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*Stimulus and Energy Efficiency - Together at Last
STIMULUS AND ENERGY EFFICIENCY — TOGETHER AT LAST....Glenn Hubbard thinks the housing market is close to its natural bottom, and in order to keep it from overshooting it's time for the government to step in and start offering below-market mortgage rates. Brad DeLong agrees:
All in all, I approve of the plan: having Fannie and Freddie buy up mortgages at market prices and refinance them at 4.5% could do a lot of good for the country and make a fortune for the government.
I'm agnostic on how close we are to a housing bottom. My guess is that we still have a ways to go, but since it takes a while for a program like this to take effect, maybe now is the time to get started.
But if we're going to do some social engineering with mortgage loans, why not go whole hog? An outfit called Architecture 2030, founded by Edward Mazria, suggests that we offer homeowners not just low-interest loans, but a sliding scale of low-interest loans that's conditioned on renovating their homes to increase energy efficiency. Their proposed scale is on the right. The nickel explanation is below:
Mazria walked me through a hypothetical example that highlighted the huge incentives the plan could unleash. Say you're a homeowner with a $272,000 mortgage at 5.55%, paying about $1550 a month. You decide you want your mortgage rate to drop to 3%. In order to qualify for the reduction, you have to improve the energy efficiency of your home 75% below code, and it's going to cost you a pretty penny: about $40,000.
Existing tax credits would take care of about $10,000 of that cost. The rest would get tacked on to your existing mortgage, bringing it up to $302,000. But, at 3%, you'd be paying only about $1280 — saving almost $300 a month on the mortgage alone, plus another $150 in reduced energy costs. The value of your home rises, you have more disposable income, you've given work to someone to do the upgrades for you — and s/he's now paying federal taxes, and you've reduced your carbon footprint.
The Architecture 2030 folks claim that their program (which has a component for commercial buildings as well) would cost a mere $170 billion over two years, and in return would create over 8 million new jobs, jump start a new $1.6 trillion renovation market, save consumers a boatload of money, and reduce CO2 emission by about half a billion tons. What's not to like?
To be honest, I'm not sure. There's something a little too free-lunchish about this plan, and I figure there has to be a catch somewhere. I invite everyone reading this to try and figure out what it is. But if the sums really add up the way they say they do, it seems worth considering, no?
"a mere 170 billion?"
Off hand I can see a couple of problems with the plan. First, it isn't free. The taxpayers are going to be paying the difference between the market and the subsidized rate. Second, because our current construction industry is deep into the use of illegal immigrants this plan is going to encourage illegal immigration. Unless we deal with the immigration issue we are going to end up putting 5-6 million illegals to work. Third, the potential for fraud is pretty great, especially the people who certify the energy reduction. Who has a natural incentive to tell the truth. Not the homeowner who is getting a big interest and tax break even if he doesn't see a real drop in usage. not the builder who is doing the work. Just who has an incentive to enforce this program? Of course in the age of Hank Paulson, maybe we just don't care if anybody checks.
It won't be as easy to implement as stated, but plans like this can work because they do address a market abnormality. People just don't do good cost benefit analyses of these type of investments. First it's a pain to calculate the cost - benefit. Second, a lot of people don't have the data.
There are successful government programs - such as EPA's Energy Start - that have pushed these type of investments in the past. So offering a carrot to push harder should be effective.
The complicating factor is of course, enforcement. How do you catch people who try to cheat?
But the bottom line that bail-outs with conditions is an excellent idea should be pursued.
The taxpayers are going to be paying the difference between the market and the subsidized rate.
Wouldn't the taxpayers be paying the difference between the subsidized rate and the cost of borrowing for the Federal government? Which may be 0% for some time?
Check with Dean Baker on what can go wrong if you lower mortgage interest rates excessively. Home prices skyrocket. So the original plan with no energy efficiency included is worse than brain dead.
The bubble needs to be unwound, not re-accelerated.
Whether you can now adjust a brain-dead, re-ignite the bubble plan with energy efficiency remains to be seen.
