Post on 16-Apr-2017
Benefit-cost analysis (BCA) and its housing applications: Three examples from the production, consumption and
government perspectivesBy: Andy Carswell, Joe Laquatra, Patryk Babiarz
Housing Education and Research AssociationOctober 12, 2015
Definition of BCA
• Choice between mutually exclusive projects/alternatives that provides the greatest value return relative to the costs.
• You would want the final best available option to be positive.
• May be public or private projects
BCA in the classroom• Economics
• Environmental economics
• Law
• Public policy/ public administration
• Real estate (?)
Our field’s own flirtation with BCA• Scott Maynes and the
“Maynes model”• A series of consumer
possibilities related to a decision choice (maximax, minimax, BOMP, highest expected value)
• Objective and subjective costs and benefits involved
• Probabilities assigned to each particular event occurring
ActionsPossible Outcomes I II III IV V VIProbabilities 0.2 0.8 0.4 0.6 0.7 0.3
Objective Costs Rent or mortgage PI (13,800.00)$ (15,000.00)$ (6,324.84)$ (6,324.84)$ (6,085.68)$ (6,085.68)$
Property tax $0 $0 (1,725.00)$ (1,725.00)$ (2,240.00)$ (2,240.00)$ Property insurance/renter's insurance (300.00)$ (300.00)$ (575.00)$ (575.00)$ (560.00)$ (560.00)$
Maint/Repair (1,560.00)$ (1,560.00)$ (1,800.00)$ (1,800.00)$ (2,100.00)$ (2,100.00)$ Closing Costs $0 $0 (4,416.00)$ (4,416.00)$ (4,300.80)$ (4,300.80)$
Opportunity cost of security deposit or down payment (5.75)$ (5.75)$ (23.00)$ (23.00)$ (22.40)$ (22.40)$
Objective Benefits Equity Build-up $0 $0 $1,944.23 $1,944.23 $1,926.60 $1,926.60
Tax Savings A. Interest $0 $0 1,226.57$ 1,226.57$ 1,164.54$ 1,164.54$
B. Property Tax $0 $0 483.00$ 483.00$ 627.20$ 627.20$ Anticipate appreciation $0 $0 575.00$ 287.50$ 560.00$ 280.00$
TOTAL OBJECTIVE Cost and Benefits (15,665.75)$ (16,865.75)$ (10,635.04)$ (10,922.54)$ (11,030.54)$ (11,310.54)$
Subjective Benefits (Security, freedom,etc) (100.00)$ (200.00)$ 250.00$ 100.00$ 500.00$ 200.00$
Subjective costs (Risk, lack of mobility, etc.) 100.00$ 50.00$ (500.00)$ (1,000.00)$ (250.00)$ (2,000.00)$ TOTAL SUBJECTIVE -$ (150.00)$ (250.00)$ (900.00)$ 250.00$ (1,800.00)$ NET UTILITY (15,665.75)$ (17,015.75)$ (10,885.04)$ (11,822.54)$ (10,780.54)$ (13,110.54)$
UTILITY
C - CondoA - Rent apartment B - Suburban House
Why not housing?
The producer scenario
BCA housing scenario #1: The builder ponders use of a temporary seller buydown
mortgage• Successful local builder faces
a difficult financial situation• Buyer realizes that (s)he has
market leverage, but not a very high income
• Local lender willing to do creative financing option, but needs some risk mitigation
• There are options to make all three parties happy
Benefit-Cost Analysis of Buydown Scenario for Builder/Seller
Up-Front Cost to Lender ($2,993)
Holding Costs Foregone
Construction Loan Costs $ 6,000
Utilities $ 814
Outside Maintenance/ Property Management $ 250
Pest Control $ 150
Property Taxes $ 1,125
Total Foregone Holding Costs $ 8,339
Net Benefit(Cost) of Doing Buydown $5,346
Translation in the end for BCA scenario #1
• EVERYBODY’S HAPPY!• Through proactive BCA:
Buyer got into a home exercising market leverage
Lender able to facilitate a sale without losing money
Builder able to sell home in down market without reducing home price
The consumer scenario
BCA housing scenario #2: The resident ponders an energy-efficiency improvement
• Resident in older homes considers making a major upgrade to save L-T energy costs
• High up-front costs• Lower monthly energy costs• Various ratios and measures help
determine if the upgrades are viable• Constrained by household’s timetable
for remaining in the home• Also hampered by “shortsightedness”
of current standard ratios and measures and their unwillingness to incorporate house price gains
The data/ratios which help drive our EE improvement decisions
• Life-cycle costs = purchase and installation costs, maintenance and repair costs, replacement costs, and energy costs
• Net benefit/savings = difference between the economic lifetime dollar energy savings and economic lifetime dollar costs of an energy-efficient home
• Savings/investment ratio = the ratio of the present value savings to the present value costs of an energy conservation measure
• Payback period = elapsed time between the point of initial investment and the point at which accumulated savings, net of accumulated costs, are sufficient to offset the initial investment cost
