Skip to main content

Advertisement

SpringerLink
Log in

Energy-efficient homes and mortgage risk: crossing the chasm at last?

  • Published:
Environment Systems and Decisions Aims and scope Submit manuscript

Abstract

A topic of recent interest is energy-efficient houses. In the last twenty years, the US market has witnessed growth in the adoption of energy efficiency via various building technologies, design schemes, and eco-labels by developers, homebuilders, and homebuyers. Although housing and real estate scholars have begun explorations of the factors associated with the diffusion of energy efficiency, the subject has yet to be explored from the perspective of a critical stakeholder—the mortgage lender. This paper distinguishes itself from the extant literature in several ways. First, using a diffusion of innovation intellectual framework, the authors explore the role of the lender as an innovation gatekeeper. Second, as a review article, the authors summarize several key papers from the underwriting, credit scoring, and finance literature to help frame a number of market frictions that could mute further diffusion of energy efficiency in housing. Finally, the authors analyze these frictions and offer both market and public policy suggestions that may help overcome these frictions and increase opportunities for both private competitive advantage and market transparency.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. In this paper, the terms green, energy-efficient, and high-performance housing are equivalent and will be used to describe any new home in which technologies are installed that have the capacity to create operational efficiencies such as reduced energy consumption and reduced water consumption.

  2. More efficient home could be framed as a less risky home in the context of volatile energy prices. However, low crude prices (such as 2014/2015) dampen the impact of locational efficiency for a home owner.

References

  • Administration EI (2010) Annual energy review. Washington

  • Adomatis SK (2010) Notes and issues-valuing high performance houses. Apprais J 78(2):195

    Google Scholar 

  • Allcott H (2011) Social norms and energy conservation. J Public Econ 95(9):1082–1095

    Article  Google Scholar 

  • Amromin G, Paulson AL (2009) Comparing patterns of default among prime and subprime mortgages. Econ Perspect 33(2):18–37

    Google Scholar 

  • Aroul RR, Hansz JA (2011) The role of dual-pane windows and improvement age in explaining residential property values. J Sustain Real Estate 3(1):142–161

    Google Scholar 

  • Avery RB, Bostic RW, Calem PS, Canner GB (1996) Credit risk, credit scoring, and the performance of home mortgages. Fed Res Bull 82:621

    Google Scholar 

  • Bellotti T, Crook J (2009) Credit scoring with macroeconomic variables using survival analysis. J Oper Res Soc 60(12):1699–1707

    Article  Google Scholar 

  • Bhutta N, Dokko J, Shan H (2010) The depth of negative equity and mortgage default decisions. Division of Research & Statistics and Monetary Affairs, Federal Reserve Board

  • Bloom B, Nobe MC, Nobe MD (2011) Valuing green home designs: a study of energy star homes. J Sustain Real Estate 3(1):109–126

    Google Scholar 

  • Brounen D, Kok N, Quigley JM (2011) Residential energy literacy and conservation. Chicago: 47th Annual AREUEA

  • Burt L, Goldstein DB, Leeds S. et al (2010) A path towards incorporating energy and transportation costs into mortgage underwriting: shifting to fact-based analysis. ACEEE Summer Study Energy Effic Build

  • Chesbrough H, Vanhaverbeke W, West J (2006) Open innovation: researching a new paradigm. Oxford University Press, Oxford

    Google Scholar 

  • Choi C (2009) Removing market barriers to green development: principles and action projects to promote widespread adoption of green development practices. J Sustain Real Estate 1(1):107–138

    Google Scholar 

  • Choi E (2010) Green on buildings: The effects of municipal policy on green building designations in america’s central cities. J Sustain Real Estate 2(1):1–21

    Google Scholar 

  • Christensen CM, Anthony SD (2004) Seeing what’s next: using the theories of innovation to predict industry change. Harvard Business Press, Boston

    Google Scholar 

  • Clauretie TM, Sirmans GS (2010) Real estate finance: theory and practice (with CD-ROM). Cengage Learning

  • Crook J, Banasik J (2012) Forecasting and explaining aggregate consumer credit delinquency behaviour. Int J Forecast 28(1):145–160

