The risk of defaulting on a mortgage is 32% lower for homeowners who live in energy-efficient properties, according to a new study by the University of North Carolina - Center for Community Capital, and funded by the Institute for Market Transformation.
The study, "Home Energy Efficiency and Mortgage Risks," is the first to try to quantify the connection between a home’s energy efficiency and its default risk, and was reported by The Atlantic Cities.
The study looked at a national sample of about 71,000 Energy Star and non-Energy Star-rated single-family home mortgages and examined loan performance data obtained from CoreLogic, a financial data provider. It controlled for the size and age of the house, neighborhood income, house value relative to the area’s median value, local unemployment rate, borrower credit score, loan-to-value ratio, loan type and price of electricity. The findings were consistent across several home model specifications.
Interestingly, the report also found that the more efficient the house, the lower the default risk. Each point decrease on the Home Energy Rating System (HERS) index of efficiency, was associated with a decrease in the risk of default by 4%, according to the research. (A HERS score is a tool used to measure a home’s relative energy efficiency.)
The two groups of houses analyzed were comparable: The average sale price of the non-Energy Star homes in the study was $218,461 (for 2,183 square feet), and $221,919 for the Energy Star homes (for 2,283 square feet). The homes were also located in areas with an average income of about $73,000 and 6.4% unemployment rate.
About 35% of the houses in the sample were Energy Star-rated for efficiency, with the rest constituting a control group. Controlling for other factors, the study found the odds of a mortgage default on an energy efficient home are one-third lower than those of a home in the control group. A mortgage holder on an Energy Star house is also one-quarter less likely to prepay (lenders consider prepayment a risk, because they’re not realizing the full expected stream of payments and interest rate return).
So is saved money on energy costs the sole factor explaining these homes’ lower default risk?
“It stands to reason that energy-efficient homes should have a lower default rate, because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments,” Cliff Majersik, executive director of IMT, was quoted saying on UNC’s site. “We long believed this to be the case, and now this study proves it. Successful housing market reforms will require reconsidering the risk factors in mortgage default, including energy costs.”
Of course, we should note that the IMT is a nonprofit dedicated to promoting energy efficiency. Naturally, it has an agenda; one of the policies recommended by the researchers is to have lenders take the energy efficiency of a home into account in their mortgage decisions. For instance, they write, “they may allow for a higher debt-to-income ratio and a higher appraisal value to offset the modest increase in cost-of-energy improvements.”
A fact sheet associated with the report notes that while the study controlled for neighborhood income and loan-to-value ratio, some degree of self-selection can be a factor. “Buyers of energy-efficient homes may be more financially astute than other borrowers,” the IMT says, and identifies this as a question for future research.