Environment Systems and Decisions

, Volume 35, Issue 1, pp 157–168 | Cite as

Energy-efficient homes and mortgage risk: crossing the chasm at last?

  • Andrew R. Sanderford
  • George A. Overstreet
  • Peter A. Beling
  • Kanshukan Rajaratnam


A topic of recent interest is energy-efficient houses. In the last twenty years, the US market has witnessed growth in the adoption of energy efficiency via various building technologies, design schemes, and eco-labels by developers, homebuilders, and homebuyers. Although housing and real estate scholars have begun explorations of the factors associated with the diffusion of energy efficiency, the subject has yet to be explored from the perspective of a critical stakeholder—the mortgage lender. This paper distinguishes itself from the extant literature in several ways. First, using a diffusion of innovation intellectual framework, the authors explore the role of the lender as an innovation gatekeeper. Second, as a review article, the authors summarize several key papers from the underwriting, credit scoring, and finance literature to help frame a number of market frictions that could mute further diffusion of energy efficiency in housing. Finally, the authors analyze these frictions and offer both market and public policy suggestions that may help overcome these frictions and increase opportunities for both private competitive advantage and market transparency.


Credit scoring Mortgage loans Risk management  OR in environment and climate change 


  1. Administration EI (2010) Annual energy review. WashingtonGoogle Scholar
  2. Adomatis SK (2010) Notes and issues-valuing high performance houses. Apprais J 78(2):195Google Scholar
  3. Allcott H (2011) Social norms and energy conservation. J Public Econ 95(9):1082–1095CrossRefGoogle Scholar
  4. Amromin G, Paulson AL (2009) Comparing patterns of default among prime and subprime mortgages. Econ Perspect 33(2):18–37Google Scholar
  5. Aroul RR, Hansz JA (2011) The role of dual-pane windows and improvement age in explaining residential property values. J Sustain Real Estate 3(1):142–161Google Scholar
  6. Avery RB, Bostic RW, Calem PS, Canner GB (1996) Credit risk, credit scoring, and the performance of home mortgages. Fed Res Bull 82:621Google Scholar
  7. Bellotti T, Crook J (2009) Credit scoring with macroeconomic variables using survival analysis. J Oper Res Soc 60(12):1699–1707CrossRefGoogle Scholar
  8. Bhutta N, Dokko J, Shan H (2010) The depth of negative equity and mortgage default decisions. Division of Research & Statistics and Monetary Affairs, Federal Reserve BoardGoogle Scholar
  9. Bloom B, Nobe MC, Nobe MD (2011) Valuing green home designs: a study of energy star homes. J Sustain Real Estate 3(1):109–126Google Scholar
  10. Brounen D, Kok N, Quigley JM (2011) Residential energy literacy and conservation. Chicago: 47th Annual AREUEAGoogle Scholar
  11. Burt L, Goldstein DB, Leeds S. et al (2010) A path towards incorporating energy and transportation costs into mortgage underwriting: shifting to fact-based analysis. ACEEE Summer Study Energy Effic BuildGoogle Scholar
  12. Chesbrough H, Vanhaverbeke W, West J (2006) Open innovation: researching a new paradigm. Oxford University Press, OxfordGoogle Scholar
  13. Choi C (2009) Removing market barriers to green development: principles and action projects to promote widespread adoption of green development practices. J Sustain Real Estate 1(1):107–138Google Scholar
  14. Choi E (2010) Green on buildings: The effects of municipal policy on green building designations in america’s central cities. J Sustain Real Estate 2(1):1–21Google Scholar
  15. Christensen CM, Anthony SD (2004) Seeing what’s next: using the theories of innovation to predict industry change. Harvard Business Press, BostonGoogle Scholar
