Don’t let the Inflation Reduction Act’s (IRA’s) name fool you. The sweeping legislation, which passed in August, may have elements that offset the rising costs of living that today’s consumers face, but it also has some that may increase them, particularly in the housing realm.
That’s thanks to the soaring sums it allocates toward combating climate change. Through various grants and tax incentives, the bill encourages municipalities to adopt stricter energy codes, which could burden home builders, sending their costs—and the eventual buyer’s—upward.
“The $1 billion set-aside for incentivizing the adoption of updated energy codes could result in a further patchwork of mandatory code requirements and incremental builder costs,” says Hilla Sferruzza, chief financial officer at Scottsdale, Arizona–based Meritage Homes. “This could be passed through to the home buyer.”
Energy code changes would likely require updates to the home construction process, too. This could increase costs and even cause delays or extended production timelines for some builders.
“It’s too early to tell exactly how the new codes would impact construction, but builders are going to have to change their practices in order to comply, which means new materials and new techniques,” says Jim Tobin, executive vice president of government affairs for the NAHB. “I think there's going to be a learning curve, so to speak.”
Consumer Incentives May Trickle Down
There are also consumer-facing facets of the IRA that could impact builder costs as well.
The 25D Residential Clean Energy Tax Credit, for example, gives homeowners credits for installing various alternative energy sources, like solar water heaters or fuel cells. The HOMES Rebate is another, offering states cash to reimburse property owners anywhere from $2,000 to $4,000 for whole-house energy improvements. Finally, there’s the High-Efficiency Electric Home Rebate Act (HEEHRA), which promises up to $14,000 to homeowners who electrify their homes.
Though these are technically incentives aimed at consumers, according to experts, they could have builder-facing reverberations as well.
For one, they may send renovation demand up—discouraging new-home construction sales, especially if mortgage rates remain high. They could also trickle down to construction-side labor costs.
“Should more Americans turn to additional home improvements and fixer-uppers, this could lead to a reduction of buying new homes,” says Erik Cofield, executive business coach at the Association of Professional Builders. “When renovating a home, the demand for labor increases. With the current labor market shortage in addition to a tighter market, builders will be forced to pay higher wages.”
Some Positive Takeaways
The bill isn’t all bad news, though, particularly for builders who are already devoted to energy-saving initiatives.
For those, the most notable takeaway is what the IRA does with the 45L Tax Credit for Energy Efficient Homes. First, it makes the per-property credit—currently valued at $2,000—retroactive for all eligible homes built this year. It also increases the credit’s value starting in January 2023, giving builders credits between $2,500 to $5,000 per qualifying home.
It also extends the new credit for another 10 years through 2032. This is the longest extension the credit’s ever been granted.
“We’ve championed energy-efficient initiatives even in periods when tax credits were uncertain,” Sferruzza says. “Delivering high-efficiency homes is a core tenet of who we are, so the extension of the tax credits for the next decade will allow us to harvest the available savings andlower our tax rate.”
Though the 45L changes are certainly a plus for many builders, those in the remodeling sector will likely see the biggest wins from the IRA, according to Tobin. “There's over $4 billion in money that's going to be accessible by states over the course of the next 10 years for energy-efficiency upgrades and retrofits for existing homes,” he says.
This isn’t just positive for remodelers’ and contractors’ bottom lines, but it might equal a meaningful change in nationwide energy output, too.
“Most energy-efficiency programs tend to focus on new construction, rather than the 120 million homes in America that were built before 2006,” Tobin says. “That's where the real energy loss is in the residential built environment, so focusing on the older housing stock is a real win for this.”
Preparing for the IRA’s Rollout
The provisions laid out in the IRA aren’t yet solidified, and the U.S. Treasury and Internal Revenue Service are still in the process of finalizing the details. They announced a request for public comment in early October and will use these responses to “inform the implementation of this landmark legislation,” according to the two departments.
There’s no telling how long this process will take, but as the government determines its strategy for rollout, Cofield recommends builders use the time wisely.
“Get educated about the law, its details, and its nuances,” he says. “Small and large production builders need to understand the tax credits and incentives and take those into consideration as they develop their strategic planning.”
And if you’re in the remodeling sector? Start educating consumers on the IRA—and the savings it offers—today.
“Don’t neglect marketing,” he says. “The time to engage potential prospects is now.”