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Unintended Consequences
Another Green Policy Backfires

Everything has a cost. That’s what many California homeowners are finding out, as they struggle to sell homes recently outfitted with better insulation, more energy efficient windows, and solar panels. Reuters explains:

More than 50,000 California households have signed up for Property Assessed Clean Energy (PACE) financing since state legislators passed a law in 2008 allowing residents to borrow money for such things as solar panels and energy-efficient windows. The financing method, authorized by cities and counties, and funded  by venture capital-backed startups like Renovate America Inc, Renew Financial LLC and Ygrene Energy Fund Inc, is then paid off through special assessments on property tax bills. […]

[S]ome homeowners trying to sell their houses have found potential buyers scared off by the higher tax assessments. And now realtors in the state are organizing against PACE, saying it makes getting new mortgages much tougher and can leave sellers stuck in their homes.

In other words, to pay for all of those green home improvements, homeowners are saddling themselves with higher property evaluations—and the higher taxes that go with them—which are in turn making it difficult to sell these houses. That’s left a sour taste in the mouths of many who hoped to take advantage of the federal program—as one homeowner enrolled in the green financing program put it, “I wouldn’t ever do it again.”

These sorts of policies are always pushed through with (we hope) the best of intentions, but they inevitably spawn a number of unforeseen issues. In this case, we’re seeing resale issues, but government-backed green programs also lend themselves to crony capitalism or third-party profiteering.

The lesson here isn’t that making homes more energy efficient or powering more homes with renewables are fool’s errands, but rather that the nice-sounding and often politically expedient programs meant to get us to that green utopia have a nasty tendency of backfiring.

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  • Ed Maryellen Kmiec

    Rather than saddle future homeowner’s with higher property tax assessments, the program should be changed so that the loan must be paid off upon sale of the home. Any gain upon sale of the home is used to pay off the loan. If the home is sold at a loss, then the homeowner should be on the hook for the loan balance.

    All those PACE investments have to increase the value of the home, right?

    • Jim__L

      Doesn’t paying the loan off upon sale of the home still make it tougher to sell the home? That would add to the price in a way that passes through to the lenders, instead of lowering the price because the maximum monthly payment the buyer could afford would include an aspect that doesn’t accrue to the seller.

      In California, it doesn’t matter how much the pile of sticks is worth. What matters is whether it’s in proximity to good-paying jobs, and whether the buyer can find a lender who will turn a blind eye to the possibility of the bubble bursting.

      Let me say it again – the sale price is sensitive to whether one or more techies can get a six-figure job within a more or less (often less) sane commute of the pile of sticks. It is not sensitive to what sort of whistles or bells (or square footage, or parking, or functioning bathrooms) the home has.

      • rheddles

        Doesn’t paying the loan off upon sale of the home still make it tougher to sell the home? That would add to the price in a way that passes through to the lenders, instead of lowering the price because the maximum monthly payment the buyer could afford would include an aspect that doesn’t accrue to the seller.

        No, paying off the loan would only reduce the capital gain or increase the capital loss of the seller. The price of the home would be set by the market independent of previous expenditures of the seller.

        • Jim__L

          In any case, it makes selling the home a less attractive option to the seller.

          • rheddles

            No question, but the seller was the one who foolishly agreed to upgrades that did not increase the price of the house. I installed a geothermal heating system at our house at significant up front cost. I knew I would be living in the house for at least a decade, so I felt confident I would realize the payback during my occupancy. But had I had to sell my house after 3 years, I never would have recovered the price of installation from a purchaser. That’s the boat these folks are in. They made a bet and lost. Don’t ask me to cover your gambling debt.

    • rheddles

      All those PACE investments have to increase the value of the home, right?

      Not really. They decrease future operating costs. Does high mileage increase the “value” of a car? Only when oil prices are very high. But energy prices are coming down these days. So the premium people are willing to pay for the “value” of energy efficiency is disappearing.

      Any time the government gets involved in a private transaction it distorts economic decision making to arrive at a less efficient solution. Some times there may be a valid social reason for doing so, but most of the low hanging fruit has been picked.

      • philo7

        What the government allowed was for PACE financing to be placed as a Mello Roos tax. So…these PACE loans effectively subordinate any existing financing on the home (do you think those first mortgage lenders are ok with that?) Oh…that’s why they’ve created the loss fund. Just wait until values go the other way (it does happen in the Golden State from time to time.)

        If Ygrene and HERO had to compete like other lenders it would be no contest….they would lose. What sane person would pay 3% in fees and 8% for the loan in this lending environment?! The only reasons people get PACE is because either: a) they cannot get approved for traditional financing, or b) they are hoping to not pay the full loan (many of these folks think they will just transfer the loan to the new buyer down the road.)

        PACE is a scam.

  • JR

    Perfect illustration of why socialism fails… The people who think that they are smart are nearly as smart as THEY think they are.

  • Andrew Allison

    There appears to me to be much more to this than meets the eye. First, why are the loans being financed by venture capital-backed startups rather than financial institutions (what’s their relationship to the manufacturers, for example). Smells fishy. Then there’s the question of the assessments. The cost of all improvements, not just energy, is added to the property tax valuation on the basis that they add value. Are the energy efficient improvements being properly priced? If the issue is that they don’t, in fact, add value isn’t that at least in part because the homeowner made a bad decision? My suspicion is that the manufactures arranged for the legislation to promote sales, just as the realtors are now trying to reverse it for the same reason. As TAI points out, “nice-sounding and often politically expedient programs meant to get us to that green utopia have a nasty tendency of backfiring.”, but it would be nice to know just how this particular scam was set up. Fact is that like every other green initiative, the improvements are not cost-effective for most people. I suppose the homeowners could try and show that the improvements did not add value to the property and request a tax adjustment.

    • philo7

      I think you may be missing part of the message. It’s not that the valuation of the property is going up necessarily, it’s that the loan itself is collected through the property tax-collection process. The loan appears as a lien or special assessment on the property. So, no matter the value the improvement added to the property, that piece of financing is there. I hope that makes sense.

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