  16. Clauretie TM, Sirmans GS (2010) Real estate finance: theory and practice (with CD-ROM). Cengage LearningGoogle Scholar
  17. Crook J, Banasik J (2012) Forecasting and explaining aggregate consumer credit delinquency behaviour. Int J Forecast 28(1):145–160CrossRefGoogle Scholar
  18. Crook JN, Edelman DB, Thomas LC (2007) Recent developments in consumer credit risk assessment. Eur J Oper Res 183(3):1447–1465CrossRefGoogle Scholar
  19. Dastrup SR, Graff Zivin J (2012) Understanding the solar home price premium: electricity generation and green social status. Eur Econ Rev 56(5):961–973CrossRefGoogle Scholar
  20. DeLisle JR (1984) Residential appraisal: a behavioral approach to energy efficiency. Apprais J 52:41–47Google Scholar
  21. Deng Y, Quigley JM, Van Order R, Mac F (1996) Mortgage default and low downpayment loans: the costs of public subsidy. Reg Sci Urban Econ 26(3):263–285CrossRefGoogle Scholar
  22. Dermisi S, Mansour A, Worzala E (2012) Performance of leed-existing buildings before and after their certification. Presented at the 2012 meeting of the Real Estate Research Institute. Chicago, ILGoogle Scholar
  23. Dermisi SV (2009) Effect of leed ratings and levels on office property assessed and market values. J Sustain Real Estate 1(1):23–47Google Scholar
  24. Eichholtz P, Kok N, Quigley JM (2013) The economics of green building. Rev Econ Stat 95(1):50–63CrossRefGoogle Scholar
  25. Elul R, Souleles NS, Chomsisengphet S, Glennon D, Hunt R (2010) What“ triggers” mortgage default? The American Economic Review, 490–494Google Scholar
  26. Friedrich K, Eldridge M, York D, Witte P, Kushler M (2009) Saving energy cost-effectively: a national review of the cost of energy saved through utility-sector energy efficiency programs. American Council for an Energy-Efficient Economy. SeptemberGoogle Scholar
  27. Fuerst F, McAllister P (2009) An investigation of the effect of eco-labeling on office occupancy rates. J Sustain Real Estate 1(1):49–64Google Scholar
  28. Fuerst F, McAllister P, van de Wetering J, Wyatt P (2011) Measuring the financial performance of green buildings in the uk commercial property market: Addressing the data issues. J Financ Manag Prop Constr 16(2):163–185CrossRefGoogle Scholar
  29. Goodwin KR (2011) The demand for green housing amenities. J Sustain Real Estate 3(1):127–141Google Scholar
  30. Green RK, Wachter SM (2007) The housing finance revolution. The Blackwell companion to the economics of housing,The housing wealth of nations, pp 414–445Google Scholar
  31. Greenhalgh C, Rogers M (2010) Innovation, intellectual property, and economic growth. Princeton University Press, PrincetonGoogle Scholar
  32. Harrison D, Seiler M (2011) The political economy of green office buildings. J Prop Invest Financ 29(4/5):551–565CrossRefGoogle Scholar
  33. Hayes S, Nadel S, Granda C, Hottel K (2011) What have we learned from energy efficiency financing programs? American Council for an Energy-Efficient EconomyGoogle Scholar
  34. Henley W et al (1997) Construction of a k-nearest-neighbour credit-scoring system. IMA J Manag Math 8(4):305–321CrossRefGoogle Scholar
  35. Howarth RB, Sanstad AH (1995) Discount rates and energy efficiency. Contemp Econ Policy 13(3):101–109CrossRefGoogle Scholar
  36. Jaffee DM, Wallace NE (2009) Market mechanisms for financing green real estate investments. Fisher Center Working Papers. University of CaliforniaGoogle Scholar
  37. Jennings BJ, Vugrin ED, Belasich DK (2013) Resilience certification for commercial buildings: a study of stakeholder perspectives. Environ Sys Decis 33(2):184–194CrossRefGoogle Scholar
  38. Kahn ME, Kok N (2012) The capitalization of green labels in the California housing market. Reg Sci Urban Econ 7(3)Google Scholar
  39. Kats G, Menkin A, Dommu J, DeBold M (2011) Energy efficiency financing-models and strategies. prepared by Capital E for the Energy FoundationGoogle Scholar
