July 13, 2010 / 9:23 PM / 9 years ago

Analysis: Energy efficiency is new green for U.S. homebuilders

NEW YORK (Reuters) - U.S. homebuilders used to brandish their environmentalist bona fides to lure customers. Now they are focusing less on green and more on greenbacks, introducing energy efficient features they say will convince customers to buy a new rather than a used home by saving them money.

A home under construction in California with solar technology designed into the shingles, July 19, 2008. REUTERS/Mike Blake

When homebuilders first clambered onto the bandwagon, they waved the green flag like everyone else. In 2007, KB Home announced its “My Home. My Earth.” program, which aimed to make it a “leading environmentally friendly company.”

But now, “energy efficiency” is the catchphrase of choice for its purported appeal to buyers’ pocketbooks. In June and July, four builders including Toll Brothers Inc and Lennar Corp issued press releases linking their new solar technologies to homeowner savings.

“Greenhouse gases is less the motivator,” said John McManus, editorial director for a group of homebuilding trade publications including Big Builder. “Saving money on a monthly basis is more the motivator.”

Builders like Meritage Homes Corp believe energy cost savings are a newly important part of the package they are offering buyers, said Citi analyst Josh Levin. But builders will likely struggle to persuade the coveted first-time homebuyer that efficient features do not mean a higher price tag, especially in this sluggish economy.

When it comes to the bottom line, builders’ aspirations for energy efficiency vary. Meritage sees its new communities as a way to gain market share while luxury builder Toll says its solar panel leasing program is “just another amenity” that might help it compete at a tough time.

Either way, new technology demands time and money.

“We didn’t just wake up and say, ‘Let’s offer this solar program,’” said Jim Boyd, a regional president in California for Toll. “We started a year ago in earnest on it. We have spent a tremendous amount of time researching, negotiating, learning.”

EDGE OVER RESALE

Toll’s program is a pilot that gives buyers in The Preserve in Vista Del Verde southeast of Los Angeles the option of renting solar panels that will generate electricity for the house’s use.

It will cost the company about $1,000 per house, Boyd said.

Meritage is building entire energy efficient communities, such as the recently opened 210-unit Lyon’s Gate near Phoenix, in which $50,000 worth of upgrades to the lighting, climate control, water and insulation systems come standard with each house, said C.R. Herro, the company’s vice president of environmental affairs.

Herro says in some cases Meritage might have to accept a slightly slimmer profit on a Lyon’s Gate-type house, but that is a trade-off the company is willing to make in the short term to capture marketshare down the road.

But both builders say their efficiency programs will not cost the buyer anything upfront and will instead save them money.

The equipment involved in the solar leasing program Toll is offering will cost about $42 a month to rent, but will save between $50 and $100 a month depending on how much electricity the homeowner uses, Boyd said.

Meritage estimates its energy efficient homes will save the buyer more than $100,000 over the life of a typical 30-year mortgage.

It can price the homes at the median in their various markets despite the cost of the improvements through a combination of price breaks with suppliers and great deals on land, Herro said.

Suppliers were willing to work with the company because Meritage persuaded them Lyon’s Gate is the future of homebuilding, and they wanted to get in on the ground floor, he added.

Homebuilders today “are building with better materials,” said Big Builder’s McManus. “Whether or not you make it a marketing message, homes are more efficient today than they were fifteen years ago.”

That is why Toll, Meritage and others sense in these features an advantage over their biggest competitor, especially in these days of lower home prices: the resale market.

Today’s customers are also more cognizant of energy costs, said D’Ann Harper, who owns a Coldwell Banker brokerage in San Antonio, Texas.

“It’s about overall efficiency,” she said. “They want to know about taxes and then utilities, and if they buy a pre-owned older home are they going to have to replace the appliances.”

OUT IN THE FIELD

Meritage has already sold “several” Lyon’s Gate homes since the community opened in late June using a sales pitch that says their energy features, which can make them up to 80 percent more efficient than a typical home, will cut the buyer’s monthly costs. The company already has 12 similar communities underway.

“There are choices beyond just what kind of countertops you want,” Herro said. “There are choices in energy efficiency that substantially change cost of ownership.”

The company is training realtors to help customers analyze not just the initial price but also the cost of ownership, Herro said.

“The key is going to be how are the sales people selling it out in the field,” said Eric Lipar, the CEO of private, Texas-based builder LGI Homes who is known in the industry for his skeptical take on “green” building.

Energy efficiency is a different matter and can indeed drive sales, he said. He sells his own homes that way.

But when the economy is soft, homebuyers focus so intensely on the price tag that even the perception of a higher initial price can jeopardize a sale, Lipar said.

He said this is especially true of the first-time homebuyer that every builder is chasing, because unlike a move-up buyer, that customer does not need to sell a home in order to buy one.

“They want to keep the price as low as possible,” he said.

Citi’s Levin is also a skeptic, and said most investors share his view, although energy efficiency might drive sales in a healthier housing market.

“Given how bad the economy is I don’t know how a solar panel can make that much of a difference,” he said.

Reporting by Helen Chernikoff; Editing by Phil Berlowitz

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