ROI and incremental costs
The topic of ROI seems to permeate a lot of the discussions of both building envelopes and heating components. I wonder if the way we look at it really takes into account the realities of the way the North American building industry works?
Unlike most of the projects here on GBA which are either custom or owner-built, the overwhelming majority of house construction is speculative – that is financed and built by developers with no input from the eventual owners.
The economics of spec building are fairly simple. The selling price is almost entirely fixed by the local conditions and competition – and in a stable market is fairly predictable. The profit margin is this price minus the costs of land and construction. Generally in the 15% to 20% range.
So how do we include considerations of ROI or incremental cost increases into this reality? I often see comments about how some components of the build, like European windows or going from resistance heating to something with a high COP, “only represent a cost premium of 20%”. But that’s my entire profit.
What do you see as the significant changes that have to occur before the types of decisions some owner-builders here make are able to penetrate that larger speculative housing market?
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Replies
Malcolm,
Way back in May 2009, I wrote a blog with these sentences:
“The low standard achieved by U.S. builders is understandable — even logical. Many builders ask themselves, ‘Why should I pay for foam sheathing?’ After all, builders don’t pay heating bills — homeowners do. In other words, the interests of builders and homeowners are not aligned. This divergence of interest between builders and homeowners is best addressed by ratcheting up our energy codes — codes which currently allow new homes to be shockingly leaky and poorly insulated. Last summer, a coalition of partners — including governors, mayors, and the U.S. Department of Energy — gathered in Minneapolis to propose energy code changes that would reduce energy use in new homes by 30%. The proposal was defeated after vigorous lobbying by the National Association of Home Builders.”
My opinion hasn't changed. Builders are behaving logically. If a community wants to raise the energy performance of new buildings, that desire needs to be expressed by raising the bar on our energy codes — and the codes need to be enforced.
I've read that residential builders as a whole realize a gross profit of 20-40 percent and realize a net less than 5 percent. That's builders as a whole, however tract builders make more of course due to their economies of scale.
Martin is of course correct with regards to building codes.
As codes get tighter there's less margin for building error. Tighter houses require better ventilation, design, and greater attention to detail. That drives up the costs. As costs increase you drive down demand for single-family dwellings.
So how does all this relate to your question?
Simple, the AVERAGE homeowner must be willing to let go of the idea of living in an esthetically pleasing house with a yard and instead opt for some sort of multi-family dwelling such as a Townhome (Row House), Condo.
Chris, energy efficiency and aesthetically pleasing can coincide. That is why we have architects and building designers.
Cramming people/families into row houses or condos with next to no storage, or outdoor space is not the answer.
Sure you could rent a self-storage space for $100/month, located 3 miles from home in an industrial area of town, or you could go to the park and share that space with all of your neighbours, but some people just do not want that inconvenience. Quality of life has to be maintained for people whose choices are to have more space. This is why I agree with Martin, the only way to drive up energy efficiency is to improve the building codes and improve enforcement, the later being the equally if not more important. In the end this benefits everyone, from builder, to trades, to designers, home owners and local utilities.
Builder's will include energy efficiency measures if buyers will pay for them. A few policy changes make that more likely. All new construction houses could be required to have HERS ratings to reduce the buyer education required to recognize and quantify energy efficiency measures. The appraisal standards could be adjusted to make sure that energy efficiency measures are reflected in the appraisal. Now, we have a chicken and egg problem. Appraisers won't give credit for something unless the market does first. However, until appraisals reflect the value, the only customers that can afford energy efficiency measures are those with excess cash. Speculative builders don't want to limit themselves to those buyers.
Code changes put builders at a disadvantage relative to existing stock. Forcing realtors to obtain a HERS rating in order to list an existing house might help.
@Ryan
Oh I agree, stricter and enforced code is need but it's not without cost.
I was just opining that we'll get there but it'll force the average homeowner into denser housing. It's what many environmental champions want anyways. So whatever.
Of course the price of land and artificially low mortgage rates don't help the situation either. In my area (Atlanta, GA) it is happening. Land prices are so high that tract builders have spent the better part of 5 years building only ($500k+) townhomes or ($700k) single-family houses set 6 ft apart and 20 feet from the street (In my area tract builders can meet a less stricter code with regards to setbacks, street width, distance between units if they call it 'private property' by throwing up a gate and a fence).
ROI for who, the builder or the homeowner? The incentives are all mixed up for builders: they see no ROI on energy-efficiency improvements because for the most part people don't value those things very much when they're purchasing a house. As a homeowner, ROI becomes very important; if you're reasonably numerate, you're not going to spend $2,500 on any kind of pure insulation or energy efficiency project if it's not projected to save you at least $100 a year (and probably it needs to be more because $2,500 in liquid form is more financially valuable than $2,500 spent on improving your house). So the time when the energy efficiency measures are implemented most cheaply--during construction--is when there is the least incentive to adopt them. That's why everything advances so slowly, or not at all, and only when the government forces builders to do things.
Maybe it's time to recognize that people just don't care that much about energy efficiency, and instead of judging them harshly for it or trying to bludgeon builders into supplying what people don't demand, we should make it moot by doing something far simpler like mandating electric appliances vs gas for new construction and then putting all our energy into making the electric grid as un-carboniferous as possible. If all the electricity comes from sources that don't contribute to climate change, who cares if people wastefully consume a lot of electricity because their houses don't have as much insulation as we'd like to see? It becomes a non-issue for society and the planet, just for individual homeowners whose incentive is to lower their own bills where it's financially rational.
In other words, if you had a 100% renewable grid and people keep paying their own way, who cares about efficiency?
Interesting question, Nate. In one sense, you are perfectly correct that we could switch to a 100% renewable grid and stop worrying about encouraging building efficiency, from an environmental perspective. But in practice there are still lots of reasons why it makes sense to build efficient buildings.
From a consumer protection point of view, there's comfort, and there's the trap that we leave for people who can only afford a basic house, which turns out to have high energy costs that they can't afford.
Then from an environmental point of view, the logistical and political challenges in changing over to a 100% renewable grid are more tractable if the amount that needs to be supplied is smaller. Here in New Hampshire, there's sometimes strong opposition to putting up wind turbines, and strong opposition to building a transmission line to bring hydropower down from Quebec. Even large solar projects face opposition. Improved building codes may be hard to pass, but they don't attract the kind of opposition that other energy projects around here seen to attract.