Partners (Number 2, 2006)

Vol. 16, No. 2, 2006


Can Housing Be Green and Affordable?

Technical Education: A Remedy for Poverty?

Soaring Insurance Costs Make Housing Less Affordable

CRA Revisions: Flexibility and New Choices

Reverse Mortgages Provide Answers for Some (but Not All) Seniors

Recruiting Retirees Calls for Careful Planning

Atlanta Fed Hosts Last in Series of Asset-Building Forums

Spotlight on the District—Georgia and Eastern Tennessee



  Can Housing Be Green and Affordable?

As the green movement in homebuilding takes off nationwide, affordable housing advocates are eager to explore its advantages.

green housingAlthough green housing still accounts for only a small percentage of the total housing market, the National Homebuilders Association sees it as the wave of the future.

Green building and affordable housing are natural partners. Affordable housing advocates focus on many of the same issues as advocates for green building—ensuring long-term housing affordability, creating neighborhoods of choice and limiting urban sprawl.

Many assume that green approaches to homebuilding, which often cost more at the outset, are not appropriate for affordable housing. However, a growing body of evidence speaks to the contrary. Advocates for the greening of affordable housing argue that it is actually more economical because over time low-income homeowners will benefit from lower utility bills, fewer maintenance costs and healthier environments.

What is green building?
The most common perception about green building is that it uses environmentally sensitive building materials in energy-efficient designs. However, green building also encompasses the character of the community to consider proximity to transportation, infrastructure, jobs and services. Green building is a holistic strategy for sustainable development that aims to reduce utility costs, improve housing conditions and the health of the community residents, and limit urban sprawl and poorly planned development.

The green building rating system of The Leadership in Energy and Environmental Design (LEED) recognizes the U.S. Green Building Council (USGBC) as the national leader in promoting healthy, environmentally responsible and profitable building. The LEED program, which created national green building standards, encourages integrating green practices throughout the design and construction process.

One of the largest national players in the affordable housing industry, Enterprise Community Partners Inc., launched its Green Communities Initiative in 2004. It aims to make green building and sustainable development a mainstream phenomenon in the affordable housing industry through the creation of national standards. The criteria established for Green Communities draw heavily on standards developed for the LEED program and are compatible with other state and local green building programs.

Green Communities criteria address three key areas: energy and resource conservation, healthy environments and community characteristics. These areas are subdivided into seven categories: integrated design, location and neighborhood fabric, site improvements, energy efficiency, water conservation, materials beneficial to the environment, and operation and maintenance. These guidelines represent the first set of comprehensive criteria for building low-income sustainable housing.

Working with the National Resources Defense Council, Enterprise has pledged $555 million to the Green Communities Initiative over the next 5 years. Their goal is to provide training, technical support and policy advocacy to create 8,500 green affordable homes.

State and local organizations have also created green building standards. For example, the EarthCraft House was created by Southface and the Greater Atlanta Homebuilders Association to promote healthy, sustainable development and affordable housing. The EarthCraft program, which began in Atlanta, has now certified over 1,500 homes in the Southeast.

Costs and benefits of building green
The affordable housing industry is assuming an important role in the green building movement as an increasing number of affordable housing developers adopt green building techniques. However, only limited research has been conducted about the costs and benefits of green affordable housing. Research thus far focuses mainly on green practices in commercial and industrial development, where results consistently indicate that long-term benefits exceed the upfront capital costs.

Housing affordability is usually measured by the initial construction costs. Green building often requires additional upfront costs and so does not appear to promote affordability. New Ecology Inc. recently completed a study of 16 green affordable housing projects and found a small green “premium” of 2.42 percent of total development costs. Research by the Home Depot Foundation indicates that green building pushes costs up 3 to 5 percent, but it also shows these costs are recouped through reduced expenses in less than 5 years.

The benefits associated with green building are far-reaching, and many can be achieved without significant initial outlays. While it is easiest to quantify savings on energy and other utilities, homeowners also profit from the use of more durable materials that reduce maintenance and replacement costs for the home. Energy and water efficiency, indoor air quality, and durability generate the highest financial return, and therefore they are the most common goals in green building.

The environmental gains associated with green building are not as easily quantified, but they are no less important. Environmentally friendly construction conserves resources by using materials with recycled content, eliminates excess waste through efficient use of construction materials and encourages pedestrian-friendly neighborhoods that reduce automobile dependence.

Finally, advocates argue that these practices produce significant health benefits that stand to lower medical expenses for green housing residents.

