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 1970.
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