Green Homes: The Price Still Isn’t Right

Buyers are declining environmentally friendly features. That may change

Once the province of custom homebuilders and small niche players, green
building is catching on with the giants of the home-construction
industry. The percentage of new homes built with eco-friendly features
will rise from 2% in 2005 to as much as 10% by 2010, according to a
study by the National Association of Home Builders and McGraw-Hill
Construction (MHP
) (which, like BusinessWeek (MHP
), is a division of The McGraw-Hill Companies (MHP

But the folks who
buy lumber by the trainload still find it a lot easier to persuade home
buyers to upgrade to granite countertops than pay for an
energy-efficient furnace. That puts builders in a bind as their
industry suffers through a serious slowdown. "We’re trying to
understand the balance between our social obligations and our
obligation to shareholders," says Jeffrey T. Mezger, CEO of KB Home (KBH
), one of the nation’s largest homebuilders. "You can’t just give away your margin."

Mezger, 51, the son of a Chicago-area homebuilder, got a glimpse of
green economics when KB opened a subdivision in the Northern California
town of Pleasanton three years ago. It used wood harvested in an
environmentally friendly manner, according to guidelines from the
Forest Stewardship Council. Although that added just $3,500 to the cost
of a $700,000 home, Mezger says KB couldn’t get a premium for it. Last
year just 47 of KB’s 25,000 home buyers chose environmentally benign
bamboo for flooring. Offered front-loading washing machines from
Whirlpool (WHR
) that use 60% less water and electricity than top loaders, only 3% of
customers accepted. A Whirlpool spokesperson says buyers generally
don’t purchase washing machines from builders.

In the case of solar panels, buyers
are clearly put off by higher up-front costs. McStain Neighborhoods in
Louisville, Colo., bills itself as the state’s premier builder of green
homes, selling more than 300 a year. It offers solar panels as a
$25,000 option on homes ranging from $300,000 to $500,000—but they’re a
tough sell, even though they can pay for themselves in a matter of
years. In six years it has installed solar kits on just three houses.
The Solar Energy Industry Assn., a trade group, says the number of
homeowners installing solar-electric panels nationwide jumped 75% last
year, to 8,512. But that’s still a sliver of the 1 million new homes
sold in the U.S. in 2006.

Change may be coming: New federal and
state subsidies could cut the cost of solar panels in half. As a
result, McStain is making photovoltaic panels standard in all 42 homes
it’s building at a new subdivision in the Denver suburb of Westminster.
And local building codes are getting greener, forcing builders to
include environmentally friendly features. Companies that sell to the
construction sector have gotten the message. Major homebuilders can now
purchase an array of green products in volumes and at prices that make
them cost-competitive. Suppliers include carpet maker Shaw Industries (BRK
), building-products supplier Louisiana-Pacific (LP
), and Masco Industries (MAS
), which makes cabinets, plumbing, and insulation. Their efforts have
helped drive energy use in new homes down 30% per square foot since

Some homebuilders are making even high-cost green features standard as
a way to help their models stand out in a tough market. Clarum Homes in
Palo Alto, Calif., includes satellite-controlled sprinkler systems that
conserve water and decking made of recycled materials in all its homes.
Founder John Suppes says these add about $22,000 to the cost of a
$700,000 home.

KB’s Mezger concedes that the industry has to do a better sales job. He
says he has been inspired by the yellow stickers the Federal Trade
Commission requires on appliances that detail how much energy they use
and how much they cost to operate over time. In March, KB plans to
introduce a marketing initiative called "myEarth" at each of its 30
design studios. When home buyers select options such as appliances and
light fixtures, they’ll see pitches on products such as tankless water
heaters, which save energy by heating water as needed instead of
storing it.


By Christopher Palmeri

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