Housing Market Capitalization of Energy‐saving Durable Good Investments

Energy conservation in the residential sector depends, in large measure, upon the willingness of builders and homeowners to invest in the durable goods which result in an energy efficient house. Since these durable goods generally become attached permanently to the dwelling unit and since ownership of the unit is likely to change within the expected lifetime of the installed equipment, the incentive to invest in conservation measures depends upon the efficiency of the housing market in capitalizing the financial benefits of future fuel savings. This paper examines housing market efficiency in this regard by first estimating an hedonic price index with the annual fuel bill included as an explicit attribute of the structure. Then, from the estimated hedonic price of a one‐dollar reduction in annual fuel costs and assumed fuel price escalation rates and remaining lifetimes of the equipment, implicit housing market discount rates are calculated. The relatively low estimated discount rates indicate that the housing market performs efficiently in capitalizing future fuel savings.