If you’ve been shopping around on the internet for a home solar electric system then you’ve no doubt come across this enticing claim on more than one website: “for every $1,000 you save in energy costs, you can increase your home’s value by up to $20,000.”
And you know what? It’s true. But I doubt if many of the companies or individuals making this claim to solar power savings have a clue as to its origins. Usually the source of their information is attributed to the ubiquitous “industry averages” or, more often than not, it’s stated as an accepted fact with no further discussion.
Actually, the source of this claim can be found in an article written by the economist Rick Nevins titled “Evidence of Rational Market Valuations for Home Energy Efficiency” published in the October, 1998 edition of The Appraisal Journal.
The reasoning behind the $20,000 in added home value for every $1,000 saved, or a ratio of 20:1, goes something like this. If a new solar electric system saves you $1000 a year in utility costs then you can afford a larger mortgage equal to the amount that $1000 in annual payments would service.
And, since after tax mortgage rates have averaged 5% over the long term, the extra $1,000 a year in free cash flow would service an additional $20,000 of mortgage debt; ergo the 20:1 formula.
Mortgage rates however are not static and trend higher or lower over time. A mortgage rate lower than 5% would yield a ratio greater than 20:1 and, conversely, a mortgage rate higher than 5% would yield a ratio of less than 20:1.
Even if you install a new solar electric system but have no intention of moving anytime soon, it’s reassuring to know you could expect to recoup most, if not all, of the system’s net cost after rebates and tax credits.
In the meantime you’ll benefit from an immediate and long term reduction in the cost of power and protect yourself from future energy inflation. Enjoy the sunshine.