The first-year report on Enterprise’s Green Communities Initiative offers strong evidence of the perks that come with building green: The 4,300 pending Green Communities homes will save families and apartment owners up to $1.5 million in energy bills, eliminate more than 5,000 tons of greenhouse gas emissions and reduce water use by 30 million gallons.

Making green building more affordable
Advocates for greening affordable houses identify several ways to make it more economical. Most important for cost-effectiveness, they say, is incorporation of green building practices from the beginning of the project. Starting the design process with green principles in mind is much more efficient than trying to add them into the project after it is designed.

A second recommendation is to follow an integrated design approach that involves all members of the development team from the beginning of the process to set green goals and identify a plan for achieving them.

To assess the true affordability of green building practices, proponents argue for a life-cycle approach that accounts for both upfront capital costs and long-term operating expenses to measure affordability. Case studies conducted by New Ecology found that energy and water costs for green housing were significantly lower than for conventional housing. They contend that these savings could potentially offset additional upfront costs for greening the project. When other benefits are factored in, the savings over time are likely to be significant.

Overcoming obstacles
There are several reasons why green building practices have not been widely applied to affordable housing. The biggest obstacle in both the conventional and affordable housing market is the prevailing emphasis on keeping upfront construction costs as low as possible. This issue is particularly acute in the affordable housing industry, which tends to focus entirely on getting low-income people into the homes, and not on the long-term costs of living in them.

Many state financing agencies are starting to include incentives for meeting green building criteria.

Green affordable housing is also indirectly discouraged by the home finance industry. Lenders use only the purchase price of the home in underwriting the mortgage. The potential long-term savings on other monthly expenses associated with green building practices are not factored into the assessment of the borrower’s repayment capacity. Thus some homebuyers are not able to qualify for the mortgage amount required to pay for a green home, even though lower operating expenses could offset the higher mortgage payment.

Finally, many public subsidy programs for affordable housing restrict green building by imposing “per unit” development costs caps. The caps limit upfront development costs and discourage developers from taking on any additional expenses, including those for green building that would reduce long-term operating costs.

Strategies for expanding affordable green housing
Overcoming barriers and expanding green affordable housing calls for both public and private sector involvement. State housing finance agencies and the lending industry are two important potential partners for this effort.

State Housing Finance Agencies. Most affordable housing requires some form of government assistance, and state and local governments can promote green practices through the public subsidy programs they administer. The Low Income Tax Credit is the most important source of financing for affordable multi-family housing, and many state financing agencies are starting to include incentives for meeting green building criteria in the Qualified Allocation Plan (QAP) used to allocate tax credits.

A study by Global Green USA late in 2005 examined the QAPs in all states to determine the extent of green building criteria in four categories: smart growth, energy efficiency, resource conservation and health protection. The study found most states gave some preference in the QAP to projects that met smart growth and energy efficiency requirements.

The study cited Georgia as one of the top five states in the country for encouraging green building practices. It pointed to several requirements in the Georgia QAP that could serve as models for states across the country to develop universal green building requirements for affordable housing.

The lending industry. The lending industry also has an important role to play in promoting green affordable housing. Few lenders have pursued new opportunities to help finance green housing. Green building advocates argue that green affordable housing would proliferate if lenders would use a life-cycle approach to determine the mortgage amount a borrower could afford.

Some financial institutions are beginning to explore creative products for underwriting green building, including energy-efficient mortgages. FHA now offers a program for borrowers to purchase new energy-efficient homes or to make upgrades that improve the efficiency of existing homes. Borrowers are able to fold the additional costs of green features into the mortgages if they can provide evidence that the improvements will lead to energy savings.

Fannie Mae, too, offers mortgage products for environmentally sound affordable housing, providing energy-efficient mortgages that qualify borrowers for a higher amount if they purchase a home with energy-conserving features. They recognize that potential energy savings will compensate for higher house payments. Fannie Mae also offers smart-commute mortgages: Borrowers who live near public transportation qualify for a larger mortgage on the basis that the homebuyer will save money on transportation expenses.

Even though such products are available, they have not been widely embraced by the lending industry. Additional research on the actual long-term cost savings afforded by green building practices may, however, encourage greater flexibility in mortgage underwriting and more widespread use of creative mortgage products.

Many synergies exist between green building and affordable housing. In fact, the affordable housing industry could become a leader in green development. But additional research is needed to ease some of the barriers to the greening of affordable housing. More extensive training is also important to expand cost-effective green strategies among builders and in the affordable housing industry generally. Despite the challenges, promoting housing that is healthy and sustainable as well as affordable seems a natural progression for an industry that has long focused on improving the lives of low-income individuals and their communities.

This article was written by Jessica LeVeen Farr, regional community development manager in the Atlanta Fed’s Nashville Branch.