  40. Kaza N, Quercia RG, Tian C (2014) Home energy efficiency and mortgage risks. J Policy Dev Res 16(1):279Google Scholar
  41. Koebel C, McCoy A (2006) Beyond first mover advantage: the characteristics, risks and advantages of second mover adoption in the home building industry. American real estate and urban economics association, WashingtonGoogle Scholar
  42. Koebel CT (1999) Sustaining sustainability: innovation in housing and the built environment. J Urban Technol 6(3):75–94CrossRefGoogle Scholar
  43. Koebel CT (2008) Innovation in homebuilding and the future of housing. J Am Plan Assoc 74(1):45–58CrossRefGoogle Scholar
  44. Koebel CT, McCoy AP, Sanderford AR, Franck CT, Keefe M (2013). Modeling the diffusion of a green housing innovation: high efficiency windows. Virginia Center for Housing ResearchGoogle Scholar
  45. Kok N, McGraw M, Quigley JM (2011) The diffusion of energy efficiency in building. Am Econ Rev 101(3):77–82CrossRefGoogle Scholar
  46. Kontokosta CE (2011) Greening the regulatory landscape: the spatial and temporal diffusion of green building policies in us cities. J Sustain Real Estate 3(1):68–90Google Scholar
  47. Lützkendorf T, Lorenz DP (2006) Using an integrated performance approach in building assessment tools. Build Res Inf 34(4):334–356CrossRefGoogle Scholar
  48. Malik M, Thomas LC (2010) Modelling credit risk of portfolio of consumer loans. J Oper Res Soc 61(3):411–420CrossRefGoogle Scholar
  49. McCoy AP, Koebel CT, Sanderford A (2013) Narrowing the chasm: Agile patterns of adoption and diffusion of innovation in the us housing industry from 2000–2010. Tech. rep, Virginia Center for Housing ResearchGoogle Scholar
  50. Miller N, Spivey J, Florance A (2008) Does green pay off? J Real Estate Portf Manag 14(4):385–400Google Scholar
  51. Moore GA (1991) Crossing the chasm: marketing and selling high-tech products to mainstream consumers. HarperBusiness, New YorkGoogle Scholar
  52. Muldavin SR (2010) Value beyond cost savings: how to underwrite sustainable properties. Green Building FCGoogle Scholar
  53. Overstreet GA, Bradley EL, Kemp RS (1992) The flat-maximum effect and generic linear scoring models: a test. IMA J Manag Math 4 (1), 97–109.
  54. Pivo G (2013) The effect of sustainability features on mortgage default prediction and risk in multifamily rental housing. FannieMaeGoogle Scholar
  55. Pivo G, Fisher J (2009) Investment returns from responsible property investments: Energy efficient, transit-oriented and urban regeneration office properties in the us from 1998–2007. Responsible Property investing center, Boston College, University of Arizona, Benecki Center for real estate studies, and Indiana University, Working Paper WP-08-2, revGoogle Scholar
  56. Pivo G, Fisher JD (2010) Income, value, and returns in socially responsible office properties. J Real Estate Res 32(3):243–270Google Scholar
  57. Pivo G, Fisher JD (2011) The walkability premium in commercial real estate investments. Real Estate Econ 39(2):185–219CrossRefGoogle Scholar
  58. Popescu D, Mladin EC, Boazu R, Bienert S (2009) Methodology for appraisal of real estate green value. Environ Eng Manag J (EEMJ) 8(3):601–606Google Scholar
  59. Quercia RG, Pennington-Cross A, Tian CY (2011) Mortgage default risk and local unemployment. Tech. rep., Working Paper, center for community capital, University of North Carolina at Chapel HillGoogle Scholar
  60. Quercia RG, Pennington-Cross A (2012) Mortgage default and prepayment risks among moderate-and low-income households. Real Estate Econ 40(s1):S159–S198CrossRefGoogle Scholar
  61. Quercia RG, Stegman MA (1992) Residential mortgage default: a review of the literature. J Hous Res 3(2):341–379Google Scholar
  62. Rauterkus SY, Thrall GI, Hangen E (2010) Location efficiency and mortgage default. J Sustain Real Estate 2(1):117–141Google Scholar
