APPENDIX D

Utilizing Alternative Building Methodologies and Energy-efficient Technologies to Increase the Availability of Affordable Housing for Low-Income Persons and Families

Introduction

According to the report by the U.S. Bureau of the Census, Characteristics of New Housing (2000), in 1999 over 1.6 million new privately owned housing units were produced in the United States. That figure was an increase from the 1.3 million produced in 1995. In the South, 750,000 new housing units were produced. That figure also represents an increase in production of housing units from 581,000 produced in 1995.¹

The majority of housing units produced in the United States are single-family dwellings for sale on the open market. A small percentage is produced for rental markets. Surprisingly, the South leads the nation in the overall number of dwellings produced having two or more units, outside of Metropolitan Statistical Areas (MSAs), according to data from the Bureau of the Census. Data indicate that low-income families generally occupy either rental units, including apartments, or rent older single- or multifamily dwellings. Older units generally do not have energy efficient features installed and are costly to heat and cool. Only newer dwellings incorporate some energy-saving features and the majority of these units are constructed using conventional construction methods. Due to cost and other factors, newer units are out of the reach of low-income families. Low-income families are rarely in the position to purchase a home of their own without subsidies and creative financing techniques.

The issue of providing homeownership to low-income families has been addressed primarily by specialty housing organizations and other nonprofit groups. PHAs, community development corporations, Community Housing Development Organizations, faith-based groups, Habitat for Humanity, and others produce affordable housing through grants and government assistance. Even with assistance from these and other sources, only a small number of low-income families are able to achieve homeownership.

Historically, the primary focus of homeownership for this target market has centered on achieving affordability. Numerous individuals and groups have approached affordability in a variety of ways. As a result, a host of models, programs and processes have been tried and tested to achieve affordability. Some of these techniques have included first-time homebuyer programs, down payment assistance, low interest mortgage programs, high risk mortgage pools, sweat equity techniques, recruiting volunteers for free labor, and many others. Most recently, the U.S. Department of Housing and Urban Development changed its rules to allow Section 8 vouchers to be used for purchasing homes. While many of these activities have proven to be successful and have positive track records, increasing homeownership among low-income families remains a challenge.

This appendix will provide direction to and implications for utilizing alternative building techniques and energy efficient technologies as a means to increase homeownership for low-income persons and families. By incorporating new technologies and financial products in this market, a more complete approach to affordability can be established and a possible missing link discovered to increase homeownership among low-income families.

Traditional Housing Construction (Site-Built Homes)

Low-income housing producers have traditionally employed private sector contractors to construct dwellings. Only a small percentage of these nonprofit organizations and governments have the construction capacity to develop their own units. The majority of these organizations and almost all residential contractors build these housing units with a single traditional construction methodology. Site building, the construction of dwellings using mostly wood frame on slabs at grade or raised columns (conventional foundations), is the primary method employed.

Site building is the standard of the construction industry for residential development. It has proven to be a frequently costly method of construction. It requires phasing and coordination of specialty trades. The usual process for phasing is preparing the site for the foundation, pouring the foundation (if slab) or building columns (if conventional), framing of the unit, installation of equipment (HVAC), then performing finish work. Coordination of the foundation crew with site preparation, framing with plumbers, carpenters, painters, and electricians, then all final exterior (bricking, etc.) and interior (painting, counter tops, tile floors, etc.) finish work is a required part of construction. Along with this activity is the required coordination at the planning level with local city or county inspectors. Mostly, however, site building is impacted by weather conditions up to the point that walls are up and a roof has been completed. Even then, some trades cannot be performed under moist conditions or in cold weather.

Costs associated with materials can be impacted by availability. For example, the construction trade in the South continues to experience a shortage of wood products for residential construction. Since wood is still being imported from surrounding states and other countries, the cost has almost doubled. The same situation continues to occur with sheet rock. Additionally, labor costs make up more than half the cost of constructing housing units. Depending upon the size of the units and materials used, the most costly labor is carpentry and finishing work. In a wood frame unit, carpentry is the primary trade. The finished work is what most individuals see in a home after construction. These finish trades require high levels of competency and are the most costly. Finished items can include counter tops, cabinets, doors, wood floors, and windows.

Data from the Bureau of the Census indicate that 94 percent of all new homes constructed in 1999 used traditional stick or site built method, 3 percent used modular technology and 3 percent used panelized or pre-cut technologies.

