When Americans shop for appliances, they see not only price tags but also bright, yellow Energy Guide labels that show the estimated cost of operating the product over its lifetime. Car shoppers, meanwhile, look for the mileage label.
Appliance tags and fuel economy figures convey crucial information to help consumers make informed decisions with energy efficiency in mind. Yet for the biggest purchase many consumers will make in their lifetimes — buying a home — there is usually no special label indicating how green the real estate is. What’s needed is a mandatory, nationwide system of rating homes based on their energy performance.
First, it’s important to note that so-called green labels for homes are available through certification programs offered by Energy Star, an energy efficiency program operated by the Environmental Protection Agency, and LEED for Homes, a voluntary rating system from the nonprofit US Green Building Council that is geared toward the home design and residential construction industry.
The problem is that these labels are found on only a small percentage of homes nationwide, mostly on newly constructed properties. More importantly, they are not mandatory. Drive down any street in America and spot a “for sale” sign, and chances are there is no outward indicator of the home’s energy efficiency status. The value of the investment by the current homeowner is not readily available to homebuyers, and therefore the premium that could be added to the sale price is not fully realized.
Research has shown that greener homes fetch more at sale, thus providing an incentive for homeowners to invest in efficiency upgrades — like improved insulation, new HVAC systems, and tankless water heaters — while they own their home or as they prepare it for sale. A 2012 study of the California housing market found a green label provides a market-price premium of 9 percent when compared with a similar home without the label.
Prospective homebuyers, in turn, will get a clearer understanding of their prospective home’s energy efficiency before they get to the point of purchase and sale.
The European Union made energy labels mandatory for residential properties through a 2003 directive that is finally bearing fruit following sporadic implementation of the policy. A recent study for the Netherlands Central Bank found that the price differences between “green” homes and “non-green” homes has encouraged home sellers to invest in making their properties more sustainable. The study also found that, in general, “green premiums” are in line with both the seller’s investment costs and the energy savings that buyers would realize over time, suggesting an equilibrium in the market.
In a fully labeled market, a prospective home buyer could see more clearly how green a particular home is, and therefore how much money the seller has invested in the property to make it more efficient. That will factor into the sale price that is negotiated between the two parties. Buyers could still choose to buy a less energy-efficient home; they would expect to pay less and then have the opportunity to make their own green investments.
Much more important, a labeling system will also bring about greater engagement on energy efficiency. As people compare energy ratings, they will be advancing environmental awareness and exhibiting greater care about our fragile ecosystem.
So while real estate is guided by the familiar mantra — location, location, location — the buying and selling of properties should be based on: labels, labels, labels.
Dennis Frenchman is professor of urban design and planning at MIT and the director of the MIT Center for Real Estate.