Should energy audits be part of home inspections?

Earlier this year when Congress was discussing an energy bill, the idea of mandating energy audits during a home purchase became a point of contention. While misinformation on the issue did occur, the notion of requiring energy audits during a home sale never saw the light of day.

The idea of requiring energy audits is not new, however. Some localities in the U.S. have already implemented a requirement including the city of Austin, TX and the state of Nevada (beginning in 2011), while other areas have proposed some form of energy audit during a sale.

Why have an audit?

The arguments for performing an energy audit when purchasing a home are much the same as for performing a home inspection. That is, a prospective homeowner is given data about the current status of the home so they can make an informed decision. Where the results of a home inspection identify items in the home that are not up to code, do not work as intended, and even ongoing maintenance issues, the results of an energy audit provide details about areas in the home that are prone to energy loss (such as air leaks and insufficient insulation) and items that could be improved or replaced to save the homeowner money on their utility bills.

One key output of the energy audit is a "score" of the home's energy performance. The Department of Energy has published the E-Scale that would allow a buyer to compare homes on a consistent basis vs. a poor substitute of using old utility bills.

Concerns regarding audits during home purchase:

The most common argument raised is that an energy audit will simply point out negatives when nothing is actually "wrong" with the house. The concern from real estate agents is that this will scare buyers off their intended purchase when there is no reason to, or cause sellers to spend additional money to raise their rating. My opinion - one in the minority I believe - is that this is helping buyers make a fully informed decision about a home and that they can then adjust their budget accordingly.

The issue of whether audits should be mandated is more of a political one and a bit more touchy. Backers point to the ability to reduce overall costs and eliminate the potential need for building new power plants. While the benefits of having energy audit results available to a consumer is undoubtedly worthwhile, there are many situations where it's need is questionable. One such example is when a sale involves a rehab investor. In this case, the investor already knows that they are looking at "distressed" property and are accounting for updates needed to the home. While many rehabbers choose to ignore mechanical and structural updates that would improve efficiency, they nonetheless know what they are getting.

A middle ground?

While there are valid arguments on both sides of the debate, it would seem that a simple compromise is that consumers are educated as to the benefits of an energy audit at the time of purchase in the same manner as home inspections. Specifically, they are provided materials explaining the energy audit process and an option to conduct an audit during the home inspection period. The consumer has the choice at that point of simply waiving the inspection or including it as they see fit. The cost of the audit would be the buyers responsibility. (And yes, they can do that now, but awareness is limited.)

Although I am simplifying for the sake of discussion, I anticipate that we will eventually see the practice of energy audits at the time of home purchase become more common - and will likely result in a few problems along the way including poor quality audits, sales that are terminated, etc. The practice of home inspections took its lumps along the way and had to implement higher standards and certifications. (According to ASHI, the first regulations for home inspectors were instituted in 1985 - and only 32 states regulate home inspectors today.) Even in their current state, results of home inspections are inconsistent and can be a point of contention during the sales transaction.

At least certifications for energy auditors are already ahead of the game. RESNET is the standards base when an energy efficient mortgage is involved, but other groups are making headway as well, including the Building Performance Institute.

July sales not a pretty sight

I think we can officially call July sales a little bit ugly. To sellers, it must have seemed like everyone left town for the month.

Based on the Cincinnati MLS numbers, the total number of sales (closings) in July fell 31% from last July. On top of that, the inventory went through the roof - sorry, bad pun - rising to 11.6 months based on the sales rate.

See Cincinnati MLS-based charts here.

The national picture wasn't any better. New home sales tanked to an all-time low of 279,000 homes at an annualized rate. Existing home sales fell 27% on a year over year basis.

The rough July wasn't unexpected, of course. For some time now the message has been that the tax credit pulled sales forward. A look at year-to-date numbers would seem to confirm that as the total sales are slightly ahead of where we were last year at this point. That made agents, title companies, and lenders scramble early in the year while we ended up with a long summer vacation.

Was there any good news in there? Well, yes, actually. As we began to see in last month's report, pricing continued to move up, albeit ever so slightly. It might still take a little while before it all comes together, but stable pricing could be the leading indicator for housing to head back to some kind of normalcy. (If you follow the stock markets, you may have noticed that home builder stocks rose following the recent reports as investors took the numbers as signs of a bottom.)

I don't expect August statistics to be quite so severe given that activity levels seemed to increase this month, but I wouldn't be looking for a quick snap back either. Once the bubble effect from the tax credit clears out, we'll probably see a continued move back to levels of a year ago with some pickup in sales towards the end of the year. My crystal ball isn't terribly reliable, but if I had to guess, I'd say that if mortgage rates remain low then we could see a real spring market next year, not one based on artificial stimulation.

Does a previous owner's utility bills tell us anything?