Traditional Housing Finance Methods

In 1999, according to the Census Bureau's Characteristics of New Housing 9 percent of all new houses in the United States were financed with FHA insured loans, 3 percent were financed with VA guaranteed loans, 79 percent were financed with conventional mortgages, less than 1 percent were financed with mortgages issued by the Rural Housing Service, and 9 percent were purchased with cash transactions. Comparatively, in the South, 11 percent of new homes were FHA insured, 4 percent were VA guaranteed, 76 percent were financed with conventional mortgages, 1 percent were financed by the Rural Housing Service, and 8 percent were financed with cash transactions.²

Programs being utilized specifically for low-income markets, including HUD's 203k mortgage program and RHS's Section 523 program (which does not provide mortgages but helps fund organizations that sponsor self-help housing), are proving successful but are not impacting affordability and homeownership on a large scale. Data show most mortgages are issued using conventional financing methods. This means that the majority of credit decisions are based upon market rate credit criteria, including level of incomes, placing possible homeownership beyond low-income households.

Low-income households generally do not qualify for conventional mortgage products. Moderate-income families have limited success accessing conventional mortgage programs, depending upon the cost of a unit. They also very seldom qualify to purchase a newly constructed unit.

To mortgage lenders' credit, many conventional mortgage providers participate with community-based organizations in addressing housing needs of the elderly, disabled, and low-income families. Often through Community Reinvestment Act programs, they are involved with mortgage loan participation programs offered by community- and faith-based groups, provide gap funding, and support nonprofit organization efforts through grants. In recent years, local banks have begun working with community-based organizations to establish Individual Development Account programs, providing a match to low-income families' accounts. Among other things, these accounts can be used for downpayments on homes once enough dollars have accumulated.

While a valuable service is being provided through conventional mortgage lenders, low-income families are still not being afforded homeownership opportunities in numbers that make a difference.

Lessons Learned Utilizing Alternative Technologies

We have learned the following about market forces impacting homeownership levels among low-income families.

• The majority of new housing units are beyond the buying power of low-income families.

• Conventional construction can increase housing prices.

• Conventional financing program criteria are too stringent for low-income families to qualify.

• Specialty programs for low-income housing development do not produce significant numbers of homeowners.

• Most new housing units contain some energy-efficient measures.

In order to increase homeownership levels among low-income families a more inclusive approach to affordability must be established. Affordability should not only drive financing methods and the attempt to realize low monthly principal and interest payments, but should include design and construction methods, which lower housing production, operation and maintenance costs.

Units should be designed, whether new or renovated, to include all energy savings options. These include solar and other available options depending on the local environment. From insulating foundations and flooring to using longer lasting materials (tin roofing materials, for example), alternative technologies should be employed to reduce the cost of housing. Value in housing is also related to lower maintenance, comfort level, energy savings and efficiency. Additionally, all appliances and equipment used in low-income housing units should achieve energy savings and efficiencies. These can be specified at the design stage and incorporated in subsequent construction plans and specifications.

Alternative Methodologies: a Review of Site Built, Modular and Panelized Housing Construction Methods

Alternative technologies have been available for housing production for some time. They can materially impact the way housing is developed. These technologies include alternative methods for construction of housing units, energy-efficient appliances and materials, and financing products that promote energy savings in residential dwellings.

Site-built construction dominates the residential building industry. As noted above, it raises certain issues but remains the staple method for housing construction. Other methods of construction for residential dwellings include modular, panelized and pre-cut construction.

Modular housing construction is a factory-based process through which entire dwellings are produced in the factory by sections. These units are produced using wall panels, similar to panelized housing units, but are pieced together in the factory and then shipped in sections to a site with prepared foundations. Electrical wiring and plumbing are factory-built into the walls and are fully operational at the time of shipment. When these units arrive on site, sections are placed on the foundation, secured and sealed. The value of modular housing is that the complete unit is manufactured in the factory and can be delivered and placed on site within a matter of days.

Panelized housing units make use of the same factory-based process to produce wall panels as does modular construction, but these units are not finished on the exterior or interior. These units usually come with service cutouts for electrical, plumbing, and ventilation systems. Panelized units are also designed to be shipped and assembled on site. These units can be set up on site within a matter of days. Panelized units can be completely finished in the factory or the basic wall panel system can be shipped and local contractors can complete finish work on site. The value of a panelized unit is the fact that it can be completely produced in the factory, can be placed on site within a couple of days and, depending on the number of units in production, can realize tremendous savings to the purchaser.

Other construction methods, not explored in this work, but which may also be less expensive and provide energy efficient implications, include increased use of native materials and reduced finishings, just to name a few.

Several common benefits are shared by modular and panelized construction methods:

• Neither method is affected by weather during the manufacturing process.

• Both use four- to eight-inch wall panels that exceed code requirements for R ratings.

• Both have great design flexibility.

• Both construction methods are quicker than site-built units.

• Both can achieve cost savings through economies of scale. (This final benefit means a lower unit cost passed on to owners).

Modular and panelized construction have been touted as the new less costly building methods. Cost savings are associated with basically two areas: less labor required than site built units and energy saving qualities.

