# Final Determination: Adoption of Energy Efficiency Standards for New Construction of HUD- and USDA-Financed Housing

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-08793

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** April 26, 2024
- **Citation:** 89 FR 33112

## Text

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
DEPARTMENT OF AGRICULTURE
[Docket No. FR-6271-N-03]
RIN 2506-AC55
Final Determination: Adoption of Energy Efficiency Standards for New Construction of HUD- and USDA-Financed Housing

AGENCY:

Department of Housing and Urban Development and Department of Agriculture.

ACTION:

Notice of final determination.

SUMMARY:

The Energy Independence and Security Act of 2007 (EISA) establishes procedures for the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Agriculture (USDA) to consider adopting periodic revisions to the International Energy Conservation Code (IECC) and to ANSI/ASHRAE/IES Standard 90.1: Energy Standard for Buildings, Except Low-Rise Residential Buildings (ASHRAE 90.1), subject to a determination by the agencies that the revised codes do not negatively affect the availability or affordability of new construction of single and multifamily housing covered by EISA, and a determination by the Secretary of Energy that the revised codes “would improve energy efficiency.” At the time of developing the preliminary determination, the most recent editions of the codes for which DOE had issued efficiency determinations were ASHRAE 90.1-2019, and the 2021 IECC. This notice follows the notice of preliminary determination published on May 18, 2023, and announces the final determination of HUD and USDA as required under section 481(d)(1) of EISA. After consideration of public comments, HUD and USDA determine that the 2021 IECC and ASHRAE 90.1-2019 will not negatively affect the affordability and availability of housing covered by EISA.

DATES:

Effective Date of this Determination:
May 28, 2024.

Compliance Date:
Compliance is required according to the implementation schedule described in Section VI of this notice; compliance dates vary according to program type.

FOR FURTHER INFORMATION CONTACT:

HUD:
Michael Freedberg, Office of Environment and Energy, Department of Housing and Urban Development, 451 7th Street SW, Room 10180, Washington, DC 20410; telephone number 202-402-4366 (this is not a toll-free number). HUD welcomes and is prepared to receive calls from individuals who are deaf or hard of hearing, as well as individuals with speech or communication disabilities. To learn more about how to make an accessible telephone call, please visit:
https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

USDA:
Meghan Walsh, Rural Housing Service, Department of Agriculture, 1400 Independence Avenue SW, Room 6900-S, Washington, DC 20250; telephone number 202-205-9590 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Statutory Requirements

