The Value of Green Labels in the California Housing Market

“The Value of Green Labels in the California Housing Market” is the first study to provide statistical evidence that, holding other factors constant, a green label on a single-family home in California provides a market premium compared to a comparable home without the label. The research also indicates that the price premium is influenced by local climate and environmental ideology. To reach these conclusions, researchers conducted an economic analysis of 1.6 million homes sold in California between 2007 and 2012, controlling for other variables known to influence home prices in order to isolate the added value of green home labels.

A recent study, conducted by economists at the University of California, Berkeley and University of California, Los Angeles, finds that California homes labeled by Energy Star, LEED or Green Point Rated Sell for 9% more than comparable, non-labeled homes. Since real estate prices depend on a variety of factors, the study controlled for key variable that influence how prices including, location, size , vintage and the presence of amenities. Considering that the average sales price of a non-labeled home in California is $400,000, the price premium for a certified green home translates into some $34,800 more than the value of a comparable home nearby.

Increased awareness of energy efficiency and its importance in the built environment have turned public attention to more efficient, “green” building. Indeed, previous research has documented that the inventory of certified green commercial space in the U.S. has increased dramatically since the introduction of rating schemes that attest to the energy efficiency or sustainability of commercial buildings (based on criteria published by the public and private institutions administering the rating schemes). Importantly, tenants and investors value the “green” features in such buildings.

Homeowners may be different from tenants and investors in commercial buildings, especially in the absence of standardized, publicly available information on the energy efficiency of homes. But in recent years, there has been an increase in the number of homes certified as energy efficient or sustainable based on national standards such as Energy Star and LEED and local standards such as GreenPoint Rated in California. By obtaining verification from a third party that these homes are designed and built to use energy and other resources more efficiently than prescribed by building codes, homes with “green” labels are claimed to offer lower operational costs than conventional homes. In addition, it is claimed that owners of such homes enjoy ancillary benefits beyond energy savings, such as greater comfort levels and better indoor environmental quality.

In the European Union, the introduction of energy labels, following the 2003 European Performance of Buildings Directive (EPBD), has provided single-family homebuyers with information about how observationally identical homes differ with respect to thermal efficiency. Presumably, heterogeneity in thermal efficiency affects electricity and gas consumption.

The EU energy label seems to be quite effective in resolving the information asymmetry in understanding the energy

efficiency of dwellings. Conversely, dwellings that are labeled as inefficient transact for substantial discounts relative to otherwise comparable, standard homes.

There are some industry-initiated case studies on the financial performance of “green” homes. An example is a study by the Earth Advantage Institute, documents for a sample of existing homes in Oregon that those with a sustainable certification sell for 30 percent more than homes without such a designation, based on sales data provided by the Portland Regional Multiple Listing Service. This paper is the first to systematically address the impact of labels such as Sustainable Design Certification, attesting to energy efficiency and other “green” features of single-family dwellings on the value of these homes as observed in the marketplace, providing evidence on the private returns to the investments in energy-efficient single-family dwellings, an increasingly important topic for the residential market in the U.S.

Using a sample of transactions in California, consisting of some 4,231 buildings certified by the USGBC, EPA, and a statewide rating agency, Build It Green, and a control sample of some 1.6 million non-certified homes, we relate transaction prices of these dwellings to their hedonic characteristics, controlling for geographic location and the time of the sale.

The results indicate the importance of a label attesting to the sustainability of a property in affecting the transaction price of recently constructed homes as observed in the marketplace, suggesting that an otherwise comparable dwelling with a “green” certification will transact for about 9 percent more. The results are robust to the inclusion of a large set of control variables, such as dwelling vintage, size and the presence of amenities, although we cannot control for “unobservables,” such as the prestige of the developer and the relative quality of durables installed in the home.

In addition to estimating the average effect, we test whether the price premium is higher for homes located in hotter climates and in electric utility districts featuring higher average residential electricity prices. Presumably, more efficient homes are more valuable in regions where climatic conditions demand more cooling, and where energy prices are higher.

Results show that the green premium is positively related to the environmental ideology of the neighborhood; green homes located in areas with a higher fraction of hybrid registrations sell for higher prices. Some homeowners seem to attribute non-financial utility to a green label. Regardless of the reasoning, a Green certified home is a great investment.

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