Appraisals for Energy and Economy

Economists believe that the housing bubble of 2008 burst for two reasons:  mortgage brokers who convinced underqualified buyers that they could buy more, and buyers who wouldn’t accept that they were underqualified.  Although these two points are not arguable we forget one of the most highly trusted participants in the equation – the Appraisors.  It is the Appraisor who convinced the Buyer and the Broker that the value of the house was fair and sustainable.  Because of the work of the Appraisors, millions of houses are encumbered by loans larger than the value of the homes. 

The appraised value of any house is established by the most recent sale price of a similar house.  So as prices of houses rise, the appraisal system allows prices to continue to rise until the bubble bursts.  As the houses are then sold at lower prices in a dead market, the prices continue to fall.  Consequently, home prices rise and fall at such great percentages that home owners lose billions in the swing.   In the period from 2008 to 2011 the value of used houses plummeted 30-40%, but the cost of new construction only declined 8-12%.  Consequently, the buyers of used houses suffered a much greater loss than the buyers of new homes.  The current appraisal system supports this trend.

Moreover, a home owner who invests the time and money to renovate their older home to a new standard will never get a return on the investment because the renovated home cannot be compared to another like kind sale.  The older home upgraded to the new standard is a sure loss if the rest of the neighborhood does not do the same.  Herein lies the flaw.  Old neighborhoods stay inefficient and ill repaired while new homes are constantly improved with better design.  Because the new homes are better designed they retain their value longer - even through an economic crash.

What would happen if appraisals were based on the reasonable cost of a new energy and water efficient home with modern ammenities, yet keeping its original size, architecture, and location?  For instance, if a home is 20 years old, what would it cost to renovate it to the new standard?  Compare this to the cost to raze the house and rebuild to a new standard.  The difference is the net value of the house.  Of course the cost of the lot is assessed separately.

We can call this the New Standard Equivalent.  The qualified buyer must be a person who can purchase the house for the net value and also has the financial ability to upgrade the property to the New Standard Equivalent.  With the New Standard Equivalent, old neighborhoods get upgraded, slums get repaired, old houses become more energy and water efficient, and urban renewal becomes automatic.  Only the seller who fails to upgrade will feel the pain when it is time to sell.  Buildings become more efficient, jobs are created, and investment risk is reduced.

The EPA reports that buildings consume 70% of the electrical energy and 37% of the total energy produced in the US.  It is also reported that new buildings are 30% more efficient than buildings 20 years older.  Yet there is no current way to incentivize the upgrading of older buildings to a higher standard.  By modifying the appraisal process to a New Standard Equivalent, this becomes a matter of economics and good investment sense.  Property values are maintained, construction jobs are increased, and energy is saved.