A Fannie Mae for the home climate crisis
Jun 22, 2023
Your house is driving the climate crisis.
It’s not fun to think about, but it’s true. Air conditioners use 6 percent of American energy and put about 117 million metric tons of carbon into the atmosphere each year. Heating our homes adds another 324 million tons of carbon annually. Running your hot water heater, mowing your lawn, and watching your television all add to the total. In fact, out of all the things in your life — driving, eating, or living — for most people, their home is the largest portion of their overall carbon dioxide footprint.
Of course, it is admirable that people want to limit their carbon footprints, particularly in their homes. But good intentions don’t pay the bills, and solar panels, heat pumps and electric stoves aren’t free. People need financing if they’re going to do what is right for the planet (and, ultimately, for their bottom lines).
We need to make this both easy and affordable for people. Fortunately, the answer is staring us in the face. We need a government entity that finances green home improvements. We need a Fannie Mae for the climate crisis that Americans are fighting in their homes.
No one can seriously doubt how effective entities like Fannie Mae are for achieving policy objectives. When Fannie Mae started offering 30-year fixed mortgages in the 1940s, 43.6 percent of American households owned their homes. By the end of 2020, 65.8 percent of American households did. There are now roughly 83 million American households that own their home.
Fannie Mae’s rapid growth was a direct result of the market not servicing the needs of the masses correctly. The massive swaths of GIs coming back from World War II had no real credit history (because they had been away fighting), so traditional lenders were reluctant to fill the market gap. The government had to step in. As we can see from the outcome, it was enormously successful.
That explosive growth would never have happened without Fannie Mae. Fannie Mae and Freddie Mac combine to back 70 percent of the mortgage market in the U.S. Critically, they also provide standardization; the process of getting a mortgage and the standards used to determine eligibility in Alaska are not all that different from those in Texas, New York or Massachusetts. The system requires far fewer lawyers, contracts and forms than it would without one central backstop. It dramatically reduces transaction costs and makes the process doable for far more people.
A climate entity similar to Fannie Mae, then, could be useful — more than that, though, it is necessary for families looking to reduce their energy usage and greenhouse emissions. Energy efficiency home improvements can be expensive. Buying and installing a heat pump averages $5,500. Solar panels average $16,000. Energy efficient windows range from $300 to $1,000 a pop.
As the average American household income is about $71,000, most families cannot afford them all at once. Yes, there are government grants and tax incentives, but even so, most families will need financing.
Yet if the costs are real, so are the benefits. Installing a heat pump could prevent as much as 7.6 tons of carbon emissions per year while saving significant money for the homeowner. (Heat pumps are about three times more efficient than gas furnaces.) Each residential solar panel can save 1.5 tons of carbon dioxide per year. Solar water heaters can cut carbon emissions in half. These reductions, multiplied by tens of millions of households, could dramatically reduce America’s carbon footprint, while saving its homeowners billions of dollars in energy costs AND helping the U.S. get to full energy independence by weaning itself from fossil fuels. It’s a proverbial win-win-win.
With the world on pace to use up its carbon budget by the end of 2030 — that is, the carbon emissions required to unleash an average temperature rise of 2 degrees Celsius or more — we need to leverage every carbon savings we can muster.
What’s more, these improvements make sense financially over the long term. Heat pumps pay for themselves over five to seven years and, depending upon where you live, solar panels can pay for themselves in about eight years. Even if a family doesn’t care a whit about climate change, it can still reap financial benefit from technologies designed to stall it.
Unfortunately, investors don’t get excited about these sorts of slow, steady returns. I am among the most guilty of that, as I work for a venture capital firm focusing on real estate, property technology, and the climate crisis — so, at least for now, it is difficult for a household to find the financing it needs.
Yes, there are risks involved in setting up another institution like Fannie Mae. No conversation of Fannie Mae is complete without an examination of its role in the 2008 housing collapse and resulting financial panic. It is possible that a climate-focused entity could similarly overextend itself, help inflate an investment bubble, and ultimately fall into government conservatorship.
Nor was setting up Fannie Mae free. Yet Fannie Mae emerged from conservatorship stronger. The New Deal politicians who set it up could not have dreamed that the limited dollars they spent would make such a colossal impact on homeownership in this country.
The same would be true if Fannie Mae for climate could help reverse the existential threat of climate change.
The battle against climate change will ultimately be fought and won in the built world. The federal government should ensure people have the money and the technology they need to prevail. It’s good for homeowners, and it’s good for the country as a whole.
Greg Smithies is a partner and co-head of Climate Tech Investment at Fifth Wall, a venture capital firm focusing on technology for the global real estate industry.
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