    Article  Google Scholar 

  • Crook JN, Edelman DB, Thomas LC (2007) Recent developments in consumer credit risk assessment. Eur J Oper Res 183(3):1447–1465

    Article  Google Scholar 

  • Dastrup SR, Graff Zivin J (2012) Understanding the solar home price premium: electricity generation and green social status. Eur Econ Rev 56(5):961–973

    Article  Google Scholar 

  • DeLisle JR (1984) Residential appraisal: a behavioral approach to energy efficiency. Apprais J 52:41–47

    Google Scholar 

  • Deng Y, Quigley JM, Van Order R, Mac F (1996) Mortgage default and low downpayment loans: the costs of public subsidy. Reg Sci Urban Econ 26(3):263–285

    Article  Google Scholar 

  • Dermisi S, Mansour A, Worzala E (2012) Performance of leed-existing buildings before and after their certification. Presented at the 2012 meeting of the Real Estate Research Institute. Chicago, IL

  • Dermisi SV (2009) Effect of leed ratings and levels on office property assessed and market values. J Sustain Real Estate 1(1):23–47

    Google Scholar 

  • Eichholtz P, Kok N, Quigley JM (2013) The economics of green building. Rev Econ Stat 95(1):50–63

    Article  Google Scholar 

  • Elul R, Souleles NS, Chomsisengphet S, Glennon D, Hunt R (2010) What“ triggers” mortgage default? The American Economic Review, 490–494

  • Friedrich K, Eldridge M, York D, Witte P, Kushler M (2009) Saving energy cost-effectively: a national review of the cost of energy saved through utility-sector energy efficiency programs. American Council for an Energy-Efficient Economy. September

  • Fuerst F, McAllister P (2009) An investigation of the effect of eco-labeling on office occupancy rates. J Sustain Real Estate 1(1):49–64

    Google Scholar 

  • Fuerst F, McAllister P, van de Wetering J, Wyatt P (2011) Measuring the financial performance of green buildings in the uk commercial property market: Addressing the data issues. J Financ Manag Prop Constr 16(2):163–185

    Article  Google Scholar 

  • Goodwin KR (2011) The demand for green housing amenities. J Sustain Real Estate 3(1):127–141

    Google Scholar 

  • Green RK, Wachter SM (2007) The housing finance revolution. The Blackwell companion to the economics of housing,The housing wealth of nations, pp 414–445

  • Greenhalgh C, Rogers M (2010) Innovation, intellectual property, and economic growth. Princeton University Press, Princeton

    Google Scholar 

  • Harrison D, Seiler M (2011) The political economy of green office buildings. J Prop Invest Financ 29(4/5):551–565

    Article  Google Scholar 

  • Hayes S, Nadel S, Granda C, Hottel K (2011) What have we learned from energy efficiency financing programs? American Council for an Energy-Efficient Economy

  • Henley W et al (1997) Construction of a k-nearest-neighbour credit-scoring system. IMA J Manag Math 8(4):305–321

    Article  Google Scholar 

  • Howarth RB, Sanstad AH (1995) Discount rates and energy efficiency. Contemp Econ Policy 13(3):101–109

    Article  Google Scholar 

  • Jaffee DM, Wallace NE (2009) Market mechanisms for financing green real estate investments. Fisher Center Working Papers. University of California

  • Jennings BJ, Vugrin ED, Belasich DK (2013) Resilience certification for commercial buildings: a study of stakeholder perspectives. Environ Sys Decis 33(2):184–194

    Article  Google Scholar 

  • Kahn ME, Kok N (2012) The capitalization of green labels in the California housing market. Reg Sci Urban Econ 7(3)

  • Kats G, Menkin A, Dommu J, DeBold M (2011) Energy efficiency financing-models and strategies. prepared by Capital E for the Energy Foundation

  • Kaza N, Quercia RG, Tian C (2014) Home energy efficiency and mortgage risks. J Policy Dev Res 16(1):279

    Google Scholar 

  • Koebel C, McCoy A (2006) Beyond first mover advantage: the characteristics, risks and advantages of second mover adoption in the home building industry. American real estate and urban economics association, Washington

