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Builders Push ‘Green’ Homes to Stand Out in Foreclosure-Filled U.S. Market

Photographer: Joe Raedle/Getty Images

Sales of green homes accounted for 16 percent of the $100 billion homebuilding industry last year, up from 2 percent in 2006, according to information-services provider McGraw-Hill Construction in New York. Close

Sales of green homes accounted for 16 percent of the $100 billion homebuilding industry... Read More

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Photographer: Joe Raedle/Getty Images

Sales of green homes accounted for 16 percent of the $100 billion homebuilding industry last year, up from 2 percent in 2006, according to information-services provider McGraw-Hill Construction in New York.

In the 20 years Ron Betenbough’s company has been building homes in west Texas, he’s always been willing to compete on price. Now, in a market crowded with cheap properties, he’s also touting environmentally friendly construction and energy-saving features.

Betenbough Homes has been promoting all its houses as “green” since November, after winning certification under an industry-run program, Betenbough said in a telephone interview. The company didn’t raise prices, absorbing added costs of less than $500 on each of its units, which list for as low as $110,000 in some subdivisions.

“We chalked it up to marketing,” said Betenbough, 70, who founded the Lubbock, Texas-based company with his son, Rick.

As the housing slump enters its sixth year, small companies such as Betenbough and giants such as PulteGroup Inc., the largest U.S. homebuilder by revenue, are using green marketing as a weapon in the battle for buyers who have their pick of low- priced existing properties, including foreclosures. Builders are touting a confusing array of potentially profit-pinching environmental standards that have yet to prove effective in swaying consumers.

To label its homes green, Betenbough Homes added a few features, such as low-flow toilets, and paid for inspections, allowing it to get the “bronze” level of certification from the National Association of Home Builders, the lowest of the Washington-based group’s four green ratings. The company had previously adopted design elements including energy-efficient windows, to block out heat and dust, and prefabricated roof trusses, which save money and create less waste.

Pragmatic Approach

Buyers in west Texas, where home sales are stronger and energy costs are lower than in many other parts of the U.S., aren’t willing to pay a lot extra for a green home, according to Betenbough, who says he’s more of a pragmatist than an environmentalist.

“If I can do something that does increase the cost and the buyer can recover the money in two years, I’m game,” said Betenbough, who has sold about 250 green homes. “If it takes 10 years, you’ve lost me. Most people don’t live in a home that long.”

Sales of green homes accounted for 16 percent of the $100 billion homebuilding industry last year, up from 2 percent in 2006, according to information-services provider McGraw-Hill Construction in New York. The increase in part reflects builders’ expectations that states will continue to adopt stricter energy codes for construction, said Clayton Traylor, policy director for Leading Builders of America, an industry lobbying group in Washington.

This Old House

The green trend also is an attempt to set new construction apart from previously owned homes on the market.

“Our competition isn’t other homebuilders, it’s resale,” said Steve Ruffner, president of the Southern California division of Los Angeles-based KB Home, which focuses on first- time buyers. “We are very focused on showing why buying new is saving money in a consumer’s overall cost.”

Builders are trying to lure buyers away from existing homes as foreclosed properties drag down prices. More than 4 million properties have been repossessed since 2006, according to RealtyTrac Inc., an Irvine, California-based data seller. A Standard & Poor’s index of 12 publicly traded homebuilders has tumbled 76 percent since new-home sales crested in July 2005, compared with the gain of 6.6 percent by the S&P 500.

The median price of a new home in May fell 3.4 percent to $222,600 from a year earlier, and is down 15 percent from the March 2007 high, according to the U.S. Commerce Department. Sales have fallen 77 percent since July 2005.

A Limited Advantage

The median price of an existing home dropped 4.6 percent in May to $166,500, and has lost 28 percent from the high in July 2006, data from National Association of Realtors show. Sales are off 34 percent from their September 2005 record.

“I don’t know that energy efficiency is enough of an edge,” said Vicki Bryan, a New York-based analyst who covers homebuilders and other industries for debt-research firm Gimme Credit LLC. “The first decision a buyer is going to make is to buy at all, not because you have a green product.”

To earn the Environmental Protection Agency’s Energy Star certification, a home needs to be at least 20 percent more efficient than the benchmark for a standard new home, according to Jonathan Passe, acting manager for the program’s residential unit in Washington. About 1.2 million homes have gotten the Energy Star label, and a quarter of single-family homes built last year qualified.

Single Standard Needed

Passe said there are dozens of green-labeling programs. Energy Star looks mostly at energy efficiency, though new guidelines for 2012 will include requirements on air quality.

Homes can be certified at various grades, from “bronze” to “emerald,” through the National Association of Home Builders, or “certified” to “platinum” through the U.S. Green Building Council, the Washington-based nonprofit that developed the Leadership in Energy & Environmental Design standards. The levels in both systems are based on scores in categories that include water efficiency, indoor environmental quality and energy usage.

