WP-024: Erica Myers, "Are Home Buyers Inattentive? Evidence From Capitalization of Energy Costs" (Revised July 2018)

In recent years, governments around the world have become interested in designing successful policy instruments for reducing greenhouse gas (GHG) emissions. Whether price-based instruments, such as taxes or cap-and-trade programs, will be effective crucially depends on whether consumers are responsive to fuel prices in markets for energy-using durables. In this new E2e working paper, Erica Myers (University of Illinois) looks at whether consumers are responsive to changes in energy prices in the housing market. It is important to investigate whether consumers are myopic about future energy costs in the housing market to determine whether taxes alone would be appropriate for regulating emissions or whether appliance standards and building codes would be more effective.

This study is the first to estimate how shifts in energy prices affect housing prices. Myers uses changes in natural gas and heating oil process over time to isolate exogenous variation in home energy costs. She focuses on Massachusetts where roughly an equal number of homes heat with oil as heat with natural gas. This allows her to estimate the effect of a change in relative energy costs on a change in relative housing prices, while controlling for changes in the macroeconomic environment and in the value of different housing characteristics over time. She compares the transaction price of oil-heated versus gas-heated homes for the period 1990-2011, during which there is significant variation in the relative fuel prices.

Myers finds that home buyers are relatively attentive to future fuel prices. They are paying attention to changes in relative fuel prices and are aware of how those changes translate into changes in the net present value of the future stream of payments. When the relative cost of heating goes up by $1/MMBTU it leads to a $1,000-$1,200 discount in relative housing price. The results imply that home buyers use an 8-10% discount rate, which suggests that they are not strongly myopic regarding future heating fuel costs when purchasing houses. These results are consistent across income distributions, indicating that rich and poor home buyers are similarly cognizant of home heating costs.

These findings suggest that since home buyers across the income spectrum are attentive to and informed about fuel prices, pollution pricing policies such as taxes or cap-and-trade programs will create incentives not only to reduce the amount of energy people choose to consume, but to convert to cleaner heating fuels, and possible increase the efficiency of building shells and appliances as well.