Assuming a unit with the same square footage, the following costs can be formulated. This example excludes land costs, site preparation, and foundation costs. It also assumes that all equipment, materials, and amenities are the same for each construction method, and it assumes the same distance and transportation to the site for modular and panelized units.

Construction costs were obtained directly from modular and panelized manufacturers and a residential home contractor in Mississippi. While the unit size of 1,300 square feet is larger than average units occupied by low-income families, it is useful for this presentation purpose. Site-built homes carry higher construction costs and in this example exceed the cost of modular and panelized units by nearly $20,000 and $26,000 respectively. However, all units would appear to be out of the reach for low-income families. Additionally, site-built unit costs would remain constant, while for modular and panelized units costs could be reduced using economies of scale. That is, if two or more units are being produced at the same time in the factory, a unit cost savings can be realized not only through the purchase of materials in bulk but in addition factory labor costs will be impacted since units can be produced at the same time without regards to weather conditions and specialty trade coordination delays.

Still, the issue of homeownership for low-income families remains a challenge. While modular and panelized unit methods could reduce costs of housing, it appears that mass production of these units would be necessary to reduce cost enough for them to be affordable for low-income families. Invariably, the combination of housing supports such as downpayment assistance coupled with modular and panelized mass production would together make these units affordable to even low-income families.

Using the panelized unit cost of $61,100, for example, downpayment assistance of $8,000 (a figure used by the Mississippi Home Corporation) would result in a purchase price of $53,100. Adding an estimated cost for land, site preparation, and foundation (slab) of an additional $5,000 would result in a cost of $58,100 for the unit. Financing this unit over a 20-year period using a 2.0 percent interest rate would result in a monthly mortgage payment of $293.92, excluding taxes and insurance.

Low income is defined as an income under 60 percent of Area Median Income (AMI). Assuming an AMI of $20,000, 60 percent would be $12,000 annual income. Using prevailing guidelines of up to 33 percent of household income for housing payments (including utilities), a low-income family would have $3,960 annually (or $330.00 per month) for debt service. In this case, low-income families could qualify for a mortgage, notwithstanding credit issues, and meet debt service and have additional dollars available for taxes and insurance payments.

Four key elements in the above example make this work:

• starting with an alternative construction method to lower costs;

• finding low cost mortgage dollars that allow creative financing terms and rates;

• obtaining down payment assistance; and

• having an area with median income of no less than $20,000. For lower income levels, additional adjustments would be needed.

Additional tools can be employed to make housing affordable to low-income families. These include the use of energy efficiency, which reduces utility costs to units on a functional basis, and financing programs that take into consideration energy savings in the mortgage. These programs too can be incorporated as part of the above example and can further affordability.

Energy Efficiency in Housing Development

Given the increasing costs of fossil fuels, electricity, and gas, energy has been a hot topic in recent years. Combating the high cost of fuels is a top priority of the federal government and many utility companies and is a concern of all persons having to pay high utility bills.

Utility costs impose a disproportionate burden on low-income households. For those on Social Security who are single, elderly, poor, or disabled, average energy burden is 19 percent of household income, according to data from HUD. The energy burden on families receiving Aid to Families with Dependent Children (replaced by the Temporary Assistance to Needy Families program) is, on average, seven times greater than for families at area median incomes. One report presented the data shown in the table below.

A National Energy Assistance Directors Association's April 15, 2001 study showed that as many as 3.6 million families in 18 states, including the District of Columbia, risk having their utilities turned off due to high energy costs. Energy costs impact persons being evicted from rental units as well. A study called "From Heatless to Homeless" showed that in Minnesota in 1997, record evictions occurred and the breakout of these evictions showed that 26 percent of evictions were due to electric and gas terminations and 40 percent were due to water cutoffs. Families no longer must choose between just paying rent or buying food, but between paying rent, buying food, or paying utility bills.

According to New Housing Construction, Bureau of the Census, of the 1.3 million new houses constructed in 1999 in the United States, 70 percent use gas for heating, 27 percent use electricity, 3 percent use heating oil, and 1 percent use other heating sources. In the South, gas accounts for approximately 50 percent of heating fuels, followed by electricity at 49 percent, while heating oils and other sources account for less than 1 percent combined. These facts alone provide reasonable yet urgent consideration for employing energy efficiency and conservation measures in residential housing development.

While current energy policies favor developing new sources of energy focusing on fossil fuels, some technologies are pointing to conservation measures. In residential housing construction, conservation measures are being employed on a wider scale than in other industries. Modular and panelized units are generally considered to be more energy efficient than site built units; however, site built units can also be designed to use minimal amounts of energy to heat and cool and be comfortable and healthy environments.

The envelope of the house is the primary focus of energy efficiency. The thermal envelope is everything about the house that serves to shield the living space from outside elements. It includes wall and roof sections, insulation, windows, doors, finishes, weather stripping, and air/vapor retarders.

