It’s the Millennials - Gen Y (born 1982-2002)- that are going to be key to turning the real estate market around.
And there’s more and more data coming out about their home buying preferences. They may not say it directly – but all the signals are indicating that they need to be sold on both performance and value.
…up the road is a much newer city, where you can get more home for your money. You’re also farther from major highways as well as inconveniently farther from our favorite sushi place.
The National Association of Home Builders found in their recent ”What Home Buyers Really Want” report that 30% of first-time home buyers (likely Millennials) select a home based on its location to where they work.
This translates in to a whole new perspective on buying for Millennials. They are not just interested in getting to the closing table. But like a cheap printer that kills you in printer cartridge costs, these buyers are making selections based on the Total Cost of Ownership for a certain address — everything from desired remodeling costs to the utility budget (and opportunities to shrink it) to the cost to get around.
For efficiency contractors, Gen Y represent a ripe market opportunity – personalizing and improving older homes. For Realtors Gen Y is an opportunity to stand out. It’s not just about knowing the properties anymore. It’s about providing tools that enable better choices – and build a very loyal base of referral customers!
…There’s technical progress in housing. So, new ones are better.
But the data that’s cited tells a tale of the SnackWell effect. My takeaway from that same data is that new may not necessarily be better.
When I do the scoring, seems like Existing Homes have more options and definitely come out ahead!
Use 21% less(Advances in space heating and building envelope)
Programs like Home Performance with ENERGY STAR often reduce total energy use by 15-20%
Use 3% more
Use 56% more More space to cool
Appliances, Electronics, Lighting
Use 18% more (More/bigger appliances, electronics, lighting)
Option to install ENERGY STAR products
Let’s talk again when the data on homes after 2010 is available. You’ll start to see carefully crafted homes that provide more quality and energy savings per square foot!
This information is also a sign why we need an alternative to the popular HERS Index for rating efficiency. HERS does not account for square footage (which leads to the SnackWell effect you see in table above). The rating system geared more towards existing homes is call Home Energy Score and takes square footage into account. No SnackWell Effect there!
This week RISMedia reported that this house-buying will be the first one where most buyers are from Gen Y.
Good news as this niche represents a very interesting pool of buyers for High Performance Homes (HPH) – either new or existing.
According to RISMedia, Gen Y has sat on the sidelines of the housing crisis, picking up lessons along the way. They are determined not to make the same mistakes as their parents, the they are tired of either living with mom and dad again, or blowing money on rent. They are looking for cool technology to make the buying process easier.
For home performance contractors and programs, Gen Y represents a group of buyers where the total price picture on their next home is very important. Mortgage costs simply will not be enough. They will be expecting information on utility costs too. The benefits of good home performance will matter, as long as there are data points to back it up.
We may finally be seeing a generation of buyers where efficiency really matters as part of the home buying process!
It’s State of the Union time, and another union worth looking at is the state of value for high performance homes (HPH). The image below shows how value comes only through a union of some unlikely stakeholders!
So how is this precarious union working anyway? First the good news.
Step 3 above – Green MLS. Green MLS activity seemed to have peaked in 2010. But there are bright spots ahead. The MLS’s Real Estate Transaction Standard includes a core set of 10 fields. As a result, their data dictionary creates a path for the dozen or MLS software vendors to implement a standard set of green fields. Then, the approximately 600 or so MLS yet to turn on green fields will have a much easier and consistent path to activate them.
Step 4, Part A – Appraisers. The Appraisal Institute’s Green & Energy Efficiency Addendum was released with many accolades in late 2011. The latest version is expect Q2 of this year. For now, this is THE workaround that holds everything together. This form is packed with the power of information – to bridge what the builder, contractor or homeowner knows about high performance improvements – and allow the appraiser to assess the value.
Step 1 – Builders/Contractors/Home Owners. The very folks who can unlock the value for HPH don’t realize they have the power. If a high performance home falls in the woods, and no one is there to know it performs better, it doesn’t have value!!! The process to value starts with builder/contractor/home owner explaining to listing agent, lender and appraiser about the features, technologies and performance that sets their home apart. See why below.
Step 2 – Real Estate Agents. Programs like NAR Green and EcoBroker are key to educating agents. I estimate that nationally only about 2% of agents and appraisers have received a green designation to date.
Step 4 B – Appraisal Management Companies. The system today holds back the right appraisers from being assigned to HPH jobs. Most appraisers earn their assignments in a pool that rewards lowest bids and quickest turnaround times with more work. While appraisals are supposed to be assigned based on competency, that doesn’t often happen for HPH today. And, any request for a certain competency has to be known around the time of contract. If you realize the appraiser wasn’t matched on competency for the job until after he/she gets on site it is very often too late!