It's a question real estate agents hear all the time - so, what have the utility bills been like on this house? So common, in fact, that both buyer's agents and listing agents will often have that information in hand before a prospective buyer even asks - especially if it shows the house in a good light.

But what does this data really tell us? Most likely, all it tells us is how much energy the previous family used. What we don't know is how. Do they like to crank up the heat in the winter? Freeze the house in summer? Leave TVs on all night? Perhaps they are miserly. What if they live in one room of the house and wear 5 layers of clothing for cold days?

Other factors might also mislead us into believing the home is more energy efficient than it really is. For example, they may have low bills but travel extensively or used the house on a limited basis in the past year.

How do you determine what the energy use is really like?

I would not completely dismiss the data from these old bills, but factor them into your overall evaluation. What's more likely is they can serve as a red flag. If you find out that the current owners had a $700 heating bill in the winter (not unheard of in a large, older home), then that should alert you to the potential that the house has little to no insulation and an inefficient heating source.

Most people don't take a close look at the mechanical systems and structural items when they are shopping for homes, they are focused on whether the house feels right. Ideally though, you want to take a closer look during that 2nd visit and during inspections. I personally try to point out some especially good or bad things I notice as I'm showing clients a home.

Home inspectors will generally hit the biggies - age of the heating and air conditioning, insulation level and ventilation in the attic, and operating condition of windows and doors are among some of the issues they may point out. The primary goal of the home inspector, however, is to determine whether these are operating adequately - not whether they are efficient for the home.

There are also some easy things you can look for yourself. Check for energy labels on equipment and appliances. If it has a basement, is there any insulation along external walls or in the joists? Do windows, doors, and pipes have good caulking and weatherstripping? Each of these can give you an idea of where improvements may be needed. The Department of Energy EnergySavers website discusses these issues in greater depth.

Factoring energy use into your housing decision

You may have come across a great old house, charm by the bucket loads, and then find out that their utility bills were sky high. Should that scare you off? It shouldn't if everything else about the house is what you are looking for. Consider it in what you plan to pay and do to the house before you move in. You don't want to end up getting a house "on the cheap," and then find out the money you thought you saved is lost paying the utility company.

This is where an energy audit can pay for itself - at least with an older home in need of some updates. An auditor will go through the home and prepare a detailed analysis of the energy usage and what cost-effective improvements can be made. My personal preference would be for buyers to take this step during their inspection period so that they can make a more fully informed decision about the home before purchase, but my opinion on this issue is a bit of an exception among real estate agents - a discussion I leave for another day.

How low can they go? (Mortgage rates that is...)

So, mortgage rates dropped to an average of 4.4% last week. The lowest in 40 years, with no expectation that they will increase significantly in the near future.

It was just a few months ago that the published conventional wisdom thought rates could increase from their already low rate of around 5% to 5.5 or even 6% by the end of the year because the Federal Reserve was ending their purchases of mortgage-backed securities. Then all kinds of goofy things took hold: Greece and Spain debt problems caused investors to rush into Treasuries, causing rates to take a step down, then sluggishness in job creation and fears of a double dip recession pushed them down a bit more.

The latest move down was spurred in part by last week's Federal Reserve announcement that they would buy Treasuries as some of the mortgage securities matured. That took the fear level up a notch and now the only thing it seems people want to buy are Treasuries. I'm not sure whether that was the intended effect of the announcement, but it did manage to take rates to their current lows.

Gauging effects

For those in position to do so, the rush to refinance is on. Lenders across the area are handling high volumes of refi applications. Purchase applications on the other hand - not so much - but at least rising a bit.

One of the positive effects is that lower rates increase housing "affordability." That is, more individuals qualify for higher loan amounts. With underwriting standards the tightest they've been in at least a decade, that is no doubt beneficial. The follow on impact is that as more people qualify for higher loan amounts, it increases the potential number of buyers at any particular price point - thus helping stabilize home prices via increased demand.

All of this also helps begin to balance out rising rental rates. As more people have been shut out of the mortgage market (or have been through a foreclosure), rents have been on the rise. This pushes the demand cycle for home ownership even more as rising rents cause people to assess whether renting vs. owning is the best financial option.

Can rates go lower?

In "effective rate" terms, mortgage rates were lower in the early 70's. That's because the difference between the inflation rate and mortgage rates were less. Several economists do suggest that we could still see rates go down a bit further, but that they probably don't have too much room left. Banks are already borrowing at stunningly low rates (i.e., from 0 - .25%), and to lend out money on mortgages they probably have to make at least a couple of points above what they can make buying Treasuries to account for the risk factor.

In May of this year, the National Association of Realtors reported that the home affordaboility index had neared an all time high. It has since pulled back a little bit, but will likely head higher with the summer slowdown in activity and dropping rates. As the economy eventually picks up steam, the stimulus effect being pushed through low rates will probably be withdrawn and rates will start to rise again. The million dollar question, of course, is when that might actually happen.