I think this is a good plan. Missouri has had great success with a similar plan (with tax breaks instead of mortgage changes) related to renovation/rehabbing (and without the green component). The rehab tax credits have spawned lots of renovation in St. Louis and makes a great incentive.
Besides the cost, I do not see other issues related to "free lunches".
I agree with Ron Byers third point: isn't this putting financiers in charge of growth again?
And wouldn't it create a new power player in the housing game - that of energy-efficiency checker? Who appoints the energy efficiency checker: environ groups, energy companies, or the gov?
We're getting to the point with banks, realtor, and appraiser agencies that it takes 10 people to build a house but 30 to sell it. Is that sustainable? How disproportionate can the producer-to-bureaucrat ratio be before the market can't sustain itself?
My guess is that we still have a ways to go,
Of course we do. The "experts" have been using the same script since 1929. "The market is going to get better any day now. Prosperity is just around the corner. The worst is behind us."
Of course the market will eventually stop falling. Just like the Titanic eventually stopped sinking.
A landlord that does'nt pay gas/electric has absolutely no incentive to make a home more energy efficient. Prospective tenents never notice energy efficiency during the walkthrough, and pay out the nose for it later when the bills come in (which the landlord has no responsibility for).
So for rental properties the incentives are powerfully in favor of least energy efficient.
Suspect that a program like this would be significantly more successful in areas with lower percentage levels of home ownership.
I loathe this idea because the size of the subsidy is directly dependent on the size of the mortgage, not on how much is spent towards energy efficiency.
It incentives people to up their mortgage for cheap money. We've seen how well that works.
"Wouldn't the taxpayers be paying the difference between the subsidized rate and the cost of borrowing for the Federal government? Which may be 0% for some time?"
Some time = 30 years?
I'm with karog here. Plus the subsidies seem excessive. Then a lot of consumption isn't much related to building efficiency, but rather to the owners attitude, and/or the appliances he/she uses. Right now in my neighborhood we have some houses with kilowatts of Christmass lights, and some with none. I bet this sort of thing wouldn't figure in -unless the program were based upon actual energy consumption, not meeting some inspectors criteria.
Then for electricity alone consumption is roughly evenly divided into residential, commercial (retail mainly), and industrial. The greatest amount of low hanging fruit IMO lies in the commercial sector, but tapping this should be more a matter of giving cheap audits so managers can do whats best for their own bottom lines.
Nice try, but I hope it doesn't fly!
I don't trust that the claimed improvements in energy efficiency would actually occur. And what "code" is being referred to? Is it a local code which can be very lax to start with?
Why can't licensed appraisers be required to learn enough about energy upgrades to certify their completion? They're no more suspect than others in the chain of unproductive people involved in the sale and finance process. Pay them an increment for verification and call it a day. Anticipate the whole process will be about as corrupt as the rest of US public and private activity. Don't pretend that your willingness to attempt a progressive program like this is contingent on it being carried out by saints.
As for the numbers, they're about right. I could modify my mid-1970s ranch house with about $30 - 40K in upgrades and cut 25 - 30 percent off my energy bill. Could probably get a modest grid-connected PV system in for that kind of money and maybe do 10 percent better. Get 10 million households to do that per year for 5 years and it might eliminate one crummy mideast war. Talk about savings!
My big project the last 4 years has been the construction of an energy efficient house. I've done a lot of research and spent a lot of time thinking about the issues involved.
It is nearly impossible to substantially improve the energy efficiency of a house once it has been built. There are too many fundamental choices made in the design stage. Orientation in relation to the sun, overhang of the eaves, HVAC system, and air leakage all play a major role and are well nigh impossible to change after construction.
The builders of tract homes need incentive to build truly efficient homes. Structuring the mortgage market so that people get a more affordable mortgage if the new house is energy efficient would certainly be worthwhile. But there is a tremendous amount of inertia to overcome.
Housing energy efficiency is strongly affected by the limited skill set of the illegal immigrant labor that builds the majority of the houses in this country.
"Housing energy efficiency is strongly affected by the limited skill set of the illegal immigrant labor that builds the majority of the houses in this country."
