There has been much speculation over the last few months that as housing sales
continue to decline, the home remodeling industry will also take a big hit.
It makes sense for a couple of reasons; sellers may be reluctant to put a lot
of money into home improvements that they may not recover on
sale, and those two seemingly never-ending sources of funds, cash-out refinancing
and home equity loans, are becoming less easy and economical to access.
Those in the remodeling industry may have harbored some hope that high energy
prices would keep their industry afloat as homeowners scrambled to do energy
efficient retrofits, thus offsetting some of the housing bubble effect.
Therefore, a recent study by the Harvard Joint Center on Housing may come as
a second blow.
The study, released earlier this summer, is entitled The Relationship Between
Home Energy Costs and Energy-Related Remodeling Activity
and was written
by Becky Russell.
The methodology of the study was a little weird. This frequently happens when
data just doesn't exist in a pure form and extrapolations are needed to
make sense out of what information does exist. The conclusions are surprising
albeit a little tortured but one does not get the feeling that Ms. Russell did
anything other than play straight with the information with which she had to
Ms. Russell set out to establish how households react to rising home energy
costs and if such rising prices encourage homeowners to invest in energy efficient
changes in their homes. The results of her research are based on data available
from 1967 to 2004, a time period during which energy prices doubled when adjusted
During this 37 year time period there were several periods that were notable
for significant increases in home energy costs but most outstanding was the
period during and after the OPEC oil embargo. Household energy costs during
this 1973-1974 period rose 47 percent.
So how did consumers react?
There were two patterns of behavior; some homeowners made adjustments to their
lifestyle and some invested in energy efficiency. Actually, the third choice
- to suck it up and pay the increasing gas, oil, and electric bills - seemed
to also be in the game but Ms. Russell does not address this option.
Householders, not necessarily homeowners, and that may account for some of
the investment avoidance, if they did anything at all overwhelmingly opted for
lifestyle changes. 49 percent reported that they turned down the thermostat,
66 percent cut back on the use of air conditioning, and 75 percent used less
electricity (seemingly duplicative of the other two choices perhaps abetted
by using the dishwasher less often.) Only 17 percent added weather stripping,
13 percent installed storm doors or windows, and 10 percent insulated voids
in wall, floors, or ceilings.
And the costs of these energy retrofits? Weatherproofing came in at a median
cost of less than $100; storm doors and windows cost a median of $300 to $400
and the insulation projects generally cost between $100 to $200.
The study postulated that energy efficiency investments may have been delayed
for a few years, perhaps because budgets were stressed by the increasing cost
of fuel so it looked at results from studies conducted in the late 1970s. The
American Gas Association reported that over 600,000 households converted
to gas between 1978 and 1979 - a move these homeowners may have come
to regret. The National Interim Energy Consumption Survey conducted in 1977
and 1978 also confirmed that "households continued to make changes several years
after the 1973 cost increases." These changes, while they did continue several
years after that 1973 crisis, remained modest and were not significant as investments.
"In fact, 60 percent of responding households reported not spending a single
dollar on conservation over the prior two year period."
Those households that did invest tended to be younger, lived in older homes,
had higher incomes and used larger amounts of home energy than others. The most
common improvements were installing more energy efficient doors and windows
and insulating attics.
Ms. Russell concluded that "The overall story from the oil shock in 1973 is
that the majority of households respond to rising home energy costs by taking
actions to reduce energy consumption to offset higher energy prices. However,
the majority of these actions are going to be minor lifestyle changes that produce
quick results, require no investment, and do not increase the energy efficiency
of their home."
But that was nearly 30 years ago. Surely we are more environmentally aware
today even if we may not be any more cost sensitive.
Well, maybe not so much. Using Census Bureau data from 1993 to 2004, the author
looked at the share of remodeling dollars that went toward
energy sensitive projects. She found that, while during that 11-year period
home energy costs were trending upward, the share of energy sensitive remodeling
was actually trending downwards. And, the year when energy sensitive remodeling
hit its highest level, accounting for almost 20 percent of all remodeling expenditures,
home energy costs were relatively low while in 2002, when energy costs were
increasing, the share of energy sensitive remodeling hit its low.
A simple correlation showed that an increase in the cost of home energy generated
(if it can even be considered responsible) an increase in energy conservation
expenditures only six to seven years after the event. Ms. Russell suggests that
either householders were taking time to research the most efficient products
or, more likely, that in each of the time periods studied, the country was emerging
from recession, enjoying high home appreciation and low interest rates, and
generally investing in large remodeling projects in which improvements in energy
efficiency may have been lost in the scope of the overall work.
The study concluded that the cost of home energy has only
a limited impact on energy efficient retrofits and, where energy cost does influence
investments, it takes several years for the effect to become apparent. However,
if high home energy prices are sustained, then we may see increased investments
in efficiency and there may be a price threshold which would encourage homeowners
to spend more on energy efficiency
With oil prices in the Northeast expected to reach as high as $2.50 per gallon
this winter (compared to around $0.98 - 1.25 in 2000) her price threshold
theory may get a real test.