A brief look at the economics of superinsulation.

First, let me emphasize that my desire to live in a super energy efficient house is not motivated by saving money. Rather, I want a house like that because I think God has commanded me to be a good steward of all of creation, including the energy to heat my house. Sometimes, obedience to God’s will brings immediate blessings, sometimes it brings burdens or even persecution. But regardless of the response of the world, obedience brings its own joy.

In this case however, I think we can have our cake and eat it too.

It is often surprising to people how little it costs for framing and insulation. One hears various numbers, but it is commonly quoted that the cost for labor and materials to frame a new house constitutes about 8-10% of the total cost. (ref: http://www.pierceconstruct.com/trusses.html) Insulation can be perhaps another 5-8% depending.

So, if you pay somebody to build you a new conventional house, and that new house cost $100,000, the framing and insulation would account for approximately 13-18,000 of the total cost. If we change the design of the house to accommodate very high levels of insulation, the framing and insulation cost will typically increase by 50 to 100%. How does that affect your total cost and mortgage payment?

If we assume worst case scenario costs for the super insulated construction, we end up with a house that cost $118,000, an additional $18,000. Not so fast though. At very high levels of insulation, you will need a much smaller furnace, less ductwork (or no ductwork-gasp!) and may get along very nicely using a big water heater for a “furnace”. If that is true, we can recoup $2-4,000 on the furnace. But let’s continue the worst case scenario analysis and assume we don’t save a penny on the furnace.

The mortgage payments on the conventional house will be:

$702.80 per month

assuming an interest rate of 5.75% on a 20 year amortization. As an aside, 30 year mortgages are as dumb as a box of rocks. Ask me why if you don’t already know.

The mortgage payment on the super insulated house will be:

$828.46 per month

with the same interest rate and amortization. The difference being $125.66 per month. Your actual monthly cash flow should be about the same, if not better in the super insulated house. North of the Mason-Dixon line (i.e., the cold states), heating bills should be ¼ to 1/3 of the regular house, and cooling bills are often trivial to non-existent. If your average monthly winter heating bill in the conventional house is $150 (conservative estimate, could easily be higher), in the superinsulated house, it will be:

0.33 x 150 = $50.00 which saves ~$100 per month.

Below the Mason-Dixon line (the hot humid states) you will save the big money on air conditioning bills.

Either way, the super house more or less pays for itself in reduced energy use even in the short term.

But I am not overly swayed by short term economics. Long term efficiencies are very convincing to me. When we consider the long run, once the mortgage is paid for, all that energy saved is essentially “free money”. Another item that is often ignored in these discussions is tax liabilities. Let’s assume we save a thousand dollars every year on energy cost. Those are AFTER TAX dollars we are saving. If you have to go out and spend those thousand dollars on natural gas or electricity, you really have to earn $1,200 or $1,400 first. Then you pay your various taxes on those earnings, then you pay your heating bill. So in reality, we are saving much more than $1,000.

We also have not mentioned anything about future energy cost. In my view of the future and energy cost, it will all become more expensive and it will do so at a brisk pace. Let’s look at natural gas prices in the recent past.

(The HTML did not like my graph, so here is a link to a graph:

http://en.wikipedia.org/wiki/Natural_gas_prices

Please note that this other graph uses different units, which doesn't matter. It's those spikes and general rise at the end we are interested in.)

As we observe the graph, a few things are obvious. Residential gas prices are cyclic, depending on the weather. Every minor peak is the winter price, every trough is the summer price. It’s also hard to miss that in the last ten years, costs have escalated rapidly after a long stable stretch. Just to pick out a few facts:

Gas was

$3.94 in Jan of 1981
$5.54 in Jan of 1991
$10.12 in Jan of 2001
and $14.92 in Jan of 2006

If this trend continues, the cost savings in a super insulated house will likely double in less than ten years, and then double again in less than ten years. So in 20 years, after the mortgage is paid off, the cash flow comparison of the two houses would look more like this:

Annual heating and cooling costs for conventional house:

$7,200

Annual heating and cooling costs for superinsulated house:

$2,397

This represents a savings of about $5,000 per year of after tax, inflation adjusted dollars. If we further assume that the house will last another 80 years and that there are no additional increases in energy cost (unlikely), this will represent a total life cycle savings of approximately:

80 x $5,000 = $400,000

Suddenly, we are not talking about just beer and pizza money any more. This could mean the difference between fixed income seniors being able to afford a house, or not. For low and middle income families, this will make the whole heat vs food issue much worse. Or perhaps they will have to choose between heat and their medications. Or heat vs retirement savings. Or heat vs a college fund for their kids. Or heat vs church giving. Do you really want to be forced to choose?

I could use the techniques used by the slippery insurance/investment industry to make this look wildly “over the top” superior to conventional housing. Rather than just computing everything in today’s dollars and ignoring inflation and interest, we could take that money that we save on energy costs and put that in a nice moderate growth fund and end up with some silly big number like $10,000,000 after 80 years.

But that is speculative, which is really a euphemism for gambling. If you want to invest the money, I’m fine with that. You will probably do very well. But the real point is that in real dollars and real buying power, without any compound interest smoke and mirrors, the superinsulated house beats the conventional house with a big stick, repeatedly. Wouldn’t you like to pass that on to your kids?

When cast in these terms, we suddenly see why this is a stewardship issue. We are all given stewardship over a limited amount of resources. Those who use the resources wisely will end up having many more options in how they use those resources.

There are other issues that can sway the balance in favor of superinsulation. If you can do some or all of your own work, the economics becomes overwhelmingly favorable to the superinsulated house. These houses are almost universally more comfortable to live in. Cold corners, cold floors, and cold rooms are a thing of the past. At high levels of insulation, the thermostat setting has less and less influence over how much you save by turning it down. It’s the law of diminishing returns. As a consequence, you can now keep it at 70F all winter if you like and walk around in shorts and a tee shirt without wasting abhorrent amounts of energy and money.

This is not theoretical. When I finally got my house in Ontario Canada closed in and insulated, we were definitely in winter. I was working on finishing the interior, drywall and whatnot. Every single day that was sunny, the furnace did not run during the day and it would be toasty warm, even on bitterly cold days in January. Visitors were often amazed to find me working in just shorts, or maybe shorts and a tee shirt, despite the winter weather. Most had never experienced that luxury due to the cost of fuel.

One gentleman in particular was doubtful that he could even get his house that warm, even running the woodstove full blast all day long. He lived in an old farm house without much/any insulation. He reported that they burned about 14 cords of wood every winter, which is an enormous pile of work and expense. It was still cold. His house is the antithesis to mine.

Of course, if you work at it, you can find some circumstance where you don’t actually save any money. Perhaps the remodeling to install that much insulation is fairly expensive. Perhaps you end up with a general contractor who is unfamiliar with the framing techniques to achieve these r-values. The work goes slower, the labor costs go up, the materials cost from waste goes up, and you end up way over budget. Perhaps the starting house is reasonably well insulated to start with, giving less room for improvement and savings.

Perhaps you build or remodel and end up with your dream superinsulated house, only to discover that you have to move in two years because of a job transfer. Don’t despair yet. The resale value on a superinsulated house with a demonstrated track record of low fuel bills will definitely bring a higher price. But whether you recoup all of your additional investment or not depends on 27 other factors that we have little or no control over.

In the long run, none of the economic issues really matters because this is not about the money. Saving money in the long run is just a nice byproduct. The goal is to be frugal with the energy we are given out of respect for God and respect for our kids and grandkids. I would do it even if I “lost” money.

Finest regards,

troy and christina