Is this actually true? As opposed to
(a) The design of the house (architect, buyer) and
(b) The components used (contractor, buyer)?
Look, maybe what you is saying is true. Maybe the way you nail Tyvek to the walls has a substantial effect on the house.
But I've have to see some actual evidence, because, I got to tell you, right now this claim looks like racist xenophobia--- and racist xenophobia of the singularly stupid kind, not the occasionally plausible rants of Steve Sailer.
One downside is that it will knock a huge chunk of value out of significantly older homes (1950 and earlier) where the cost of the upgrades may be dramatically higher. Over the long term, you'll have less architectural diversity and visually less interesting neighborhoods as a result.
This isn't rocket science. If you live in California in a house built since Jerry Brown was governor, it's as energy efficient as cost-effect techonology of the time allowed. California has the lowest per capita use of energy of any state and it's been remarkably flat for decades.
Credit Title 24, the California Energy Commission, and smart incentives for the utilities to encourage conservation. This building retrofit plan of Ed Mazria (I still have his passive solar handbook) makes a ton of sense in states with inefficient housing stock. It makes less sense in California, especially in newer homes. What would work for California would be incentives to purchase new American made appliances that meet super strict energy standards.
"It is nearly impossible to substantially improve the energy efficiency of a house once it has been built. There are too many fundamental choices made in the design stage. Orientation in relation to the sun, overhang of the eaves, HVAC system, and air leakage all play a major role and are well nigh impossible to change after construction." Stuart's comment
This is not true at all.
Even brand new houses in energy efficiency leader California can reduce their energy use by 15% using relatively low cost technology.
Here is a video featuring a leader in building energy efficiency (Rick Chitwood)produced by Endependence.
http://endependence.info/research/videos-c-3-v-106.html
It would seem that the government making large numbers of low-interest long-term loans to homeowners would take a huge number of profit-generating "good" loans off the hands of banks. Not the most sympathetic characters for sure, but this could have a significant impact on the fragile financial sector.
That said, I like the positive "green" incentives and would happily partake in such a program. Surely improving the efficiency of existing homes can't be quite as bleak as Stuart suggests; high-efficiency furnaces, more insulation, smart control of lights and appliances and plain old caulk and insulating tape can go a long way, depending on the house structure and the climate.
"Why can't licensed appraisers be required to learn enough about energy upgrades to certify their completion? They're no more suspect than others in the chain of unproductive people involved in the sale and finance process. Pay them an increment for verification and call it a day. Anticipate the whole process will be about as corrupt as the rest of US public and private activity. Don't pretend that your willingness to attempt a progressive program like this is contingent on it being carried out by saints."
Don't support programs that only make sense if carried out by saints because they won't be.
This is my favorite K. Drum post in months.
I agree that at first sight it looks like a great program... Just a few questions remain:
What will prevent people from turning their homes into McMansions, so they can get the extra low mortgage? (Haven't we gone down that road recently)
What will prevent unscrupulous mortgage brokers from pushing people into taking more money out than they can afford, to upgrade a home, at a lower interest rate? (Haven't we gone down that road recently)
Do you need to spend the money first, to apply for a lower 're-finance' rate? In the current situation (tight credit markets) how will you obtain the money in order to make the investment needed to increase your energy efficiency?
What is the small print? What will be considered the standard as the measurement? Will LEED take the lead on this?
Who will eventually be paying for the added bureaucracy?
The so called cost savings.. how realistic are those? It's always easy to go with the most rosy scenario.
There will invariably be some crooks who will take advantage of this and spoil it for the rest of the population. Who will they be? Where will be be coming from?
One of the problems with this kind of scheme is that there's incentives that may result in much less energy use reduction, or none at all.
For one thing, presumably either renovators or their builders are going to be the ones paying the assessors for the energy efficiency ratings, and they're going to want their buildings passed. It's like Standard and Poor's assessing CDOs.
Secondly, energy efficiency standards are susceptible to gaming. If the standard requires certain physical fittings, some builders will spend their time figuring out the cheapest way to achieve the absolute minimum to qualify to meet the standard, and won't care about the actual efficiency gains. If the standard has some kind of computer model that calculates efficiency, the builders will get a copy of the model and try to figure out how to game it.
