Green federal tax credits impact on US housing prices

Abstract

Purpose

The purpose of this study is to investigate whether increases in homeowner green amenities occurred because of income tax credits to the degree that changes in housing prices are measurable. Are higher incomes, lower mortgage rates and green income-tax credits impacting housing price changes?

Design/methodology/approach

The paper uses the least-squares regression model with natural log specifications. The log of income and a dummy variable, which was assigned to the Energy Policy Act (2005) and the American Recovery and Reinvestment Act (2009) coverage dates are used as independent variables. Two regression models were examined using monthly housing price data from January 1990 through the year 2018. The first regression model used a single dummy variable for credits available under the Policy Act of 2005 and the Recovery Act of 2009. The second regression model considered the credits granted under these two laws separately. Disposable income per capita impacts demands for housing while green upgrade expenditures affect the cost of housing.

Findings

The laws set low credit limits of $500 followed by $1,500 but because of the multiplier effect, the spending appears to have magnified and been much higher. The credit availability variables have positive coefficients and were significant at 1 per cent. This implies that single-family housing prices were sensitive to the existence of residential energy property income-tax credits. The R² results were 0.93 or above for both models.

Research limitations/implications

The data used was aggregated and publicly available online. Many studies use aggregated macroeconomic data when modeling housing prices using the exogenous variable of disposable income but there is no substitute for examining individual homes by location and their sales price to see under what conditions green income-tax credits have the most impact. There could be demographic issues that are missed when using aggregated information.

Practical implications

Spending on heating/cooling systems, dual pane windows and other green amenities keeps the housing stock modernized and housing prices steady or rising. An additional benefit is that spending motivated by self-interest can simulate household consumption spending. Houses deteriorate due to wear and tear. Physical-repairable depreciation represents a situation where maintenance funds are continuously needing to be spent. Repairs and upgrades to the structure of the property keep its price stable by stopping the physical depreciation that would otherwise occur with the passage of time.

Social implications

The paper provides support for the idea that residential green amenity upgrades positively impact the value of a house. These green-amenity upgrades, which other research studies have suggested should be included explicitly in the appraisal process, are a major characteristic of a property when a price estimate is being done. Housing being sold should have a section on the information sheet noting the property green upgrades that exist and an energy efficiency score should be assigned to each house listed for sale.

Originality/value

There are few (if any) academic research papers studying the impact of green tax credits available under the Energy Policy Act (2005) and under the American Recovery and Reinvestment Act (2009). The degree to which green income-tax credits stimulate spending on housing has not been addressed by researchers. This paper is an initial research attempt to quantify whether these legislative efforts measurably encouraged homeowners to adopt newer, greener technologies.

Citation

Brotman, B.A. (2020), "Green federal tax credits impact on US housing prices", International Journal of Housing Markets and Analysis, Vol. 13 No. 4, pp. 553-564. https://doi.org/10.1108/IJHMA-10-2019-0104