Are Renters Less Energy Efficient than Homeowners?

by Elizabeth La Jeunesse
Research Assistant

According to data from the Energy Information Administration, American renters use nearly a third more energy per square foot than homeowners. What accounts for this difference?

In part it’s because rental units are typically smaller, and are therefore more energy intensive. For example, a family in a small apartment needs a refrigerator, stove, and water heater the same way a family in a larger apartment (or a homeowner) does.  These things require a basic amount of energy, regardless of square footage.  Rental units also tend to be older; 75 percent of renters live in units built before 1990 while 68 percent of owners live in older units.

Source: US Department of Energy, Energy Information Administration, 2009 Residential Energy Consumption Survey.

That said, the above chart shows that the amount of energy used by renters can vary depending on whether their utility costs are fixed (built into their rent) or if they pay for utilities themselves.  As the chart illustrates, renters consume considerably more energy when some or all of their utility costs are fixed.  This shows the general tendency of people to consume more of something when there is no added cost for doing so. Such excess energy consumption drives up the amount of energy renters use overall, further accounting for the efficiency gap between owners and renters.  

Even so, renters who pay for utilities separate from their rent still use slightly more energy per square foot than owners.  This suggests a real, structural efficiency gap between rental and owner units. In fact, a recent study found that multifamily rentals in 2009 had 34% fewer energy efficiency features on average than other housing types. Consumer fuels and utility costs have risen over 50 percent over the past decade, outstripping overall inflation, which makes energy efficiency improvements (insulation, energy efficient windows, compact fluorescent lighting, HVAC upgrades, energy efficient appliances) appealing to people wanting to lower their energy bills.  But when tenants pay for their metered energy usage, a property owner’s incentive to perform energy efficiency retrofits is lower, since any cost savings will benefit the tenants, not the owner. Rental property managers also have less control over how their tenants respond to an energy retrofit (e.g. more efficient windows might still be left open in the winter).  These things can keep rental property owners from performing energy efficiency retrofits at the same rate as homeowners which, in turn, keeps energy usage by renters high.

The gap in energy usage between owners and renters suggests that there are real opportunities for savings through some combination of added incentives for property owners to make these investments in retrofits and greater incentives for tenants to conserve energy. Lowering energy use would have the additional benefit of bringing down the cost of rental housing at a time when more renters are paying very high shares of their incomes for housing as a new study by the National Low Income Housing Coalition shows. 

Watch the Inventory – and the Investors

by Eric Belsky
Managing Director

As housing demand has been coming up, the inventory of homes for sale on the market has been going down.  This tightening of supply relative to demand is the bedrock of the recovery. It gives consumers confidence and a sense of urgency to buy.

Those interested in the course of home prices should watch inventory levels, especially relative to demand.  Multiple listing services (MLS) provide measures of inventories at the metropolitan level and typically even for submarkets within them.  If you start to see inventories in a market climb, the recovery in prices—and demand which is partly linked to the urgency created by rising prices—may not stay on course.

In assessing housing market recovery, then, an important question is what is in store for inventories of homes for sale.  Will demand at some point be outstripped by inventory growth as new home building ramps up again and more existing owners place their homes on the market because of rising prices?

The answer to this question of course will hinge on conditions in individual housing markets.  Broadly speaking, the dynamics will likely differ depending on the share of homeowners in a market who are underwater and the activity of investors in single-family rental properties.

In places where only a small fraction of homeowners are underwater, rebounding homes prices may be enough to spark owner interest in selling their existing homes to trade up or down.  With interest rates so low and the potential to move unfettered by negative net equity, many may start to feel that now is the time to sell.

In places where many owners are deeply underwater, however, even a strong single-digit increase in home prices may not be enough to induce many owners to place their homes on the market.  After all, they would still have to write a check at the closing table if they did. Therefore, one would expect inventories to fall more in places with negative net equity as demand picks up because homeowner interest in selling does not follow suit.

In fact this is precisely what seems to be occurring. Inventories have fallen more sharply and asking prices risen more in areas with more underwater homeowners (click figure to enlarge). 

JCHS tabulations of data from CoreLogic and www.deptofnumbers.com

However, the buyers of these homes are not necessarily individuals looking to move. In many of these places much of the demand has come from investors who snapped up homes at low prices and then rented them out. Figure 2 lists places where there has been a significant shift in the share of single-family homes that are rented. These are the markets where investors have been most active, helping to soak up the excess supply of distressed homes.

Source: JCHS tabulations of US Census Bureau, American Community Survey data.

Moving forward, it is therefore not just what homeowners in these places do that matters but also what investors will do with recently acquired single-family properties they are currently renting out. Many will look for a chance to exit their investments when prices appreciate enough to make it worthwhile.

For investors in distressed markets, the run-up in prices from the trough is pure upside. Many may head for the door at about the same time, especially if they discover that it is both more arduous and costly to manage scattered-site, single-family rentals than they had anticipated.

If enough investors in any of these markets start to head for the door to try to gain from capital appreciation, home price appreciation could slow.  So to predict where prices may be headed, keep your eyes on investors and what they are doing.  Local realtors will see the first signs of activity in homes now rented shifting back to the for-sale market.  Seek them out and find out what they are seeing.