Finally, such efficiency standards might not take into account house size (or, more to the point, will take into account house size). If you offer people low-interest loans, they might be able to afford to renovate and make their house bigger. It might be more efficient, but if they're climate-controlling an area twice the size nothing much is gained.
Finally, efficiency gains in HVAC might get chucked away in other areas - dozens of halogen lights is the classic example.
I'm not ruling out this idea, but it's much harder to make work when you think when both the home owner and the home builder regard it as a hurdle to be met rather than a priority.
The stick of higher energy costs is still probably the most effective way to get people to conserve.
Ah the populist Left.
Your scheme would be very brilliant way of provoking in about 7-10 years time a second insolvency of your mortgage agencies.
Interest rate risk of the size implied in a 4 to 2% range over a 30 year lifespan is nearly impossible to hedge out. Given the extremely inflationary pressures of the mass of money being pumped into the global economy (a proper response to deflationary pressures, but if successful, almost sure to produce a high 5% reference rate interest rate enviro several years down the line), it is almost certain you would setting up a second banking / financial sector crisis. And idiotically pumping up an overbuilt housing sector that has already sucked in rather too much productive capital.
Of course it's never the "Peoples" fault, the People are Good & Innocent. It's the Evil Financiers or Businessmen or Jews (etc)....
I agree that we need major incentives to encourage people to improve their energy efficiency, but I suspect a mortgage-based approach will just cause a repeat of the bursting bubble we've just witnessed.
It would make more sense to me to incorporate the full environmental and societal costs costs of energy use into the price of the energy itself - so when you heat with electricity you pay for the CO2 and smog and mercury emissions from the coal-fired plant. Paying more for energy is the best incentive people have to make their homes more energy efficient - and there's lots you can do without spending much money. I cut my electricity use to a quarter the national average with very little money investment.
Instead I'd go for expanded tax credits, rebates, subsidized fees for home energy audits, and increasing the energy efficiency requirements for all new homes to the point where, in 5-10 years, all new homes must be carbon neutral. (Carbon neutral homes can be built - there are whole communities of them going up in places like Germany.)
Maynard,
I live in a little town near Austin, Texas where the population is predominately hispanic or black. If I were a racist xenophobe I would have chosen somewhere else to live. I have hired a foundation crew and an interior framing crew to work on my house. The business owner in each case is a bilingual person of hispanic descent. The crew foremen in each case were bilingual with poor english skills and the crew members speak no english.
The house I am building is constructed with Structural Insulated Panels. I consulted with a building performance engineer so I could do everything possible to maximize the energy efficiency of my house. The biggest problem I've had to deal with is every builder has a crew of people who are used to building conventional stick framed houses that leak air like a sieve. Try to find someone who knows how to do anything different and you will have a tough time.
The average house here in south central Texas has an HVAC system that is 100% over sized and duct work that runs through an attic that reaches 140 to 160 degrees in the summer. A third to a half of the energy it consumes is wasted. Changing that one aspect of house design would make a huge difference in long term energy consumption.
The practices of the entire industry need to be changed. One of the barriers is that the workers are disposable and there is no system in place to upgrade their skills. Denying that the system functions the way it does will not change it. The American housing industry is based on the exploitation of semi-skilled labor with the profit going to people like Bob Perry who funded the Swiftboat liars.
I've heard a lot of discussions about how to stem the tide of foreclosures, each one more complicated than the next. Clearly this one has some major benefits, but realistically it's something that is likely to be taken up by the affluent or upper middle class.
One of the problems that a lot of mortgage rescue plans have is that they are aimed at people who are struggling to make payments, so they are lambasted as favoring the 'undeserving' -- people who took out loans they couldn't afford and now want gov't help.
So here's an idea: how about increasing the tax deductions for mortgage payments across the board? For people struggling to make payments, this could help them stay in their houses. For people who can make their payments, this would provide them with $ to spend, basically fiscal stimulus. Maybe it could even be done retroactively for the 2007 tax year...
I haven't seen this proposed anywhere. Think it could help?