Step 4 C – Government-Sponsored Entities. Today, Fannie Mae and Freddie Mac are struggling. FHA loans are the best option for many buyers today. In many ways the underwriting guidelines of these GSE lenders set the stage of all underwriting. And their guidelines either ignore or don’t address HPH. In some cases they restrict the tools appraisers have to value these properties. In many cases, using an approach appraisers believe is a fair way to assess value is actually kicked out for review once it gets to an underwriter. Appraisers are highly restricted in that they must find comparable matches when assessing HPH – otherwise the underwriting guidelines in practice today essentially means no comps and the value disappears!
So as I take the podium, here’s the challenge I put forth to all the professionals who are tied into this unlikely union toward value for High Performance Homes:
All utility, local, state or non-profit efficiency programs, as well as high performance builders issue a completed Green & Energy Efficiency Addendum when work is complete.
Real estate professionals addend the Green & Energy Efficiency Addendum to the purchase contract to increase the likelihood that a competent appraiser will be assigned to the job.
And the biggest single action the high performance industry can do to impact value - give us more supply of great homes, and report how those numbers are growing!
Note that the common theme in root cause for lack of progress above has to do with lack of supply:
MLS not adopting green fields – If they upgrade these fields they need to know at least 10% of the market is green, and number is growing. Think about it – only 3-5% of any market comes up for sale in a year. That’s not a big pool to invest in a special set of fields.
Agent Education – There still is not enough supply of HPH to motivate agents to invest in this education.
GSE’s – They require comps, and if the comps are not there, neither is the value!
So please share this post and join me in the easy action steps above. And, keep sharing the good news about growing supply. Once that happens, value will be the power for the demand engine!
How often do I hear folks envision a “MPG sticker for homes” to drive demand in energy efficiency? But my friend and colleague Mike Rogers points out what’s been plaguing me – that Americans just love their pickup trucks, despite the very MPG sticker on the window.
He makes excellent points, not to criticize, but to highlight that it’s features and benefits that drive action, not information simply on its own.
While I don’t think an MPG when a homes sells is the right tool or time, I do firmly believe that the better the efficiency world gets at calculating projected and actual savings, the more the market will respond with demand. So MPG or not – we still need those numbers!
In the interest of a tipping point, many envision a time when every home that’s sold includes a disclosure of its energy efficiency.
Malcolm Gladwell is the king of the Tipping Point. His book is about how change happens. Much of the book is connected to what we know about adoption of change. There are always Innovators and Early Adopters. At the end are the Laggards. And in the middle is the Majority.
Before any discussion of mandated efficiency is even constructive, you have to understand what’s happening within the adoption curve. You need the right tactics at the right point on the curve to create change. This is important because adoption of efficiency is tied to home values. And in addition to the adoption curve, there is a predictable curve in valuation.
Today we have a market that accepts inefficiency in homes. The handful of HPHs that are superior because of better efficiency get slightly rewarded (they sell for more, they sell faster, or today – they sell at all!). As adoption grows and HPHs become the majority, we will see market acceptance of efficienthomes. The premium will become more pronounced, eventually shifting to a penalty for the inefficient home, rather than a premium for the efficient. This leads to the final phase of the adoption curve where the Laggards find that their inefficient homes are functionally obsolete and they must sell at a discount to address the deficiency. The image below demonstrates the overlay.
What does this have to do with the discussion of mandated energy disclosure? It creates a framework for which levers will work best to drive demand at different phases.
Innovators & Early Adopters/Market Acceptance of Inefficient Homes.Best Levers - Incentives, rebates, education and tools that inspire investment despite efficiency being an untested risk. Mandatory Disclosure - Too premature. Mass majority of homes will do poorly, therefore market will reject the information.
Early Majority/Early Acceptance of Efficient Homes.Best Levers – Market tools like Green MLS and green valuation techniques. Standard tools to signal superior homes to the market. (Good news is that we can and are making progress here prematurely!)
Late Majority/Full Acceptance of Efficient Homes. Best Levers - Valuation (market penalty for inefficiency begins). Mandatory Disclosure - Could be effective to distinguish the near split between inefficient and efficient homes.
Laggards.Best Levers – Valuation (penalty for inefficiency). Mandatory Disclosure - Redundant (Market has adjusted to incorporate efficiency.)
Bottom line: This is a classic chicken and egg. Although mandatory disclosure could be a tipping point, we need supply before it would create demand. Mandatory disclosure also has a very short window where it makes a difference.
Instead, now is the time to talk about building the supply of High Performance Homes where the early adopters live. Incentives and education is needed most!
A group of industry visionaries has set out to make the home-buying process as simple as buying a latte! It’s an inspired vision of simplicity and data-sharing all built around the consumer. Latte Vision Video
According to their website, Inman News is the leading source of independent real estate news, information, advice, research, opinion and commentary for industry professionals and consumers alike.
Last month at their Real Estate Connect NYC 2013 they set out to redefine the real estate industry by calling for a fully digital transaction.
Nothing would help High Performance Homes more than a homes-like-a-latte experience!
Much of what is holding back value for High Performance Homes is that data sits in silos and is not shared with real estate agents and appraisers at critical points.