B. Energy Codes Overview

C. Covered HUD and USDA Programs

D. Current Above-Code Standards or Incentives

E. Current Housing Market Affordability Trends

F. Changes From the Preliminary Determination to the Final Determination

1. Adjusted Economic Factors

2. Adjusted Cash Flow and Financing Factors

3. Updated State Code Adoption

4. Alternative Compliance Pathways

5. Implementation and Compliance Timelines

6. Inflation Reduction Act Tax Credits and Rebates

II. Public Comments

A. Higher First Costs

1. General Support

2. Cumulative Costs

3. Proposals for Financing and Tax Credits

4. Proposals for Technical Assistance

5. Concerns Regarding an “Appraisal Gap”

6. Delegation of Legislative Power

7. Lower Availability of Affordable Homes for Home Buyers

8. Affordability and Availability Impacts in Rural Communities

9. Limited Cost Effectiveness of Individual Code Measures

10. Understated Impact on Low-Rise Multifamily

B. State and Local Adoption of Energy Codes

1. Alignment With State and Local Codes

2. Adoption of Earlier Code Versions

3. State and Local Code Amendments

C. Cost Benefit Analysis

1. Construction Cost Estimates

2. Builder vs. Consumer Costs

3. Reliance on Simple Payback vs. Life Cycle Cost Savings

4. Current Financing and Economic Factors

5. Timeframe of Analysis

D. Ventilation, Manually Operated Fans

E. Air-Sealing Requirements and Fire Codes

F. Builder Familiarization With New Codes

1. Implementation Timeline

2. Need for Training and Technical Assistance

3. Enforcement and Compliance

G. COVID-Related Supply Chain Challenges

H. Green Building Standards and Alternative Compliance Paths

1. Alternative Compliance Pathways

2. Promoting Unvented Attic Spaces

3. Alignment With Existing State or Local Codes

4. Alternative Prescriptive and Performance Compliance Pathways

I. Additional Comments

1. VA Enhanced Loan Underwriting Methods

2. Incorrect Montana Data

3. Inclusion of Greenhouse Gas Emissions

4. Covered Housing vs. Existing Housing Stock

5. Impact on Increased Sprawl

III. Final Determination—2021 IECC

A. Overview

1. Current HUD-USDA Standard and Subsequent Revisions

2. 2021 IECC Overview

3. Current State Adoption of the 2021 IECC

4. Estimated Impacts

B. 2021 IECC Affordability Analysis

1. Cost Benefit Analysis and Results

2. Limitations of Cost Saving Models

3. Estimated Costs and Savings

4. Analysis of Adopted State Energy Codes for Residential Buildings

5. Incremental or Added Costs

6. Annual Cost Savings

7. Simple Payback

8. Total Life Cycle Cost Savings

9. Consumer Cash Flows

10. Low-rise Multifamily Buildings

11. Additional Analysis—6.5% mortgage interest

12. Cash Flows for Single Family and Low-Rise Multifamily

13. Appraisals of Energy Efficiency Improvements

14. State-Level Results

15. Total Costs and Benefits

C. Final Affordability Determination—2021 IECC

IV. Final Determination—ASHRAE 90.1-2019

A. Overview

1. Current HUD-USDA Standard and Subsequent Revisions

2. ASHRAE 90.1-2019 Overview

3. Current State Adoption of ASHRAE 90.1-2019

4. Analysis of Adopted State Energy Codes for Commercial Buildings

5. Impacted Multifamily Housing

B. ASHRAE 90.1-2019 Affordability Analysis

1. Cost Benefit Analysis

2. Building Prototypes

3. ASHRAE 90.1-2019 Incremental Costs

4. State-Level Results

5. Total Life Cycle Cost Savings

C. Final Affordability Determination—ASHRAE 90.1-2019

V. Impact on Availability of Housing

A. 2021 IECC—Single Family

1. Builder Impacts

2. Single Family Market Impacts

3. Evidence From Prior Code Adoption

4. Variability in Building Practices in Relation to Energy Codes

B. ASHRAE 90.1-2019 Rental Housing

VI. Implementation

VII. Environmental Impact

List of Tables

Table 1. Distribution of State Adoption of IECC and ASHRAE 90.1 Equivalent Standards

Table 2. Covered HUD and USDA Programs (New Construction)

Table 3. Current Energy Standards and Incentives for HUD and USDA Programs (New Construction)

Table 4. Incremental First Cost of Energy Star Version 3.2 (Above 2021 IECC) in Select Cities

Table 5. Maximum Energy Rating Index—2021 IECC

Table 6. Appraised Values Relative to Sales Price—FHA Insured New Homes 2020-23

Table 7. ICC Economic Factors for 2024 IECC Analysis

Table 8. Revised Economic Parameters for Final Determination

Table 9. National Costs and Benefits—2021 IECC vs. 2009 IECC (Single Family)

Table 10. Incremental Energy Savings Associated with Each IECC Version—2006 to 2021

Table 11. Current State Adoption of the IECC

Table 12. Estimated Number of Units Impacted Annually by 2021 IECC

Table 13. National Costs and Benefits—2021 IECC vs. 2009 IECC (Single Family)

Table 14. National Costs and Benefits—2021 vs. 2009 IECC (Low-Rise Multifamily)

Table 15. National Costs and Benefits—2021 vs. 2018 IECC

Table 16. National Costs and Benefits—2021 vs. 2009 IECC (Single Family) 6.5% interest, 3.5% downpayment

