Sierra Club Austin

Point by Point Response to REALTORS® (aka KeepAustinAffordable.org) “Why not point-of-sale?” misinformation May 30, 2008

Everything below except for the Sierra Club’s responses in green text came from the Austin Board of REALTORS® website KeepAustinAffordable.org http://www.keepaustinaffordable.org/7/point_of_sale.cfm on May 30, 2008:

We pay a premium to live in our wonderful city. At $184,700, Austin has the second-highest median home-sales price in Texas (behind only Collin County), according to data from the Real Estate Center at Texas A&M. The median home price in Austin is $41,600 higher than the statewide median home price. We pay $31,400 more (again, median price) than in Dallas, $36,700 more than in Houston, and $39,900 more than in San Antonio.

Negative effects of mandated, point-of-sale energy upgrades
Adding mandated energy-upgrades to the cost of buying a home in Austin will make it even more difficult for many people to afford a home in our city, hitting hardest those who can afford it least.

Response: Energy efficiency makes homes more affordable and healthier. These are factors critical to all of us especially the poorest among us. Reduced utility expenses and reduced exposure to rate increases is essential to young growing families and seniors on fixed income.

City of Austin documents state that “… the task force is considering capping total required expenditures at no more than 0.5% of the home price in early years ..., rising to 1% in later years.” The percentage may be small, but based on a purchase so large, it can have significant financial consequences.

Response: Energy efficiency reduces the cost of home ownership making it more affordable. If upgrades are made and paid for at the point of sale savings are optimized.

CFL light bulbs for lights except closets and halls typically on for less than 5 minutes at a time

Savings $120/year – investment yield based on 7 yr bulb life = 97%/yr and higher if it actually lasts as long as the 9 years they are supposed to last.

Savings $30 to $200/year – although this is routine maintenance and if it has been done recently the expense and increased savings will be at the low end. If the homebuyer does it every 3 years the yield is 23%/yr.

Savings $100/year equals 24%/yr investment return based on the DOE estimate of a 15 year useful life.

Even after you factor in an energy audit fee currently estimated at $300 the combined weighted average yield of these $1,730 in upgrades plus the $300 energy audit fee is 21.6%/year at current rates, higher if utility rates rise, and lower if rates drop. Are the Austin Board of REALTORS® betting that utility rates will fall?

Compare 21.6% yield to the returns you get on your savings, stocks, or bonds. Where else can you finance high yield investments with mortgage money? All of these upgrades are low risk investments. After all, what is more certain than your utility bill? All likely efficiency standards upgrades will save you money and therefore make housing more affordable and less risky.

But there is another layer to the onion. Since these improvements can be financed into the home mortgage if they are mandatory at the point of sale then you are going to enjoy positive leverage. Positive leverage is investing at a higher yield with money from a lower interest rate loan. So far we have ignored the fact that as little as 5% of the $2,030 ($1,730 + $300) is cash and as much as 95% is mortgage money borrowed at around 6% interest these days. So you save about $50/month the first three years, $33.33/mo. in years 4 thru 7, and $23.33/mo in years 8 thru 15 (ignoring the fact that you will reinvest in replacement CFLs and HVAC tune ups). If you borrowed 95% you’d see an increase in your monthly payment of $16.27/mo. This results in a net monthly cash savings every month for 15 years. I used 15 years because you could increase your 30 year amortized loan payment by $4.71/month and pay off the energy efficiency upgrades in 15 years with interest. And after you factor in the benefit of the mortgage the yield on your $101.50 cash investment (5% of $2,030) is 397%/year. If you couldn’t finance the audit fee of $300 your yield would only be 102%/year on your $401.50 cash investment. But under a mandatory minimum energy efficiency standard an energy audit fee could be financed. If anything the cap of 0.5% to 1% is too low!

Closing costs are one of the biggest constraints first-time and low-income buyers face when trying to buy a home. A few years ago when the National Association of REALTORS® researched the effect a 0.5% point-of-sale/transfer fee on a $125,000 home price, the research pointed to 16,000 Texas families every year that would be prevented from buying a home. While that study was done on a statewide basis, it points out how even a 0.5% mandated fee can price a significant number of people out of buying a home.