    Google Scholar 

  • Koebel CT (1999) Sustaining sustainability: innovation in housing and the built environment. J Urban Technol 6(3):75–94

    Article  Google Scholar 

  • Koebel CT (2008) Innovation in homebuilding and the future of housing. J Am Plan Assoc 74(1):45–58

    Article  Google Scholar 

  • Koebel CT, McCoy AP, Sanderford AR, Franck CT, Keefe M (2013). Modeling the diffusion of a green housing innovation: high efficiency windows. Virginia Center for Housing Research

  • Kok N, McGraw M, Quigley JM (2011) The diffusion of energy efficiency in building. Am Econ Rev 101(3):77–82

    Article  Google Scholar 

  • Kontokosta CE (2011) Greening the regulatory landscape: the spatial and temporal diffusion of green building policies in us cities. J Sustain Real Estate 3(1):68–90

    Google Scholar 

  • Lützkendorf T, Lorenz DP (2006) Using an integrated performance approach in building assessment tools. Build Res Inf 34(4):334–356

    Article  Google Scholar 

  • Malik M, Thomas LC (2010) Modelling credit risk of portfolio of consumer loans. J Oper Res Soc 61(3):411–420

    Article  Google Scholar 

  • McCoy AP, Koebel CT, Sanderford A (2013) Narrowing the chasm: Agile patterns of adoption and diffusion of innovation in the us housing industry from 2000–2010. Tech. rep, Virginia Center for Housing Research

  • Miller N, Spivey J, Florance A (2008) Does green pay off? J Real Estate Portf Manag 14(4):385–400

    Google Scholar 

  • Moore GA (1991) Crossing the chasm: marketing and selling high-tech products to mainstream consumers. HarperBusiness, New York

    Google Scholar 

  • Muldavin SR (2010) Value beyond cost savings: how to underwrite sustainable properties. Green Building FC

  • Overstreet GA, Bradley EL, Kemp RS (1992) The flat-maximum effect and generic linear scoring models: a test. IMA J Manag Math 4 (1), 97–109. http://imaman.oxfordjournals.org/content/4/1/97.abstract

  • Pivo G (2013) The effect of sustainability features on mortgage default prediction and risk in multifamily rental housing. FannieMae

  • Pivo G, Fisher J (2009) Investment returns from responsible property investments: Energy efficient, transit-oriented and urban regeneration office properties in the us from 1998–2007. Responsible Property investing center, Boston College, University of Arizona, Benecki Center for real estate studies, and Indiana University, Working Paper WP-08-2, rev

  • Pivo G, Fisher JD (2010) Income, value, and returns in socially responsible office properties. J Real Estate Res 32(3):243–270

    Google Scholar 

  • Pivo G, Fisher JD (2011) The walkability premium in commercial real estate investments. Real Estate Econ 39(2):185–219

    Article  Google Scholar 

  • Popescu D, Mladin EC, Boazu R, Bienert S (2009) Methodology for appraisal of real estate green value. Environ Eng Manag J (EEMJ) 8(3):601–606

  • Quercia RG, Pennington-Cross A, Tian CY (2011) Mortgage default risk and local unemployment. Tech. rep., Working Paper, center for community capital, University of North Carolina at Chapel Hill

  • Quercia RG, Pennington-Cross A (2012) Mortgage default and prepayment risks among moderate-and low-income households. Real Estate Econ 40(s1):S159–S198

    Article  Google Scholar 

  • Quercia RG, Stegman MA (1992) Residential mortgage default: a review of the literature. J Hous Res 3(2):341–379

    Google Scholar 

  • Rauterkus SY, Thrall GI, Hangen E (2010) Location efficiency and mortgage default. J Sustain Real Estate 2(1):117–141

    Google Scholar 

  • Rogers EM (2010) Diffusion of innovations. Simon and Schuster, New York City

    Google Scholar 

  • Runde TP, Thoyre S (2010) Integrating sustainability and green building into the appraisal process. J Sustain Real Estate 2(1):221–248

    Google Scholar 

  • Safavian SR, Landgrebe D (1991) A survey of decision tree classifier methodology. IEEE Trans Syst Man Cybern 21(3):660–674

