“It’s much better to be your own disruptor than to have disruption done to you,” says CR Herro, vice president for innovation at Meritage Homes. JLC Senior Editor Ted Cushman took a few minutes of Herro’s time to ask about the impact of California’s new solar and zero-energy goals on Meritage’s operations, in California as well as nationwide. Here’s what Herro had to say:

C.R. Herro, Meritage vp.
C.R. Herro, Meritage vp.

Ted Cushman: C.R. Herro, I’m interested in talking to you about the challenge of zero energy coming out of California. You guys build around 7,000 houses a year. How much of that is in California?

C.R. Herro: We do about 1,600 or 1,800 a year in California.

Ted Cushman: So this is one of the things that California does, whether it’s VOC regulation or lead-free faucets or whatever, is they push a new thing out there and it’s important enough for people that people start doing it nationwide. California’s going to require all homes to have solar power and to be net zero starting in 2020. Are you starting to think about what it would take for you to do net zero in other parts of the world besides California?

C.R. Herro: Well, we have been building net zero for 8 years. We established ourselves in trying to differentiate ourselves with energy efficiency about a decade ago. We were the first big production builder to build to Energy Star, and we’ve been voluntarily building well ahead of compulsory code in California and all throughout the country for quite a while. And so for us it was a much shorter putt to get our homes to zero. We’ve built community scale zero, we’ve had standard solar homes across states — we’ve been in this space for a long time. And I guess kind of philosophically, I’ve got two main positions on it. One, energy efficiency and renewable energy is the right financial thing to do at everybody’s price point, from entry level to luxury. But two, California and everybody else that has been pushing an energy efficient and renewable energy agenda isn’t enabling it. What I mean by that is that they’re not differentiating the value of this energy efficiency and renewable energy benefit in the transaction. So it’s difficult for people to compare apples and oranges. And the net effect of that is that you could actually impair new home construction, because inevitably, older homes without all of these features are cheaper to build. So the evolution from my perspective is, we have to change appraisals and underwriting and possibly go to a labeling system which captures both the selling price of the home and the operating cost of the home. I consider that the true cost of ownership. So buyers can make more informed decisions. What they’re doing in California isn’t financially irresponsible; but it’s irresponsible not to support the benefits in the marketplace.

Ted Cushman: Well, what are the kinds of changes you have to make to achieve zero energy? Let’s just look at the shell, the envelope — what do you have to step up in order to build a house that you can supply with power using rooftop solar?

C.R. Herro: We do literally dozens of things. We put in high-performance windows, we do advanced framing details to reduce thermal bridging, we do better insulation, we do better air-sealing details, we do more efficient lighting, more efficient heating and cooling systems, more efficient water heating systems, more efficient appliances. What you look at is how many kilowatts you reduce for every dollar you have to spend. And there’s a lot you do that is more financially responsible before you get to solar.

Ted Cushman: So you’re going to be required to do solar in California now. Have you had to change things like your rooflines? The configurations of the houses, the massing, the orientation, that sort of stuff?

C.R. Herro: That’s going to be one of the big challenges is that the municipalities where we build have an architectural review process. And that process has led to more and more and more complex rooflines, which is the antithesis of what you want when you’re trying to put in a solar array. We’re just now starting to see that conflict between architectural review and required solar placement. And so something’s going to have to give, and I think what’s going to happen is that the architectural review process is going to have to defer and go to a simpler roof design in order to accommodate these arrays and meet these codes. And I think that’s a good thing. I think the level of kind of gingerbread chopped-up roofs has gotten a little silly, so if we come back to the middle in order to accommodate solar, that’s not a bad thing at all.

Ted Cushman: This is something that you’ve had experience working out not just in California, but in other states. How have you dealt with the architectural review problem up until now?

C.R. Herro: It ends up being a lot of education. It takes a little longer to get through the permit process, and you have to educate these smaller municipalities on larger issues and you have to demonstrate to them why compromising one is better for the other. But hopefully that amount of bureaucracy and education is smoothed out, because for all builders and the people that buy homes, that kind of time costs money and increases the cost of building a house.

Ted Cushman: So what about entirely re-thinking the building systems? I see there are some places where Meritage is building whole neighborhoods using the HercuWall panel system.

