Trying to Be Rational in an Irrational World

Think about the last time you went looking for a new car. What did you look for? I am guessing you started with your needs for a vehicle. Are you looking for a large car/SUV to move a lot of people or equipment, a car for commuting to work, or something to enjoy on the weekends? Next you probably were interested in the looks of the vehicle because it is a large investment and you should like what you drive. I am guessing you glanced at the miles per gallon (mpg) of the car. You even likely went online to see reviews from others on the comfort, crash test rating, and typical maintenance issues of the car. Of course, you will need to look at the sticker price. I am even assuming you asked to test drive the vehicle to make sure that the information that you obtained aligns with how you perceive the vehicle.

Image of animated home Now, what if I told you that you must make that vehicle purchase decision only based on the dimensions of the car, the features (radio, A/C, seat controls, etc.) of the car, some pictures of the interior, and the price. Do you think you could decide on which car you would want? My guess is that you would say I am crazy and that you wouldn’t make the decision on such a pricey purchase with so little information. But, that is exactly what millions of people do when making a significantly more expensive purchase… a home.

Look at the two homes shown in the table below. Which one would you pay more money for? Other than a wider driveway and new siding on the home on the right, these two homes appear to be identical, so you would likely expect to pay the same for both homes. If you look at the property details, you will see that the home on the right has an updated HVAC system, a generator, and solar photovoltaic (PV) panels; so maybe you pay slightly more, but not much more (maybe $10,000).

Image comparing left house to right house

In fact, these two homes are one and the same (just pre- and post-retrofit). But in a rational world, you would value the home on the right significantly more. Why? While the home’s square footage, lot size, and layout remains the same, there are several key enhancements (beyond those listed in the “Ext. Features”) that the home on the right has that should make it more valuable. Let’s go back to the way we think about purchasing a car. What are the mpg-like metrics for a home? The home on the left spends $5,700/year on utilities ($2,100 electric bill, $3,500 oil bill, and $100 propane bill), while the home on the right spends $1,600/yr ($600 electric bill and $1,000 natural gas bill). What would you do with $4,100 more each year? Simply apply those utility savings to additional mortgage payments and you would trim years off of your mortgage.

Let’s consider comfort next. I am guessing that you want your car to be fairly quiet, have a smooth ride, and keep you warm in the winter (I love heated seats) and cool in the summer. Do you consider those type of things when looking for a home? Just because a home has a heating/cooling system, doesn’t mean it is comfortable. The home on the left was drafty (infiltration rate of 7.1 ACH50) versus the tight home on the right (infiltration rate of 1.9 ACH50). This resulted in significantly more space conditioning being required as conditioned air was lost to the outdoors. It also meant that the temperature throughout the home on the left would vary by 5°F, while the home on the right maintains temperatures within 1-2°F of the thermostat setpoint throughout the home (with the addition of upgraded HVAC as well).

How about durability and maintenance? There are several items that separate these two homes:

  • The house on the left had issues with water intrusion at several retrofit windows that allowed water to get into the walls. The house on the right has properly installed windows and a continuous drainage plane on the exterior facade.
  • The house on the left had window A/Cs, so these need to be installed each spring and removed/stored each fall. The house on the right doesn’t have to deal with this issue.
  • The house on the left had wood shingle siding that was in poor condition and peeling paint. The house on the right has fiber-cement siding.
  • The house on the left had to deal with oil deliveries (and volatile oil prices), the house on the right does not.
  • The house on the left lost power a couple times a year when the utility power went down. The house on the right does not (even when all the surrounding neighbors didn’t have power for several days).

There is more, but you get the idea.

Lastly, what about health? Would you buy a car that you thought could make you sick or had a poor safety rating? The house on the left had an issue with mice infestation. Thankfully, the house (on the right) no longer has this issue. After finding mice feces and dead mice everywhere in the home (attic, basement, in walls/ceiling), the previous homeowners were contacted to see if they had health issues. All their kids had asthma symptoms, which have since minimized since they left the home.

After considering all of the points outlined above, do you think these two homes are worth the same approximate value?

How do we become rational when it comes to valuing healthy and efficient homes? Fortunately, there are efforts to improve this process. For instance, the Department of Energy (DOE) has been coordinating with the Appraisal Institute regarding green appraisals[1],[2]. Additionally, you may have read about numerous municipalities and even entire states that are starting to include a HERS Index in MLS postings to provide an efficiency metric that can be used by buyers to compare homes.

There are many other efforts being done at an industry level, but what can you do the next time you are looking for a home?

I recommend looking beyond the aesthetics and neighborhood comps. Start requesting utility bill data from previous homeowners and talk to surrounding neighbors. You will be surprised what you can learn from them. Select a home inspector that has expertise on health issues, such as pests, radon, and mold. The way to change the housing market is for the consumer to demand more. It will take time, but it is time for us to start acting rationally when it comes to the largest purchase that most of us will make in our lifetime.

[1] https://www.energy.gov/sites/prod/files/2014/12/f19/ba_innovations_2014_green_appraisal.pdf

[2] http://www.appraisalinstitute.org/assets/1/7/ResidentialGreenandEnergyEfficientAddendum.pdf

 

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By Srikanth Puttagunta, Principal Mechanical Engineer

2 replies
  1. Avatar
    Tony says:

    Maybe a house is not comparable to a car. With a house, you can get a home energy audit from a certified energy auditor and then you can get home performance upgrades from certified contractors to significantly improve the energy efficiency of the house.

    There is no standardized process for improving the mpg of a car.

    The only reason energy should be evaluated during the home selling/buying process is to affect the price based on the valuation of the energy assets. Energy should affect the appraised value of the home, either up or down. That’s what the home buyer and the industry needs to know.

    The energy problems can be addressed and fixed later.

    Reply

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