On January 1, 2020, California became the first state to require solar panels on all new homes—what many are calling a “solar mandate.”
What impact will this have on home building in California in 2020? By all accounts, not very much.
No big impact on housing demand. Our consultants in the field tell us that builders who have started including solar early (in anticipation of the code change) have noted little or no change in demand. Consumers see the benefits in comparison to owning a less energy-efficient resale home and appear to be willing to pay the difference. Most builders are offering solar leases, which keep base prices lower and more attractive to buyers.
Cost impact to builders mitigated by solar leases. Solar leases help keep base prices and builder costs lower. When solar is offered for lease, solar companies pay for the solar installation and lease the system directly to home buyers, with builders not having to pay out of pocket.
Builders are ready. Builders have been gearing up for the new energy code for years, with many engaging solar providers for the first time. The Building Energy Efficiency Standards (Title 24 of the CA Building Code) gets updated every three years. Some builders were caught unprepared for the 2016 change and seem to have learned their lesson this time around. Most builders have become compliant early, offering solar as standard for many months in anticipation of the code change, or have been offering solar as an option to ease into the transition. Still, some builders (particularly smaller ones) rushed to pull additional permits in late 2019, which allows them to build those homes under the old standards.
Additional $40 per month doesn’t move the needle for most buyers. The California Energy Commission (CEC) estimates that “the standards will add about $40 per month for the average home and save consumers $80 per month on heating, cooling, and lighting bills.” According to our consultants, it costs on average $9,000 to $10,000 to comply with the new energy code, which roughly equates to a $40 increase in mortgage payment, in line with CEC estimates. Lease terms differ across solar companies, but we assume that lease payments would be in a similar range.
Lower-priced markets where buyers are struggling to qualify will be more impacted, primarily because mortgages don’t consider the utility cost savings in buyer qualification. They should. Nonetheless, even in the most price-sensitive markets like Bakersfield, a $40 monthly payment change only reduces the buyer pool by less than 1 percentage point, as you can see below.
.
Although much has been made of the solar mandate, it will likely pass as a non-event as we move into the selling season in 2020. There may even be some potential upside as builders get more traction demonstrating the benefits and cost savings of owning a more energy-efficient new home, which can help them gain market share from resale homes.