For wall and roof assemblies, several alternatives are available to conventional site-built units. Optimum Value Engineering, a method of using wood only where it works best to reduce cost but workmanship must be of the highest quality and little room is left for errors. Structural Insulated Panels (SIPs) or panels used in both modular and panelized unit construction is generally plywood or oriented strand board sheets laminated to a core foam-board. Usually 4 to 8 inches thick, SIPs act as both the framing and the insulation. They allow much faster construction than OVE or site-built units. This construction is higher quality than site-built, too, since there are fewer places for workers to make mistakes. Finally, insulated concrete forms, which consist of two layers of extruded foam-board – one inside the house and one outside the house – act as forms for steel-reinforced concrete centers. This is the fastest construction technique and the least likely to result in construction mistakes. While units constructed this way are extremely strong and easily exceed code requirements for tornado and hurricane areas, they too are expensive.

Insulation is the primary energy-efficient agent in residential construction, and is measured by R ratings. The higher the R rating, the lower the amount of heating and cooling lost from structures, thus reducing the amount of energy used to heat and cool structures. Code requirements vary from state to state, but usually require somewhere in the range of R-19 in exterior walls and ceilings, while insulation being optional in floors and foundation walls. Codes also require between R-20 and R-30 for interior walls. Types of insulation include fiberglass batt or roll, wet-spray cellulose (recommended), or foam insulations to completely fill wall cavities.

Additional areas of concern are equipment and appliances used in the unit. Energy efficient heating and cooling equipment and water heaters provide energy conservation measures and use less energy than older models. The same should be the goal of appliances in the unit. No washing machine or dryer, microwave oven, stove, garbage disposal, dishwasher or refrigerator should be used that does not carry a reduced energy usage certification or that is not energy efficient.

Energy Efficient Mortgages

Incorporating energy-efficient measures in residential housing development must start with the design. To include such measures requires additional funding in the mortgage. New mortgage products have been in the market for quite some time to assist new homeowners and existing homeowners in incorporating energy-efficient measures.

What are energy-efficient mortgages? Such mortgages are a means of financing a dwelling that credits a home's energy efficiency as a part of the loan. There are two types of energy mortgages: an Energy Improvement Mortgage (EIM) and an Energy Efficient Mortgage (EEM).

An EIM finances energy upgrades, usually on existing units, in the mortgage loan using monthly energy savings as the source of payment. An EEM uses the energy savings from a new unit to increase the home buying power of consumers and capitalize the energy savings in the appraisal.

The conventional mortgage industry should support these mortgages because they:

• increase the volume of mortgage loans;

• qualify more first-time homebuyers for mortgage loans;

• reduce the cost of homeownership and cost of construction to developers; and

• reduce dependence on fossil fuels and aid the environment.

The use of these mortgage programs can serve to increase the volume of loans made in the industry by 6.8 percent, according to a recent analysis by the Environmental Protection Agency. Another published study found that the market value of homes are increased $20 by every $1 decrease in annual energy costs. Another recent study by the Pacific Northwest National Laboratory showed that building a home to exceed Model Energy Codes results in annual savings of $170 to $425 on energy costs. Still further, if these findings were applied to the value of a home, market values would increase by $4,000 to $10,000, according to an Appraisal Journal report.

Energy-efficient mortgages are being offered by several organizations including Fannie Mae, Freddie Mac, FHA and VA. These organizations make financing energy measures on new and existing homes less burdensome. While space does not allow the full description of these programs and guidelines, they can be found online at RESNET, Lender's Corner, http://natresnet.org/lenders/default.htm.

Recommendations

The combination of energy savings and alternative construction methods could substantially increase the availability of affordable housing to low-income families. The conventional mortgage and construction industry cannot be asked to address the need to produce affordable housing alone. Public organizations, nonprofits, faith-based and philanthropic organizations must join together in an effort to address affordability problems in a functional way. The ever-changing need for affordability can be operationalized through a combination of financing, construction methodology, and energy-efficient measures.

To achieve this operational definition, organizations providing affordable housing to low-income families should:

• add alternative construction methods to their homebuilding arsenal;

• gain knowledge and technical assistance in making use of all energy-efficient mortgage programs;

• locate a local lender willing to work with energy-efficient mortgage products;

• locate alternative construction contractors and manufacturers and obtain bids on new and existing housing units; and

• gain knowledge and obtain technical assistance on calculating residential energy savings.

ECD should support low-income housing producers by providing training dollars to learn about home energy efficiency, provide mortgage dollars for low-income mortgage programs, incorporate the National Energy Code as a part of its housing and housing funding efforts, and develop training materials for local financial institutions to encourage participation in home energy efficiency in the low-income housing market.

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