Granting loans on cheaper properties doesn't necessarily put borrowers in a position to succeed
Plenty is considered when a prospective homeowner’s ability to pay back a mortgage is evaluated: income levels, savings, past credit history. Weighed against the price of a borrower’s desired home, current underwriting models allow lenders to determine, to a relative degree of accuracy, what that borrower’s long-term performance as a mortgage holder will be.
But what about the performance of the property itself, and the influence it has over a borrower’s monthly expenses? If a slightly more expensive property can save a borrower tens of thousands of dollars over the life of a loan, would it not be in the lender’s and borrower’s best interest to approve the higher loan amount?
Those are the questions being asked by Ron Jones, president and co-founder of Green Builder Media. Jones feels current valuation models, still based on price per square foot, are “completely upside down.” For new product, for example, sale price reflects the costs incurred by a property’s builder. It doesn’t take into consideration what that property will cost its owner, through maintenance fees and utility costs, month after month after month.
“Unfortunately, the building industry has adulterated the use of the term ‘affordability’ to suit their own purposes,” Jones says. “‘Affordability’ to the building industry actually translates to ‘profitability.’”
He cites as an example two homes being built in the same new subdivision. Both are listed at $200,000, but Home A is 2,000 square feet while Home B is 2,200 square feet. Home B is cheaper on a price per square foot basis, but what corners are being cut to justify the lower price? Cheaper flooring or roofing materials that will cost thousands of dollars to replace in five years? An inefficient heating system that costs the owners an extra $200 a month in energy charges and erodes their savings a little more each month?
It's dangerous to equate affordability with value, Jones says, “because it dismisses any inclusion of what we would call ‘quality’. That’s very subjective, but there are some elements that we need to put into play there, like resiliency, durability, performance – the various things we look for in the built environment.”
Rather than focusing on concepts like affordability and attainability, Jones says lenders should be concentrating on strategies for creating successful homeowners, like getting them into properties that cost them less each month, even if they come attached to heftier price tags. Evaluating properties using a full-cost, rather than a first-cost, model could do just that.
At the core of Jones’ argument is energy efficiency, and for good reason. The Department of Energy determined that changes to the residential energy code in 2015 and 2018, which increased energy efficiency to roughly 80 percent, increased the cost of construction of the typical new American home by a total of $1.25 per square foot. That would add approximately $2,500 to the sale price of a 2,000 square foot home – essentially nothing.
The DoE found that the increased efficiency resulting from the higher cost of construction would save homeowners between $200 and $400 in energy costs every month. Over the course of a 20-year mortgage, that results in potential savings of between $48,000 and $96,000. Cut those numbers in half and those buyers are still miles ahead of where they would be if they had purchased a less efficient, “cheaper” home.
“And it’s not just for the life of the mortgage,” Jones says. “That savings goes on for as long as that building is occupied, and that could be two or three generations.”
The full-cost concept has slowly been making its way into the industry for the past thirty-years. Fannie Mae’s Green Mortgage products, launched in the 1990s, achieved a certain amount of success, but market penetration was far from total. Jones makes no bones about who was responsible for the initiative’s lack of success.
“The real reason was because of laziness on the part of the mortgage industry. They didn’t want to go through the extra steps that were necessary to make it successful,” he says, adding that the industry “is always flirting” with such programs, but unwilling to fully embrace them.
Jones says there is a growing desire among consumers and some builders to have an independent, third-party certification of efficiency that both groups can point to when it comes time to buy and sell new product, like RESNET’s HERS Index. Doing so might not only save homeowners – and let’s not forget renters trying to save up down payments – hundreds of dollars a month, it could also raise building standards in America, which Jones describes as “shameful.”
As with the mortgage industry’s resistance to full-cost evaluating, Jones expects a similar level of hard-headedness from the nation’s builders where improving building standards and efficiency is concerned.
He recalls when, back in the 1970s, all new buildings in Arizona were first required to have double-pane windows. The state’s homebuilders, outraged and banging the gong of “affordability,” came together to say the increased cost would mean the end of new home construction in Arizona.
The memory makes Jones laugh.
“Do you know how many homes have been build in Arizona since the 1970s, for crying out loud?”