Are you solar ready? The clock is ticking. In 71 days, give or take, it will be 2020, a new year, a new decade, and that's not the half of it.
The deadline for compliance with the California Energy Commission's (CEC) 2019 Building Energy Efficiency Standards kicks into building code approved by the Building Standards Commission with the calendar change to 2020.
At that moment, all California homes permitted of three stories or less--for sale or rent--will need to include a solar energy system. The roiling, seething unknown here concerns what the transformative moment will cost--to home buyers, to builders, to taxpayers, to local, regional, and state governments--and what it will be worth.
The expected bang is big, immediate, and sustained. Solar Builder correspondent Chris Cowell scoped the impact from a meta perspective in his four-part series on the California efficiency standards. In Part 1, Cowell here quotes California Solar and Storage Association analysis:
“Each year there are roughly 120,000 residential solar installs (105,000 retrofit on existing homes and 15,000 on new homes). California averages 75,000 to 80,000 new homes built per year. So, this new rule will see an increase from 15,000 to 80,000 new solar homes (65,000) each year. If retrofit stays the same (roughly 105,000/year), that increases overall installations to 185,000 per year, or a 54 percent increase over the current 120,000 installs per year.
“If the average system size for a new solar home is 3.5 kW [a rough guess based on minimum system size of 2.5 kW], the additional 65,000 installations will result in an additional 225 MW. Compared to the total current market of customer-sited solar in California of approximately 1,100 MW, this is an increase of 20 percent.”
By any measure, that's a quantum leap, and few would argue that California is only the first of a raft of states likely to adapt similar standards as their governments contend with scarier and scarier evidence of the impact of carbon emissions and the production of greenhouse gases on the rate of climate collapse. Orange County Register staffer Jeff Collins wrote:
“These provisions really are historic and will be a beacon of light for the rest of the country,” said Kent Sasaki, a structural engineer and one of six commissioners voting for the new energy code. “(It’s) the beginning of substantial improvement in how we produce energy and reduce the consumption of fossil fuels.”
Making history and being a beacon, however, don't come without a cost--Californians are by no means going to get something for nothing.
That worries both prospective home buyers and home builders. There's a whole lot of legitimate anxiety about the effect the new standards--and the cost of implementing them that passes along to near- and longer-term future home buyers--will have on a housing market already undergoing stress. The widening gap between household incomes and housing costs--especially in an economic climate that's throwing off decidedly mixed signals as to its ability to sustain growth--has already shrunk the addressable universe of would-be home buyers. Adding costs now may mute demand even further, further reducing the number of households with homeownership payment power.
What market experts are left to try to predict--but can't--is how much of a "wet blanket" the effective date of the new rules will have on both buyer appetite and builder investment. The challenges underlying this prediction are two-fold and fundamental.
- One is the question of what the pricetag of something feels like versus what it's worth.
- The other is the matter of near-term gratification versus longer term benefit.
It's an environment where price tolerance and rigidity are already signaling shocks and duress, and a big, expanding group of households who can not afford the market--and have emitted evident sensitivities to such stresses. Will the value of solar-equipped homes--both in the operational sense and the positive environmental impact--outweigh the cost differential of more than $10,000 on a new solar-equipped home?
What's more, will the friction of that cost differential get in the way of what might benefit homeowners over a longer-run, as they recoup their initial outlay in incremental savings on energy bills during the years they dwell in the home? We've considered this "first cost versus total lifetime cost" analysis before here.
When it comes to drilling into the data of costs versus value, my colleague Ali Wolf, Director of Economic Research at Meyers Research, illuminates both the perception sensitivities for buyers, and the narrative challenges builders need to overcome to keep themselves in a virtuous cycle of growth rather than succumb to a vicious circle of hesitancy, lost pace momentum, less investment, and, eventually, decline. Wolf notes:
"Affordability and lack of supply are two of the biggest issues in homebuilding today. These challenges are even more pronounced in California, where just 8% of households can afford the median-priced new home in Los Angeles, 19% in San Francisco, 31% in the Inland Empire, and 33% in Sacramento; the national average is around 50%.
"With affordability already an issue, adding in $10,000 to the purchase price of a home for solar panels will inevitably cause some headaches for builders. For example, some consumers will see that, all else equal, the price spread between new and existing homes is higher and opt for the cheaper option. Others may decide to spend less on options and upgrades to offset the $10,000.
COSTS VS SAVINGS
The focus, however, should really be on the monthly payment. We calculated that the change in the mortgage payment is just under $40.00 a month when considering median home prices and current mortgage rates. The $40.00 difference is the same whether one is buying a $200,000 home or (paying) $1.5 million, making lower-cost areas are more vulnerable. Here's the cost breakout by select regions:
- California average: 2.0% increase in the monthly payment
- Central Valley: 3.0%+
- Coastal Southern California: Roughly 1.0%
- Bay Area markets: <1.0% difference
The 2020 mandate looks costly on the surface, especially for consumers who don't place a high value on the technology, but adding solar panels is estimated to be a net gain for households (see the graphic above. Furthermore, unlike some regulatory fees that raise home prices without an obvious benefit, consumers can enjoy the utility of the solar panels.
The take-away here? The message, the math, and the location--right down to the community need to match. For example, the message to a potential buyer in, say Riverside/San Bernadino, who's fixated on both the asking price and her monthly payment capability would be different than that for a Bay Area buyer for whom the $40-per-month bump is barely perceptible. Wolf adds:
Using Zonda, we determined that builders in Los Angeles/Orange County, Riverside/San Bernardino, San Diego, San Francisco, and Sacramento will feel the most immediate impact of the new mandate.
Remember, when it comes to buying a house, three direct measures or filters of value play a key role in the ownership experience, and one intangible.
- First costs
- Operational total cost of owning
- Exit costs (in the form of appraisal/comps)
The value part of the equation starts with a buyer's experience of worth that exceeds initial costs. If mortgage loan-to-value benchmarks can be adjusted to reflect a lower energy cost factor--i.e. if a buyer can qualify for a larger than normal loan because he or she will be saving on monthly energy bills--the measure and impact of those first costs could be mitigated.
In the current, abnormally low, interest rate environment, the calculus of monthly costs--where, as the Meyers graphic shows, the buyer comes out $40 per month ahead--is a meaningful part of the story of appeal to a buyer who's more sensitive to where every dollar goes in her monthly budget.
For those whose incomes and wherewithal are perhaps less rigid on a monthly basis, focus might be on the value premium achieved at the point of exit. For example, if you can get an appraised value and sell a solar home for more than one not equipped with solar in the same market, then there's a measure of worth at that point that could be a draw.
The fourth driver--not unimportant but fuzzier in its impact--concerns whether people will begin to be motivated, and more discriminating, in their purchase behavior for an item like a home because of its differentiated performance related to carbon dioxide emissions, greenhouse gas production, global warming, and climate collapse.
It will be years of study and analysis before any data may show that people could value a home that produces low to no carbon more than one that doesn't.
Clearly, though, if those studies come out of anywhere in the future, California's the place researchers can do them first.
