Understanding Housing Market Responses to Stringent Energy Codes

Abstract

Increased energy efficiency in buildings is essential to reducing carbon emissions and addressing climate change. How do the more energy efficient building codes that are needed affect housing prices and housing production? To reduce carbon emissions by 50% by 2030 and achieve net-zero emissions by 2050, Massachusetts enacted the Green Communities Act of 2008, which requires the adoption of a Stretch Energy Code appendix in order to be designated a "Green Community" and be eligible for certain state funding. This appendix to the base building code adds energy-efficiency mandates, including a requirement that all new residential construction meet increasingly ambitious Home Energy Rating System (HERS) Index scores. In addition to their obvious environmental benefits, more stringent energy-efficiency requirements may lead to increased construction costs and have effects housing production and affordability. Using the staggered municipal adoption of the Stretch Energy Code to tease out causal relationships, we analyze the effects of the Stretch Energy Code on housing quantity and price across municipalities in Massachusetts. The results indicate that more energy-efficient properties command a sales price premium of 3.1% to 3.4%, and that the Stretch Energy Code adoption is associated with a decrease in the quantity of new housing starts (especially for single-family homes). Roughly 60% of the total price increase appears to be attributable to a higher willingness to pay for energy-efficient homes, with the remaining percentage explained by the increase in construction costs coupled with the decrease in housing supply.