    Article  Google Scholar 

  • Sanderford AR, Keefe M, McCoy AP, Koebel CT (2013) The diffusion of energy efficiency in housing. Tech. rep, Virginia Center for Housing Research

  • Schultz PW, Nolan JM, Cialdini RB, Goldstein NJ, Griskevicius V (2007) The constructive, destructive, and reconstructive power of social norms. Psychol Sci 18(5):429–434

    Article  Google Scholar 

  • Seager T, Collier Z, Linkov I, Lambert J (2013) Environmental sustainability, complex systems, and the disruptive imagination. Environ Syst Decis 33(2):181–183

    Article  Google Scholar 

  • Simons RA, Choi E, Simons DM (2009) The effect of state and city green policies on the market penetration of green commercial buildings. J Sustain Real Estate 1(1):139–166

    Google Scholar 

  • Sklar S (2014) Perspective on multi-scale assets for clean energy technologies in buildings. Environ Syst Decis 34(2):323–325

    Article  Google Scholar 

  • Slaughter ES (1998) Models of construction innovation. J Constr Eng Manag 124(3):226–231

    Article  Google Scholar 

  • Slaughter S (1993) Innovation and learning during implementation: a comparison of user and manufacturer innovations. Res Policy 22(1):81–95

    Article  Google Scholar 

  • Straka JW (2000) A shift in the mortgage landscape: the 1990s move to automated credit evaluations. J Hous Res 11(2):207–232

    Google Scholar 

  • Thomas LC, Edelman DB, Crook JN (2002) Credit scoring and its applications. Siam, Philadelphia

    Book  Google Scholar 

  • Van Order R (2007) Modeling the credit risk of mortgage loans: a primer. Stephen M. Ross Working Paper Series.  University of Michigan

  • Von Hippel E (2005) Democratizing innovation. MIT press, Cambridge

    Google Scholar 

  • West D (2000) Neural network credit scoring models. Comput Operat Res 27(11):1131–1152

    Article  Google Scholar 

  • Wiginton JC (1980) A note on the comparison of logit and discriminant models of consumer credit behavior. J Financ Quant Anal 15(03):757–770

    Article  Google Scholar 

  • Yezer AM (2010) A review of statistical problems in the measurement of mortgage market discrimination and credit risk. Research Institute for Housing America. Washington, DC

  • Yobas MB, Crook JN, Ross P (2000) Credit scoring using neural and evolutionary techniques. IMA J Manag Math 11(2):111–125

    Article  Google Scholar 

  • Zerkin AJ (2006) Mainstreaming high performance building in new york city: a comprehensive roadmap for removing the barriers. Technol Soc 28(1):137–155

    Article  Google Scholar 

  • Zhu H, Beling P, Overstreet G, (2001) A study in the combination of two consumer credit scores. J Operat Res Soc 52(9):974–980 [Special Issue: Credit Scoring and Data Mining (Sep., 2001)]

  • Zhu H, Beling P, Overstreet G (2002) A bayesian framework for the combination of classifier outputs. J Operat Res Soc 53(7):719–727

Download references

Author information

Authors and Affiliations

  1. College of Architecture, Planning, and Landscape Architecture, University of Arizona, 1040 N. Olive Road (A303G), Tucson, AZ, 85719, USA

    Andrew R. Sanderford

  2. McIntire School of Commerce, University of Virginia, Charlottesville, VA, 22904, USA

    George A. Overstreet

  3. Department of Systems and Information Engineering, University of Virginia, Charlottesville, VA, 22904, USA

    Peter A. Beling

  4. Department of Finance and Tax and The African Collaboration for Quantitative Finance and Risk Research, University of Cape Town, Rondebosch, 7700, South Africa

    Kanshukan Rajaratnam

Authors
  1. Andrew R. Sanderford
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. George A. Overstreet
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Peter A. Beling
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Kanshukan Rajaratnam
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Andrew R. Sanderford.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Sanderford, A.R., Overstreet, G.A., Beling, P.A. et al. Energy-efficient homes and mortgage risk: crossing the chasm at last?. Environ Syst Decis 35, 157–168 (2015). https://doi.org/10.1007/s10669-015-9535-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10669-015-9535-8

Keywords

Search

Navigation