Table 17. Cash Flow for Single Family—2021 IECC vs. 2009 IECC

Table 18. Cash Flow for Low-Rise Multifamily—2021 IECC vs. 2009 IECC

Table 19. State by State Costs and Benefits 2021 IECC vs. 2009 or 2018 IECC (Single Family)

Table 20. Aggregate Estimated Costs and Savings for 2021 IECC (Single Family and Low-Rise Multifamily)

Table 21. Incremental ASHRAE 90.1-2019 Construction Costs ($/sf and %/sf)

Table 22. Incremental ASHRAE 90.1 Construction Costs ($/Prototype 32-Unit Building)

Table 23. Current Adoption of ASHRAE 90.1 Multifamily Mid- and High-Rise Buildings

Table 24. High-Rise Multifamily Units Potentially Impacted by ASHRAE 90.1-2019

Table 25. Mid-Rise Apartment Building Prototype Characteristics

Table 26. ASHRAE 90.1-2019 Added Costs and Savings—National

Table 27. ASHRAE 90.1-2019 Added Costs and Savings—States

Table 28. Total Life Cycle Savings—States

Table 29. Incremental Costs and Energy Savings Resulting from Adoption of ASHRAE 90.1-2019

Table 30. Type of Financing of New Single Family Homes

Table 31. FHA-Insured Single Family Forward Loans, 2021

Table 32. Compliance Dates for the New Construction Standards in this Notice

List of Figures:

Figure 1. IECC Adoption Map (Residential)

Figure 2. Economic Parameters for Consumer Cash Flows

Figure 3. ASHRAE 90.1 Adoption Map Mid-Rise and High-Rise Multifamily

I. Background

A. Statutory Requirements

Section 481 of the Energy Independence and Security Act of 2007 (“EISA,” Pub. L. 110-140) amended section 109 of the Cranston-Gonzalez National Affordable Housing Act of 1990 (Cranston-Gonzalez) (42 U.S.C. 12709), which establishes procedures for setting minimum energy standards for the following three categories of housing financed or assisted by HUD and USDA:

• New construction of public and assisted housing and single family and multifamily residential housing (other than manufactured homes) subject to mortgages insured under the National Housing Act;
1

1
This subsection of EISA refers to HUD programs. See Table 2 for specific HUD programs covered by the Act.

• New construction of single family housing (other than manufactured homes) subject to mortgages insured, guaranteed, or made by the Secretary of Agriculture under title V of the Housing Act of 1949;
2

and,

2
See Table 2 for specific USDA programs covered by the Act.

• Rehabilitation and new construction of public and assisted housing funded by HOPE VI revitalization grants under section 24 of the United States Housing Act of 1937 (42 U.S.C. 1437v).

In addition to these EISA-specified categories, two HUD programs apply EISA to new construction projects through their program statutes and regulations: the HOME Investment Partnerships Program (HOME) and the Housing Trust Fund. Sections 215(a)(1)(F) and (b)(4) of Cranston-Gonzalez (42 U.S.C. 12745(a)(1)(F) and (b)(4)) make new construction of rental housing and homeownership housing assisted under the HOME program subject to section 109 of Cranston-Gonzalez (42 U.S.C. 12709) and, therefore, to section 481 of EISA. Although the energy standards at 24 CFR 92.251(a)(2)(ii) are reserved in the July 2013 HOME final program rule, the statutory requirements of section 109 of Cranston-Gonzalez (42 U.S.C. 12709) continue to apply to all newly constructed housing funded by the HOME program.

For the Housing Trust Fund, program regulations at 24 CFR 93.301(a)(2)(ii), Property Standards, require compliance with the minimum standards required under Cranston Gonzalez section 109 (42 U.S.C. 12709).

