ResearchWorks

PATH Offers New Perspectives on Affordability

How much home can a low-income family afford to buy? More than they’re currently buying, according to the Partnership for Advancing Technology in Housing (PATH).

When it comes to calculating buying power, little has changed in the last half-century in the way homebuyers and their lenders size up housing options. A simple PITI calculation — principal, interest, taxes, and insurance — brought everyone to the same “first cost”; a hard number quantifying the financial commitment home-ownership demands. For years, PITI remained unchallenged as the yardstick used for measuring the cost of a home, while the bidder’s financial profile provided a more or less obvious answer about ability to buy.

But as every homeowner knows, mortgages don’t exist in a vacuum. The true cost of owning a home includes monthly energy bills and maintenance costs, over and above the monthly mortgage payment. This more inclusive monthly figure is sometimes referred to as the “life cycle cost” of owning a home.

Homes that include innovative technologies to improve energy efficiency can be significantly more affordable on a monthly basis, despite a somewhat higher first cost. To demonstrate this concept, PATH sponsored the 2004 NextGen Demonstration Home at the International Builders’ Show in Las Vegas earlier this year.

The NextGen Home featured multiple innovative technologies and building practices, including:

• Smart framing to reduce materials and waste;
• Advanced piping that eliminates unnecessary materials and roof penetrations;
• Durable roofing and siding;
• An energy-efficient HVAC system and spray foam insulation;
• Water conservation systems, including a tankless hot water heater;
• Recycled building materials; and
• ENERGY STAR® qualified appliances, which use substantially less energy than conventional models.

By meeting strict energy efficiency criteria, the 2,400-square-foot, single-story home qualified for an ENERGY STAR certification from the U.S. Environmental Protection Agency (EPA). Homes that qualify for the ENERGY STAR label are at least 30% more energy efficient than homes built to the 1993 Model Energy Code or 15% more efficient than the state energy code, whichever is more rigorous. According to EPA, ENERGY STAR-qualified new homes use significantly less energy for heating, cooling, and water heating, so homeowners can expect to save about $200–$400 annually on their utility bills. While these savings are attractive for all homebuyers, they are especially important to low-income buyers, whose need for more manageable monthly costs is often a deciding factor in homeownership.

Buyers of energy-efficient homes not only save money on long-term operating costs, but can also qualify for energy-efficient mortgages (EEMs). Backed by the federal government, EEMs allow homebuyers to qualify for larger loans at their present income level by incorporating the projected monthly energy savings into the maximum allowable housing expense, or PITI.
Homebuyers can use their increased purchasing power to buy a more energy-efficient home, or choose to make an older, less efficient home more comfortable and affordable. Through EEMs backed by the Federal Housing Administration (FHA), homebuyers can finance 100% of their energy upgrades. Loans are available for as much as 15% of an existing home’s value and 5% of a new home’s value. EEMs require that a Home Energy Rating System assessment be performed on the house, which can cost $300 to $800, but the math makes sense for homeowners who expect to live in their home for at least five years. As energy prices continue to rise, the break even point could easily occur sooner than that.

But a homebuyer doesn’t need an EEM to reap the benefits of the higher performance, higher first-cost home. It represents the best value, no matter the financing option.

For more information on the NextGen Home and its innovative technologies, visit the PATH Web site at www.pathnet.org. For more information on EEMs, visit www.efanniemae.com and follow the link to single family mortgage products.

Life Cycle Cost Comparisons Life cycle cost comparisons also work with individual items in the home. For example, faced with the decision to replace a 100-watt light bulb with a 27-watt compact fluorescent bulb, looking at the life cycle cost makes the decision very easy. In this example, the 100-watt bulb costs $0.50 (and lasts 1,000 hours), the 27-watt compact fluorescent bulb costs $8.00 (and lasts 10,000 hours), electricity costs $0.08 per kilowatt-hour, and you will use the bulbs for four hours per day. Cost of Lamps 100 Watt Incandescent 27 Watt Compact Fluorescent Lamp Life 1,000 hours (250 days) 10,000 hours (2,500 days) Annual Energy Cost $14.60 $3.94 Lamps Purchased in life of compact fluorescent (6.8 years) 10 1 (one bulb lasts the entire time) Bulb Costs $5.00 $8.00 Energy Costs $99.28 $26.81 Total Cost $104.28 $34.81 Savings Over Lamp Life   $69.47 savings This simple life cycle cost model does not include the cost (or inconvenience) of actually changing the bulb. In the model shown above, based on the energy savings alone, you save the cost of the compact fluorescent bulb in nine months.

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