Response: This is not a fee or tax but an investment that immediately reduces your utility bill thereby reducing the cost to live here while raising the value of your home.

Some proponents of the proposal have suggested the cost of improvements simply be rolled into the home mortgage. Title companies have said that is not an option, but even if it were, it would make the energy improvements more costly. Rolling the costs into the mortgage sounds like an easy solution, but comes with its own set of problems.

Response: REALTORS® asked title companies about mortgages? I asked mortgage lenders and they do have excellent solutions. Please see the article “Green Equals Value and Affordability”.

Response – Let’s recognize the fact that energy efficiency upgrades significantly reduce utility bills. The whole point of minimum energy efficiency standards is to reduce consumption and its success requires a proportionate reduction in your utility bill! By definition an energy efficiency upgrade must reduce wasted energy consumption and therefore must reduce your utility bill. The savings on utilities could be used to reduce the mortgage balance much more than the $779 balance they talk about above and much faster. ( Since the REALTORS® are currently giving such bad advice I will suggest that most people should only pay down a mortgage that has a low, tax deductible, interest rate after you’ve paid off any higher, non deductable, interest loans or credit cards.

Response – Only if upgrades are required AND your REALTOR® is one of those conspiring to raise the cost of homeownership and prolong pollution from power plants could they delay closing. Yes we may need more properly certified inspectors in sufficient numbers to do the job. Gosh – financial relief and improved indoor air quality for homebuyers, reduced power plant emissions for all, AND jobs? Green really is good. Good for you, good for us, and good for the economy.

Concerns about adequate numbers of inspectors are unfounded. The audit standards are not yet set and may end up being adequately performed by the large number of existing state certified home inspectors with the addition of a City of Austin energy audit form or at the highest imaginable standards require qualifications of independent third party inspectors who also already exist and are currently certifying 400 homes/month here in Austin.

Energy efficiency for Austin homes is a great goal, but a mandate is simply the wrong approach.

Please see the article “Green Equals Value and Affordability”. But understand that without mandatory minimum standards these REALTORS® are obviously not steering you toward optimal home health and financial security and that is why mandatory is necessary.

You have to wonder what is going on here. Consider this from http://www.keepaustinaffordable.org/6/index.cfm ”Socar Chatmon-Thomas, 2008 Chairman of the Austin Board of REALTORS®, put it this way, “As REALTORS®, of course we’re concerned about the potentially debilitating impact an ordinance like this could have on our business,…”

Mandatory (as opposed to voluntary) standards level the playing field. We currently have a situation where the inclusion of energy efficiency in a home in Austin puts the energy efficient home at a marketing disadvantage because in a market shepherded by uninformed or negligent REALTORS® the seller must compete with homeowners who can resell an inefficient home for a superficially lower price despite the fact that the total cost of ownership may be far greater to the buyer than it would be for an energy-efficient home. It is easy for a slick home salesman/woman to gloss over these hidden energy costs or to make light of them in selling a house. By continuing the status quo, we actually punish those who already are upgrading their homes to meet or exceed any efficiency standards the city would adopt. Energy inefficiency contributes to the expensive burden that rate-payers pay when growing energy costs exceed available supply and the city must significantly increase energy production to meet growing demand. Conservation of energy is fast becoming a national priority and measures such as this help us reduce energy consumption in the early stages before costs spiral out of control and before homeowners are faced with the dilemma of being unable to unload an energy inefficient home in a future market where only energy efficient homes are salable.

Point by Point Response to REALTORS® (aka KeepAustinAffordable.org) “The Facts” misinformation May 30, 2008

Unfortunately, some misinformation exists in our community about the information presented by Keep Austin Affordable. This page outlines the inaccuracies we’ve encountered and corrects the record.

Accusation: Keep Austin Affordable is scaring the public and acting prematurely.
Fact: We’re engaging the public early to ensure we’re ready to act.