  63. Rogers EM (2010) Diffusion of innovations. Simon and Schuster, New York CityGoogle Scholar
  64. Runde TP, Thoyre S (2010) Integrating sustainability and green building into the appraisal process. J Sustain Real Estate 2(1):221–248Google Scholar
  65. Safavian SR, Landgrebe D (1991) A survey of decision tree classifier methodology. IEEE Trans Syst Man Cybern 21(3):660–674CrossRefGoogle Scholar
  66. Sanderford AR, Keefe M, McCoy AP, Koebel CT (2013) The diffusion of energy efficiency in housing. Tech. rep, Virginia Center for Housing ResearchGoogle Scholar
  67. Schultz PW, Nolan JM, Cialdini RB, Goldstein NJ, Griskevicius V (2007) The constructive, destructive, and reconstructive power of social norms. Psychol Sci 18(5):429–434CrossRefGoogle Scholar
  68. Seager T, Collier Z, Linkov I, Lambert J (2013) Environmental sustainability, complex systems, and the disruptive imagination. Environ Syst Decis 33(2):181–183CrossRefGoogle Scholar
  69. Simons RA, Choi E, Simons DM (2009) The effect of state and city green policies on the market penetration of green commercial buildings. J Sustain Real Estate 1(1):139–166Google Scholar
  70. Sklar S (2014) Perspective on multi-scale assets for clean energy technologies in buildings. Environ Syst Decis 34(2):323–325CrossRefGoogle Scholar
  71. Slaughter ES (1998) Models of construction innovation. J Constr Eng Manag 124(3):226–231CrossRefGoogle Scholar
  72. Slaughter S (1993) Innovation and learning during implementation: a comparison of user and manufacturer innovations. Res Policy 22(1):81–95CrossRefGoogle Scholar
  73. Straka JW (2000) A shift in the mortgage landscape: the 1990s move to automated credit evaluations. J Hous Res 11(2):207–232Google Scholar
  74. Thomas LC, Edelman DB, Crook JN (2002) Credit scoring and its applications. Siam, PhiladelphiaCrossRefGoogle Scholar
  75. Van Order R (2007) Modeling the credit risk of mortgage loans: a primer. Stephen M. Ross Working Paper Series.  University of MichiganGoogle Scholar
  76. Von Hippel E (2005) Democratizing innovation. MIT press, CambridgeGoogle Scholar
  77. West D (2000) Neural network credit scoring models. Comput Operat Res 27(11):1131–1152CrossRefGoogle Scholar
  78. Wiginton JC (1980) A note on the comparison of logit and discriminant models of consumer credit behavior. J Financ Quant Anal 15(03):757–770CrossRefGoogle Scholar
  79. Yezer AM (2010) A review of statistical problems in the measurement of mortgage market discrimination and credit risk. Research Institute for Housing America. Washington, DCGoogle Scholar
  80. Yobas MB, Crook JN, Ross P (2000) Credit scoring using neural and evolutionary techniques. IMA J Manag Math 11(2):111–125CrossRefGoogle Scholar
  81. Zerkin AJ (2006) Mainstreaming high performance building in new york city: a comprehensive roadmap for removing the barriers. Technol Soc 28(1):137–155CrossRefGoogle Scholar
  82. Zhu H, Beling P, Overstreet G, (2001) A study in the combination of two consumer credit scores. J Operat Res Soc 52(9):974–980 [Special Issue: Credit Scoring and Data Mining (Sep., 2001)]Google Scholar
  83. Zhu H, Beling P, Overstreet G (2002) A bayesian framework for the combination of classifier outputs. J Operat Res Soc 53(7):719–727Google Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Andrew R. Sanderford
    • 1
  • George A. Overstreet
    • 2
  • Peter A. Beling
    • 3
  • Kanshukan Rajaratnam
    • 4
  1. 1.College of Architecture, Planning, and Landscape ArchitectureUniversity of ArizonaTucsonUSA
  2. 2.McIntire School of CommerceUniversity of VirginiaCharlottesvilleUSA
  3. 3.Department of Systems and Information EngineeringUniversity of VirginiaCharlottesvilleUSA
  4. 4.Department of Finance and Tax and The African Collaboration for Quantitative Finance and Risk ResearchUniversity of Cape TownRondeboschSouth Africa

Personalised recommendations