invest in energy efficiency may be more financially stable. But the study and its findings certainly should not be ignored.