Some have alleged that Keep Austin Affordable is acting prematurely by discussing this issue before a formal proposal is presented. We disagree. While it’s true no official recommendations have been made, it is also true that the Energy Efficiency Retrofit Task Force could make its recommendations to the Austin City Council and our city leaders could vote on those recommendations immediately. That’s why we’re engaging consumers in this process early. We aim to ensure the task force can consider the opinions of Austinites as they formulate their recommendations and that our citizenry is informed and ready to act as soon as the opportunity for public input arrives.

Response: The REALTORS®, hiding behind the name Keep Austin Affordable, are scaring the public and the statements of the REALTORS® are false and/or misleading.

Accusation: Keep Austin Affordable says the proposal is costly and wrong, and yet there is no proposal as of yet. How can they criticize what doesn’t exist?
Fact: We’re criticizing the approach that the city has taken.

It's true that, as yet, no proposal exists. What does exist is a task force to propose energy efficiency upgrades. The charter for that task force stipulates all recommendations made must be enforced at the "point-of-sale." This takes the power out of the task force's hands to operate in the best interest of Austinites and that is part of the approach that concerns Keep Austin Affordable.

Specifically, Austin City Council Resolution No. 20070215-023 was passed on December 13, 2007. It created the Energy Efficiency Retrofit Task Force and charged it with developing a proposal to bring before the full city council by August 1, 2008. However, as described above, that task force was told what to do and how to do it. Because of the way it was written, this resolution dictated the approach that the task force would take. Item 2d says, “That the task force shall produce recommendations reflecting the following guidelines and mandates: Protocols shall apply to owner-occupied residential properties at the point of sale.”

Adding mandated energy upgrades to the cost of buying a home in Austin will make it even more difficult for many people to afford a home in our city, hitting hardest those who can afford it least.

Response: The Point of Sale (POS) is the best timing for energy efficiency upgrades when needed. The POS upgrades can be included in the purchase mortgage to be financed at one of the lowest possible interest rates and that interest is tax deductable (if you itemize your deductions as is most likely).

Energy efficient homes are more affordable thanks to lower utility bills and less risky thanks to reduced exposure to future utility rate increases in a world of wildly fluctuating fuel costs.

Accusation: Keep Austin Affordable is inflating cost estimates of proposed upgrades.
Fact: No one yet knows how much these upgrades will cost.

The cost estimates for the upgrades under consideration have ranged as low as $500 to higher than $15,000 and Keep Austin Affordable has informed the public about all these estimates. The fact is, they may all be true, for a few reasons: 1) the specific upgrades discussed have varied widely, from changing light bulbs to replacing air conditioning units and 2) Austin boasts homes of every age and condition, meaning even the simplest upgrades could cost thousands. The fact is, our city isn’t mounting this substantial effort to require Austinites to change a few light bulbs. As outlined in the Climate Protection Plan, these upgrades are intended to be far reaching and likely to be expensive.

Response: The REALTORS® hiding behind the name Keep Austin Affordable have exaggerated costs. The menu of upgrades includes low cost items to optimize energy savings per dollar invested. These will coincidently improve indoor air quality, a serious health issue REALTORS® prefer to ignore along with real affordability. City of Austin documents state that “… the task force is considering capping total required expenditures at no more than 0.5% of the home price in early years ..., rising to 1% in later years.” There are proposed upper limits and latitude on energy efficiency upgrades to meet minimum standards so only a home selling for more than 3 million dollars would need and benefit from $15,000 in energy efficiency upgrades. A median home priced at $250,000 would max out at $1,250 in energy efficiency upgrades if needed.

Accusation: The costs associated with the upgrades will not be substantial enough to keep Austinites from buying homes.
Fact: Even a modest increase in the money homeowners must produce at closing will diminish homeownership opportunities for our citizens.

In 2004, the Real Estate Center at Texas A&M University conducted an analysis of the impact of a real estate transfer tax in our state. The proposed tax ranged from .05% - 1.5% of the value of the home (very similar to the caps in upgrade costs being discussed by the City of Austin now). That study asserted that closing costs are the biggest constraint first-time and low-income homebuyers face to homeownership. The following outlines how much even these modest caps would require that homeowners produce out-of-pocket, which could limit homeownership opportunities for some residents:

Average Texas home price in 2004*	Transfer tax rate	Additional funds needed at closing
$164,400	0.5%	$822
$164,400	1%	$1,644
$164,400	1.5%	$2,466

Response - The accusation is true and not just because the upgrades (if needed due to inefficiencies of the home) would be relatively small but because they pay for themselves in reduced utility bills thereby making the home MORE affordable. Please see the article “Green Equals Value and Affordability”.