EISA references two standards: the International Energy Conservation Code (IECC) and ANSI/ASHRAE/IES Standard 90.1.
3

The IECC standard applies to single family homes and multifamily low-rise buildings (up to 3 stories), while the ASHRAE 90.1 standard applies to multifamily residential buildings with 4 or more stories.
4

For both agencies, applicability is limited to newly constructed housing and does not include the purchase or repair of existing housing.
5

3
ANSI—American National Standards Institute; ASHRAE—American Society of Heating, Refrigerating, and Air-Conditioning Engineers; IES—Illuminating Electrical Society.

4
Note the IECC addresses both residential and commercial buildings. ASHRAE 90.1 covers commercial buildings only, including multifamily buildings four or more stories above grade. IECC Section C 401.2 adopts, by reference, ASHRAE 90.1;
i.e.
compliance with ASHRAE 90.1 qualifies as compliance with the IECC for commercial buildings.

5
The statute covers rehabilitation as well as new construction of housing assisted by HOPE VI revitalization grants; however, as noted below, the HOPE VI program is no longer funded.

Sections 109(c) and (d) of Cranston-Gonzalez, as amended by EISA, establish procedures for updating HUD and USDA energy standards following periodic revisions to the IECC and ASHRAE 90.1 codes, typically every three years. Specifically, section 109(d) of Cranston-Gonzalez (42 U.S.C. 12709) provides that revisions to the IECC or ASHRAE 90.1 codes will apply to the three categories of housing financed or assisted by HUD or USDA described above if: (1) the agencies “make a determination that the revised codes do not negatively affect the availability or affordability” of such housing, and (2) the Secretary of Energy has made a determination under section 304 of the Energy Conservation and Production Act (42 U.S.C. 6833) that the revised codes would improve energy efficiency (42 U.S.C. 12709(d)). On July 28, 2021, the Department of Energy (DOE) published final determinations that the 2021 IECC and ASHRAE 90.1-2019 standards would improve energy efficiency (86 FR 40529 and 86 FR 40543).

Through this notice, HUD and USDA issue their final determination that the 2021 IECC and ASHRAE 90.1-2019 energy codes will not negatively impact the affordability or availability of housing covered by EISA.

Note that manufactured housing is not covered in this notice: the relevant

section of the EISA statute specifically excludes manufactured housing; DOE has issued a separate final rule under EISA section 413 that establishes energy conservation standards for manufactured housing (42 U.S.C. 17071).
6

Those standards are also based on the 2021 edition of the IECC adapted for the unique features of manufactured housing, as well as feedback received during interagency consultation with HUD and extensive public comments from stakeholders.

6
87 FR 32728 (May 31, 2022); 10 CFR part 460.

B. Energy Codes Overview

There are two primary benefits of adopting energy-saving building codes: a private benefit for residents—either homeowners or renters—in the form of lower energy costs, and the external social value of reducing the emission of greenhouse gases (GHGs). Additional benefits include improved health and resilience against extreme hot or cold weather events. The affordability analysis contained in this notice focuses exclusively on the first of these benefits: the direct costs and savings to the consumer, both in the short and long term, for both renters and homebuyers. The affordability analysis recognizes the unique nature of the energy efficiency investment: while there is a one-time incremental cost, the benefits in terms of energy and utility cost savings to the consumer persist over time, for as long as the property exists. This is especially important for low- and moderate-income renters and homeowners, who share a disproportionate energy cost burden, spending a significantly higher share of their incomes on energy than other households. The accompanying Regulatory Impact Analysis (RIA) also addresses a second benefit, the external cost savings in the “social cost of carbon,” but these are larger societal benefits that may result from lowering energy use in the HUD- and USDA- financed housing and are not directly reflected in the cost of buying, owning, or renting a home, and therefore are not included in the affordability analysis.

As discussed in more detail below, states or localities typically adopt the IECC and ASHRAE 90.1 standards on a voluntary basis one or more years after their publication. As of December 2023, only a small number of states (five) have adopted the 2021 IECC or its equivalent (California, Washington, Connecticut, New Jersey, and Vermont), another five states have adopted the 2021 IECC with weakening amendments (Florida, Louisiana, Montana, Maryland, and Oregon), while another twenty or more states are actively considering and are likely to adopt some version of this code in the near future.