C.R. Herro: Yeah, that’s definitely part and parcel of challenging what is the best value to a buyer. Is really looking at our industry and innovation to implement things that create more value than the dollars that they cost. And so the reason ten years ago we implemented a strong energy-efficiency program was that it made sense. And even though most builders at the time weren’t able to cost-justify it, it has been a really good business decision of ours, to improve the way we build homes and then inspire consumers to select those homes. So, the process of challenging the last hundred years of the way we build homes — it’s sort of surprising to me that it’s innovative to do that. Every other business sector constantly challenges everything that they do in order to create unique products and create value for buyers and differentiate themselves from the competition. And home building just hasn’t had that kind of innovative push. But as you see things like a lot of the very large Asian home builders coming into the U.S. that spend more on R&D in a year than the entire U.S. industry combined, and you look at these modular building practices in Asia and Europe coming to the U.S., and you look at some very large companies acquiring panelization plants and modular building companies, there’s a lot that is going to change in everything from the materials we build homes with to whether they’re built on site or off site. All of that is in flux, and I think the whole industry is in the middle of disruption. And I think it’s a good thing.

Ted Cushman: So I’ve been looking at this as California is forcing the disruption. What I hear you saying is that you guys are leading the disruption. You are going to go ahead and disrupt.

C.R. Herro: It’s much better to be your own disruptor than to have disruption done to you. We recognize that what we are today as a home builder will not be relevant and competitive in ten short years. And so we are trying to develop new processes, we are trying to influence the direction of change, and we are trying to align ourselves with the suppliers and the trades that will allow us to be relevant in ten years. And those who don’t, I think those who constantly have to react, it costs them a lot more, and change is a lot rougher to them. So yeah, we definitely are trying to be proactive.

Ted Cushman: Well so the trades are definitely one of the conservative factors in today’s marketplace. Guys know how to do it the way they have always done it, and you are trying to get them to do something better. Is that a factor for you guys?

C.R. Herro: It is, and one of the things that is both difficult and a benefit is that when we decided we were going to significantly stand for something better, we brought in all of our trades and all of our trades’ competitors, and announced what the vision of the company was and where we were trying to go, and half the trades opted not to participate. And so while we have fewer trades that can build the kind of homes we build, the trades that are our partners are true partners and are leaning in and supporting and participating, because they are aligned to the same thing we are: that the world is changing and they need to get good at it.

Ted Cushman: So you’ve built net zero and you’re building it currently, but not all your homes are net zero or net zero ready, are they?

C.R. Herro: No. We have probably built more than any other production home builder. But the issue is still buyer sophistication. And I keep going back to the same solution. You know, for the average home in the U.S., it costs you about $200,000 or $250,000 over that thirty-year mortgage for appliances, for lighting, for heating and cooling — for utility bills. And a well-built home is half of that. So there is $100,000 or $125,000 worth of savings opportunity to build a better home. And if you add renewable energy to that, there is a couple hundred thousand dollars worth of savings opportunity. But the average buyer doesn’t understand that, the average Realtor doesn’t understand that, the mortgage companies don’t have effective ways to capture that value, and the appraisers are busy appraising used homes that don’t have these features, and so not many of them have the skill set to differentiate and recognize the value of these kind of homes. So those are the things that enable the things that California is envisioning, and without them, it’s a struggle. So we deal with the very pragmatic reality that many buyers just don’t understand true cost, which is that operating cost with the mortgage. If they did, I think if buyers knew the benefit to them and their family for what net zero is, I think they would demand it. But unfortunately it has become prescriptive in California instead of creating the tools necessary for buyers to choose it.

Ted Cushman: So you’re critical in some ways of California’s approach. What would you say they’re doing wrong?

C.R. Herro: They haven’t enabled it. So I don’t think the policy is fiscally bad, but they haven’t created the infrastructure to support the change. And by not creating that infrastructure, my concern is that people without the right tools could inadvertently move away from new homes with all this additional cost, and not create the benefit that California intended. So my big criticism is they have to support the value at the transaction. And if you’re interested in the best resource I know of to do that, if you go to imt.org, there’s a policy piece called the SAVE Act, the Sensible Act to Value Energy, it’s a piece of federal legislation that would compel all government-underwritten mortgages to recognize operating cost. And if they did that, what they did in California would absolutely make sense, because now there’s consistent energy labeling, there’s consistent underwriting standards and that will then require appraisers and the Realtor industry to understand these differences, so that buyers now have the tools and the support network to make an informed decision.

Ted Cushman: So starting in 2020, you’ve got to be net zero and you have to have PV on all these houses. Are you ready to do it?

C.R. Herro: Yeah. Like I said, we’ve seen this coming. We’ve been building zero for 8 years. For us, it’s not difficult. But we do recognize that it is a lot of additional cost. And we are working hard trying to develop the tools to help buyers make more informed decisions. And we are certainly working with the California Energy Commission and anybody else that will listen to us, to help them understand that they need to empower this code change in the transaction of the home-buying purchase.

Ted Cushman: C.R. Herro, thank you.