Potential limiting factors when arriving at ratios and measures
• There is almost certainly an immediate equity influence (+) on a home price after upgrades
• There may also be a house price premium attached to degree of energy-efficiency
• Also, there may be a year-to-year equity premium over and above regular house price appreciation rates
Sample HERS form
Application of energy efficiency features and analytical tools
Variables Values Values After Retrofit
Discount Rate 10%
Months Left in House 120
Purchase and Installation Costs $7,500
Salvage Value N/A
Maintenance/Repair Costs $20 $10 $10
Replacement Costs N/A
Energy Costs $265 $140 $125
Life-Cycle Costs $25,500
Net Benefit /Savings $2,716
Savings-To-Investment Ratio 1.36
Payback Time Analysis 55.56
Variables Values Values after Retrofit
Discount Rate 10%
Months Left in House 120
Purchase and Installation Costs $7,500
Salvage Value $1,500
Maintenance/Repair Costs $20 $10 $10
Replacement Costs $3,000 $ -
Energy Costs $265 $140 $125
Energy-Efficiency Equity Kicker $2,700
HERS Rating Kicker @ HERS Score of 80 $1,200
Life-Cycle Costs $25,500
Net Benefit /Savings $6,616
Savings-To-Investment Ratio 1.88
Payback Time Analysis 26.67
Impact analysis of energy efficiency analytical tool results after factoring in house price growth
So what sort of tricky consumer situation does this apply?
• Home valued at $200K• Buyer contemplating $5K
energy upgrade• Saving $100 per month in
energy costs• HERS rating of 90• Appraiser estimates 2% equity
push• AVM suggests $100 premium
per HERS point beyond the baseline
• Time horizon of 4 years before moving
Just focusing on the payback period portion of the equation…
Under traditional method of measurement:Payback period = 58 monthsThus, the improvement is not undertaken
Under housing equity incorporated method of measurement:Payback period = right away, since $5K equity gain is instantly realized through upgrades
Cost to the buyer of not doing the upgrade:PV of sum of cash flows in added savings from lower energy costs = $4,258
The government scenario
BCA housing scenario #3: Local government considers funding early intervention homeless program called
“Housing First”
The “Housing First” approach to homelessness prevention
• Housing is a basic human right.• People facing homelessness should have immediate
access to permanent, independent housing.• Issues that led to a person becoming homeless are
best addressed from a foundation of stable housing.• Case worker dedicated to handling social service
aspects of Housing First clients.• Similar to a preventative maintenance approach.
Emergency Room Costs
Hospital Overnights
Incarceration Costs
Sheltering Costs
Detox/Substance Abuse Costs
Inpatient Medical or Psych (Non-Medicaid)
Medicaid Costs
Mental Health Overnights
Outpatient Medical (Non-Medicaid)
Booking Costs/Police Contacts
Ambulance Costs
Prescription Drug Costs
Hirsch and Glasse
r 2008
Mondello et al 2007
Home & Healthy for G
ood
Perlman and Parvensky 2006
Mercer Housin
g First Demo
Culhane, Metra
ux and
Hadley 2002
Larimer et al 2009
Corporation 2008
Martinez and Burt 2
006Previous BCA
Studies
References• Carswell, A.T., & Babiarz, P. (in press). Benefit-cost analysis and optimization modeling for a seller/builder buydown mortgage.
Journal of Real Estate Practice and Education. • Gladwell, M. (2006). Million-dollar Murray. The New Yorker, 13, 96. • Gramlich, E. M. (1981). Benefit-cost analysis of government programs. Prentice Hall.
• Guess, G. M., & Farnham, P. G. (2011). Cases in public policy analysis. Georgetown University Press.
• Laquatra, J. (1986). Housing market capitalization of thermal integrity, Energy Economics, 8(3); 134-138.
• Laquatra, J. (2003). The value of energy efficiency. Home Energy, 20(6): 30-32.
• Laquatra, J., & Carswell, A.T. (2015, in press). Re-assessing the economic and analytical tools of measuring and optimizing energy efficiency. Housing and Society.
• Maynes, E. S. (1976). Decision-making for consumers: An introduction to consumer economics. New York: Macmillan. • Tsemberis, S. (2010). Housing First: ending homelessness, promoting recovery and reducing costs. How to house the homeless, 37-
56.
• Zerbe, Jr., A., & Bellas, A.S. (2006). A primer for benefit-cost analysis. Northampton, MA: Edward Elgar Publishing.