Robert Shiller Says Retrofits Are Never Worth It!

His economic truth about homeownership:

By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style.

"Here is a harsh truth about homeownership: Over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time — unless the company makes poor decisions, as some certainly do.

By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style."

-Robert Shiller, economist, Yale, Case-Shiller Real Estate Index, predictor of real estate bubble and crash, April 2013

ps: he went on to say in a tv interview that it is never worth the money to retrofit a single family home for lower energy costs, but it is worth the money to purchase a new construction home with energy efficient features. In general, with few exceptions, homes depreciate vs. inflation and total expense calculation!

the link with the proof: Robert Shiller says ...

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Comment by tedkidd on May 21, 2013 at 3:19pm

Bob B.  

Buying a home is a good investment because it is forced savings more than a good investment from "return on investment" perspective.  When you factor in risk, illiquidity, depreciation and headache factor, buying a home has a lot of cost premiums that only payback by satisfying "preferences".  

People don't really track their true cost of ownership.  Owning a house is a preference that people pay a premium for.  It's good forced savings, not good investment.  Of course there are a lot of people who will say otherwise, but ask where their self-interest is served...

WHAT MPG DOES YOUR HOUSE GET?  EE improvements are a hard thing to value because the savings are nearly impossible to "see".  You want me to pay $50 more in my mortgage for the $70 in energy I'm going to save over other comparable homes whose energy consumption I can't compare?  Effectively pay $11,000 more for your house for savings you can't compellingly prove?  

I believe that if energy transparency occurs EE improvements WILL be fairly valued by the marketplace.  Until you can convincingly see the value, the value argument will be mostly dismissed.  

Comment by Dennis Heidner on May 12, 2013 at 3:50pm

R Higgins,  I agree.  That is why I am becoming more convinced that all buildings (including residences) should have energy benchmarks that are included when listed (by someone certified).  It does add cost to the transaction, it may result in lower selling prices for some houses that need more work - but it also could raise the selling prices for houses that are efficient.  After a few years, when there has been a documented spread in prices and  F and F can accept the results - they would most likely change to allow a improvements that stay within the spread range to be made.... because they expect a sell would recover the money.

Benchmarks on homes may be the correct long term decision.

Comment by R Higgins on May 11, 2013 at 3:22pm

A follow up to Dennis Heidner :  Fannie Mae, Freddie Mac actually squashed public efforts to create low interest loan pools that would have made energy improvements accessible to the bulk of homeowners who don't have spare cash laying around.  Some local / state gov's were lending money and getting it back via special real estate tax assesments from the owners, thus at the extreme, a GSHP with a 20 yr payback but an immediate positive cash flow becomes doable.  F and F felt the real estate tax assesment was a "mortgage" that had precedent over thier mortgage (note - assesment for a town library, not a problem for F and F).  When an owner walks away from a property do the RE taxes need to be paid before the "mortgage" by whoever picks up the property, yes, but, the energy improvement stays with the property, and would make it "more marketable" to those picking up foreclosures thus increasing the chance of F and F being repaid.

Just another example of the US Gov't having no clear energy policies, except for drill baby drill (no hate mail, I'm for energy independence, but we are gearing up to export our oil and natural gas, so, no independence, and we run out of fossil fuels faster).

Comment by Bob Blanchette on May 11, 2013 at 7:59am

Depends a LOT on rent vs housing prices in your area. Look at the 1% rule, if a house would rent for $800, and you can buy it for $80k or less, in many cases buying is the better option. If that same house would sell for over $80k, renting may be the better option. In overheated markets the rent to price ratio got to be downright stupid, $1,200 rentals selling for $200k. Hence why those areas were the first to fall when prices corrected in 2008.

Comment by Jim Gunshinan on May 9, 2013 at 2:28pm

And another thing. If you don't consider your house as primarily an investment, and instead consider it home for the long run, than it changes the whole equation. What is the payback, besides lower operating expenses? See my comment below.

It's easy to forget, especially after the housing crisis (during, really), that we build homes to live in, and quality of life is very very important.

Comment by Jim Gunshinan on May 9, 2013 at 2:23pm

Good thing there are other very important and valuable but not monetized benefits to energy efficiency retrofits. The big two in my book—improved comfort, and improved health and safety of residents. Not to mention the "green" stuff.

Comment by Tom DelConte on May 9, 2013 at 10:23am

DH: Will never say never, again! By the way super economist Robert Shiller was referring to the big cost, high profit stuff normally proposed by some of us home energy pros, not the low cost maximum improvement stuff done by concerned homeowners, conscientious home energy pros, and "eco-hackers/modders." Of course, most people cannot afford to purchase new construction due to the high cost of "window treatments!"

Comment by Dennis Heidner on May 3, 2013 at 7:39pm

This is also interesting reading...  Why banks are reluctant to finance energy improvements.

In Germany on the other hand KfW,  offers low interest financing for energy efficiency and renewable energy improvements.  KfW is the equivalent of our Fannie Mae.   The EU and member states have signed up to the Kyoto agreement and the CO2 reductions.  As part of the effort to meet their "20/2020" goals, they benchmark and score the houses - much like we do appliances.  Low scoring houses sell for less on the market.  Low scoring houses may be required to make energy upgrades when furnace(boiler) is replaced.

Those scores help drive energy improvements.  It opens the doors to financing.

Comment by Dennis Heidner on May 3, 2013 at 7:29pm

"The never" and "always" words frequently come back to haunt the writer (as does "frequently").

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