Green Premium?

October 6, 2010 at 11:28 am 4 comments

Contributed by Sam Lai:

Is there such a thing as a Green Premium?

This is one of the more controversial topics in the residential green development realm.  From the residential green and energy efficient advocacy perspective, we all want the answer to be unequivocally “YES!  There is a HUGE premium.”  Numerous  consumer surveys comport that a majority of Americans want green homes.  But I’m not so sure the “Green Premium” is the most accurate way to describe positive consumer response.

Let’s start from what most people think of when we say “Green Premium.”  For example, Joe the builder just finished up on an Energy Star-certified and 4 Star BuiltGreen-certified home.  Joe’s home is at the tip-top of the local market in terms of marketable appealand functional utility.  There are plenty of conventional high quality homes that have recently sold in the immediate vicinity of similar design, appeal & functional utility for $815k, $822k, $830k & the highest sale in the area $835k.  Joe and his real estate agent decide that the home might be worth about $830k if it wasn’t green.  But they decide that because there is a “Green Premium” of 6% based on a recent research study, the market value of the property should be $880k.  The definition of “Green Premium” from this example is the premium a green home yields above the competitive market.  This is a great way to not sell a house.

The question of whether or not there’s a “Green Premium” reminds me of a scene in a mockumentary movie “Spinal Tap”, where guitarist Nigel asserts that his guitar amplifier goes to eleven.

Every market has an upper threshold whether you call it 10 or 11.  From a valuation or banking perspective, if a home is superior to the rest of its market it is overbuilt because at some point the market stops responding.  Although most consumers in America desire green characteristics in their next home today doesn’t mean that they throw all other deciding factors aside.  Green characteristics are weighed alongside all other distinguishable marketable characteristics including price, functional utility, aesthetic appeal and quality.

Speaking of quality, how does the market distinguish quality in residential homes?  I would assert that our homes can be seen as an emblem of the leading cultural values of the moment.  In 1999, common characteristics for what was considered high quality new construction home would be 5,000 sq ft of living area, master suite with whale size soaking tub, “drive-through” shower and of course a gourmet kitchen with Viking range and Sub-Zero refrigerator.  Shifting values of our time are reflected in the kind of quality buyers are looking for today:  energy-efficiency, ‘quality over quantity’ and low-toxic finishes.

So, is there such a thing as a “Green Premium?”  Or, does it go to 11?  Sure, call the “tip-top” whatever you want.  We believe that green characteristics will continue to be the hallmarks of quality in residential homes into the future.  We just need to remember that people primarily buy homes for location and you can’t just slap on a “Green Premium” and expect the market to agree.   Do you agree?

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4 Comments Add your own

  • 1. Nigel the Anonymous Builder  |  October 6, 2010 at 2:47 pm

    Good points. Over-building has been the way builders have tried to differentiate for so long. Being able to differentiate on energy metrics makes so much more sense.
    Still, I’ve always liked it that my ski bindings go to 11….

    Reply
  • 2. Aaron Adelstein  |  October 7, 2010 at 2:19 pm

    Sam- you’ve identified two really important things in this post. One is a common misunderstanding of green building values- while on countywide averages green homes are carrying a premium over non-green homes, most of the projects that enter the market as far and away the most expensive home on the block fail to perform financially. People won’t throw out their other values (investment potential and resale in this case) because a home meets their green values.

    The other thing you identified…purely coincidentally…is my favorite movie clip of all time. Nice one.

    Reply
  • 3. Ben Kaufman  |  October 8, 2010 at 10:03 am

    Sam – A quick look at the stats does show a pretty clear premium for green. If you look at the NWMLS stats for Seattle since ’07, it shows the median home sales price for green homes is 3.3% higher than non-green homes in the same category. Thing is, those homes make up a big chunk of the market, 33.6%, are 5.4% smaller, and sell in 24% less time. Dissecting those stats for a builder pricing homes is another matter.

    I agree you can’t slap on a premium an already high priced home and expect to get that value out of it. The key is to build a little smaller, priced at or slightly above the better quality homes in the neighborhood. Go 5% smaller, with a 3-5% premium. If you go deeper green, that stats show you can get a 10%-15% price premium or more, but market time lengthens the higher the premium.

    Also, I think the reason we were building such large homes had to do with developers and builders maximizing profit on land values. That trend ran smack dab into decreasing household sizes.

    Thanks for the flashback on Spinal Tap!

    Reply
  • 4. Michael Chasnow  |  November 11, 2010 at 8:27 pm

    Research says that energy efficient homes should have more value than other comparable homes (e.g., similar location, size), basically $20 more in value for every $1 in annual energy bill savings. My question is whether, in practice, people know about the difference in energy bills between homes. Only a few municipalities have point of sale disclosure requirements where annual energy bills need to be posted (e.g., Montgomery County, MD, Berkeley, Austin). However, annual energy bills, which average about $2000 for single family homes, are just as high as property taxes and homeowner insurance. If instead of just tacking on a “Green Certification” people saw the difference in dollar savings (e.g., $1300 vs. $2000 in annual energy bills), on realtor advertisements, then I think we would see energy efficiency better integrated into home values.

    Reply

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