Minimum Energy Standards at-a-glance
On April 26th 2024, the U.S. Department of Housing and Urban Development (HUD) updated its energy standards by adopting the 2021 International Energy Conservation Code (IECC). This code is now mandatory for housing developments funded by HUD and the USDA, impacting programs like FHA-insured single-family and multifamily homes. According to the Department of Energy, homes built to the 2021 IECC are 34.3% more energy-efficient than those under the 2009 energy standards and offer 8.66% national energy cost savings compared to the 2018 standards. FHA-insured single-family programs will be required to implement the new standards by November 2025, 18 months after the effective date of the Notice. It is estimated that the new energy standards will impact 25% of all new homes nationwide.
Energy codes have been a major contribution to lower energy use in residential homes, and this initiative, effective May 2024, will replace the 15-year old 2009 energy standards to enhance energy efficiency, reduce greenhouse gas emissions, and improve the overall comfort and resilience of housing. The key points include:
- Implementation and Scope: This policy applies to multifamily and single-family homes funded by HUD and the USDA. Specific compliance timelines vary, with some flexibility provided for rural and high-poverty areas.
- Compliance and Enforcement: Builders must ensure that new construction projects meet these updated energy standards. Compliance will be assessed through third-party verification processes, and failure to comply may result in penalties or the requirement to make necessary adjustments to meet the standards.
- Financial Impacts: The updated standards are expected to lead to significant energy cost savings for homeowners, with an estimated average annual savings of up to $1,000 per household, depending on the size and location of the property. Over 30 years, the new energy standards could reduce energy consumption by 13.5% and carbon emissions by 8.7 million metric tons.
- Environmental and Social Benefits: Beyond cost savings, the new standards contribute to broader environmental goals by reducing carbon footprints and promoting more sustainable housing. The standards also aim to improve the living conditions of low-income residents by ensuring that homes are more energy-efficient, more comfortable, and healthier to live in.
Impact on homebuilders
The changes in the federally backed mortgage program requirements have several implications for home builders, particularly those involved in affordable housing and first-time homebuyer markets.
- Incentives for Affordable Housing Construction: The administration is using tax credits and grants to support the construction of affordable housing. The $2,500 per home tax credit requirement for single-family homes was increased to ENERGY STAR 3.2 beginning January 1, 2025. The $5,000 per home tax credit requirement of DOE Certified Zero Energy Ready Program was increased to Version 2 for 2024 and 2025). These incentives could provide builders with new opportunities to engage in projects that receive federal support, primarily through the Neighborhood Homes Tax Credit and other initiatives designed to close the housing supply gap.
- Increased Demand for Affordable Housing: The administration’s initiatives, such as reducing mortgage insurance premiums for FHA loans, are intended to make homeownership more affordable, especially for first-time and low-income buyers. This change could increase the demand for homes in the lower price ranges, typically requiring more entry-level and affordable housing. Builders who focus on these segments might see an uptick in demand.
- Leverage ADUs for Additional Income: New policies allow prospective buyers to include income from Accessory Dwelling Units (ADUs) when qualifying for FHA-insured mortgages. Builders who incorporate ADUs into their designs could find these properties more attractive to buyers, as this policy makes financing easier and homeownership more attainable.
- Potential Challenges: While these initiatives will likely boost demand, builders may face supply chain issues or labor shortages, particularly in the affordable housing sector. Additionally, the effectiveness of these programs relies heavily on Congressional approval of proposed budgets and tax credits, which could create uncertainty in planning and executing new projects.
Overall, builders who can navigate these changes and align their offerings with federal incentives may find significant opportunities in the evolving housing market.