But now we must add a new accusation: Comparing an investment in energy efficiency upgrades in your home to a tax is ludicrous. The energy efficiency upgrades increase the value of your home and reduce your monthly utility bill. A tax would be an expense only with no reduction in monthly expense or increase in property value.

Accusation: Point-of-sale is a legitimate trigger for energy-efficient retrofits. Why are you so against it?
Fact: Point-of-sale will directly affect the seller or the buyer. Probably both. Either way, consumers pay.

Response – Arguing without recognizing that energy efficiency upgrades have significant utility bill savings benefits ignores the reality of reduced utility bills. The whole point of minimum energy efficiency standards is to reduce consumption and its success requires a proportionate reduction in your utility bill! By definition an energy efficiency upgrade must reduce wasted energy consumption and therefore must reduce your utility bill. The savings on utilities could be used to reduce the mortgage balance much more than the $779 balance shown above and much faster. But most people should only pay down a mortgage that has a low, tax deductible, interest rate after you’ve paid off any higher, non deductable, interest loans or credit cards.

Accusation: These upgrades will not delay the process of buying and selling a home.
Fact: No matter how you slice it, residential real estate transactions will be delayed if these upgrades are mandated at the point-of-sale.

The city has stated that compliance with these upgrades will not require additional home inspections because the items can be added to the current home inspection process. However, home inspectors are not trained to inspect these upgrades and are not regulated by the city. They are trained and regulated at the state level, meaning the city has no authority to change the scope of what they inspect. That means the city would have to arrange for its own inspectors and that’s another layer of bureaucracy Austinites simply don’t need.

Response – Only if upgrades are required AND it take too long to get could they delay closing. Yes we will need properly certified inspectors in sufficient numbers to do the job. Gosh – financial relief and improved indoor air quality for new homeowners, reduced power plant emissions for all, AND jobs? Green really is good. Good for you, good for us, and good for the economy.

Concerns about adequate numbers of inspectors are unfounded. The audit standards are not yet set and may end up being adequately performed by the large number of state certified home inspectors with a City of Austin energy audit form or at the highest imaginable standards require qualifications of independent third party inspectors who already exist and are currently certifying 400 homes/month.

Accusation: This measure wouldn’t impact as many homes as alleged by Keep Austin Affordable.
Fact: If the measure wouldn’t have a significant impact, why would the city pursue it so aggressively?

We can produce estimates of how many homes would be impacted by this measure (for example, the Multiple Listing Service logged 25,000 residential real estate transactions in Austin last year), but what’s really important is that the city isn’t pursing this measure so only a few Austinites have to comply. If we open the door to energy efficiency mandates, even for just a few, we know more will follow. Mandates for energy efficiency are simply the wrong approach, regardless of how many citizens would be affected.

Response – Silly straw man position. With all these benefits to the new homeowners and the community airshed along with reduced energy costs for all Austinites from deferred costly new energy plant construction we hope it accrues to as many inefficient homes as possible. But still for REATLORS® to say, “We can produce estimates of how many homes would be impacted by this measure (for example, the Multiple Listing Service logged 25,000 residential real estate transactions in Austin last year),..” is awkward. The REALTORS® should know their own data. 25,000 homes includes the entire multi county, multi city region covered by the Austin MLS. According to Emily Chenevert, Government Affairs Department, Austin Board of REALTORS®, “For Houses sold in Austin for 2007, there were 10,799.” With a REALTOR® on the taskforce they also know to exclude newer Austin homes and homes that have adequately participated in voluntary Austin Energy energy efficiency upgrade programs. So, the relevant sales volume for 2007, the busiest year ever, would be about 4,000 homes. Did the REALTORS® almost mislead you by 21,000 homes or a factor of more than four?