Builders could reduce confusion surrounding the multiple standards by developing a single national metric similar to the miles-per-gallon sticker on cars, allowing buyers to easily compare both new and existing homes, according to Sean Penrith, executive director of the Earth Advantage Institute, a Portland, Oregon-based nonprofit that works with the industry to help implement sustainable-building practices.

The group, which offers its own green-certification programs, recently introduced the “energy performance score,” which displays the energy usage and carbon emissions of a house.

Extra 3%

“We in the industry expect homeowners to become building scientists to understand what the performance elements of a home are,” Penrith said. “What’s really needed is a simple way to compare one high-performance home to another.”

Top green ratings often go to high-end custom homes because the technology is expensive, said Michelle Desiderio, director of green-building programs for the Upper Marlboro, Maryland- based National Association of Home Builders Research Center, which has certified 2,500 houses and 52 multifamily buildings since starting more than two years ago.

Going green adds about 3 percent to building costs, which aren’t always passed on to customers, according to Allison Bailes, president of Energy Vanguard LLC, a Decatur, Georgia- based training, consulting and design firm.

Michael G. Smith, an analyst for JMP Securities LLC in San Francisco, said builders that appeal to first-time buyers often can’t invest enough money in green features to make a significant difference in energy savings without eating into profit margins. A company such as Meritage Homes Corp. (MTH), which caters to move-up buyers, has more flexibility to spend on green options, he said.

‘Net Zero’ Homes

“In general you have to invest in technology to differentiate them,” Smith said. “It can’t just be marketing and an Energy Star seal.”

Most of Meritage’s houses are 35 percent more energy efficient than a typical new home, and in the 25 communities where solar panels are standard, the differential is about 75 percent, said C.R. Herro, vice president of environmental affairs at the Scottsdale, Arizona-based company.

The company has sold about a half dozen “net zero” homes, designed to generate as much power as a typical household would use, since their April introduction, he said. While the homes cost an additional $10,000 to $20,000, tax incentives help defray the difference.

Appraisal Issue

KB Home (KBH) also plans to introduce net zero houses as an option in some markets. In its 10 solar communities, homeowners may save 30 percent on energy over a standard new home.

At Meritage’s Lyon’s Gate project in Gilbert, Arizona, the annual energy bill was $720 for a 1,640-square-foot (152-square- meter) home. That’s 60 percent less than a standard new home of a similar size, according to an analysis by the Salt River Project, which supplies power to customers in the Phoenix area.

“We can charge a little bit more and still be competitive with other new homes and used homes,” said Brent Anderson, a Meritage spokesman. “But a homebuyer has a fairly small threshold.”

Builders say sales of green homes are being hindered because appraisers don’t always account for energy-saving features, making it more difficult for borrowers to qualify for loans. The Sensible Accounting to Value Energy Act, a bill supported by groups including the Leading Builders of America that has yet to be introduced in Congress, would require providers of any government-backed mortgage to take borrowers’ expected energy savings into account. That would allow buyers of eco-friendly homes to afford higher prices.

Data Scarce

David Weekley Homes, one of the biggest closely held builders, is subsidizing some of the additional costs because mortgage appraisers don’t give full credit for the average $3,000 it spends on green features, according to Mike Humphrey, the company’s vice president of operations.

If the homes were appraised at a higher value, the Houston- based company wouldn’t have to take a hit to its margins, he said.

Studies on the strength of the green-home market are limited because few multiple listing services across the country collect information about energy efficiency. An exception is in the Portland area, where homes with green certifications sold 18 days faster on average and for 3 percent to 5 percent more than comparable houses, according to a 2009 study by the Earth Advantage Institute.

Model Customer

Jennifer Fong is the kind of buyer builders are targeting with their green efforts.

The 31-year-old dentist, who doesn’t own a television and keeps her thermostat at 80 degrees Fahrenheit (27 degrees Celsius), moved into the PulteGroup-built Villa Trieste in Las Vegas in 2009. The Bloomfield, Michigan-based company has built about 120,000 Energy Star homes in the U.S., and has 24 solar communities, including Villa Trieste, which was designed to cut energy use by 65 percent.

Fong is competing for bragging rights for the lowest annual electric bill in her Las Vegas community, where rooftop solar panels are standard on all 185 homes. Her monthly bills have never been more than $45, and her 1,775-square-foot house even generates a surplus of power in some months. Her June bill was $8.40, which covered the minimum service fee and taxes.

“I did consider buying a foreclosure,” said Fong, who paid $275,000 for the house. “But I liked the home anyway and with the added green features, it made it that much better.”

To contact the reporter on this story: Prashant Gopal in New York at pgopal2@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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