Adoption of ASHRAE 90.1-2019 for multifamily buildings has been more advanced, with ten states and the District of Columbia (DC) having adopted this standard as of December 2023. Another two states (Florida and Louisiana) have adopted the 2019 standards with weakening amendments.

DOE has determined that the 2021 IECC represents an approximately 40 percent improvement in energy efficiency for residential and commercial buildings compared to the 2006 edition and 34.3 percent compared to the 2009 edition.
7

The 2021 IECC also for the first time includes a Zero Energy Appendix. The Appendix is an optional add-on to the 2021 IECC that—if adopted by a state or local jurisdiction—will result in residential buildings having net zero energy consumption over the course of a year.

7
Lucas R.G., Z.T. Taylor, V.V. Mendon, and S. Goel. 2012. National Energy and Cost Savings for New Single- and Multifamily Homes: A Comparison of the 2006, 2009, and 2012 Editions of the IECC. Richland, WA: Pacific Northwest National Laboratory.

DOE has also determined that the 2019 edition of ASHRAE 90.1 represents a 2.65 percent efficiency improvement over the 2016 edition, and approximately 33 percent over the 2007 edition. As explained in DOE's State Portal, DOE assesses state energy code adoption based on a quantitative analysis of energy savings impacts within the state.
8

This approach analyzes the energy use of a state base code along with accompanying state amendments through DOE's energy modeling framework to determine an overall “state energy index.” The state index is then compared to the index of the last six national model energy codes to characterize each state at a specific code equivalency. The current state adoption of the IECC- and ASHRAE 90.1-equivalent standards is as follows:

8
DOE State Portal,
https://www.energycodes.gov/state-portal.

EN26AP24.091

C. Covered HUD and USDA Programs

Table 2 lists the specific HUD and USDA programs covered by EISA, with certain exclusions noted, as discussed below. Apart from the HOPE VI program, where rehabilitation is referenced, only new construction of housing financed or assisted under these programs is covered by EISA.

EN26AP24.092

EN26AP24.093

Several exclusions are worth noting,
i.e.,
programs which, while classified as public or assisted housing, or may be specified in the statute, are no longer funded or do not fund new construction:

• HOPE VI. While EISA references the “rehabilitation and new construction of public and assisted housing funded by HOPE VI revitalization grants,” funding for HOPE VI revitalization grants was discontinued in fiscal year (FY) 2011; the program is therefore not covered by this notice.

• Project Based Rental Assistance (PBRA). HUD is no longer authorized to provide funding for new construction of units assisted under the Section 8 PBRA program, except under the Rental Assistance Demonstration (RAD). Apart from RAD, current authorization and funding that Congress provides for the PBRA program is for the limited purpose of renewing expiring Section 8 rental-assistance contracts. Accordingly, this notice does not apply to the current Section 8 PBRA program except through RAD, as referenced in Table 2. If in the future Congress were to appropriate funds for new PBRA assisted units, such developments would be covered by this determination.

In addition, other HUD programs that provide financing for new construction are not covered because they do not constitute “assisted housing” as specified in EISA and/or are not authorized under statutes specifically referenced in EISA, as follows:

(1) Indian Housing. With the exception of Section 248 FHA-insured mortgages, Indian housing programs are excluded because they do not constitute assisted housing and are not authorized under the National Housing Act (12 U.S.C. 1701
et seq.
) as specified in EISA. For example, the Section 184 guaranteed loan program is authorized under Section 184 of the Housing and Community Development Act of 1992 (42 U.S.C. 1715z-13a).

(2) Community Development Block Grants. Housing financed with Community Development Block Grant (CDBG) funds is excluded since CDBG, which is authorized by the Housing and

Community Development Act of 1974 (42 U.S.C. 5301
et seq.
), is neither an assisted housing program nor a National Housing Act mortgage insurance program.

(3) USDA Multifamily Housing and assisted housing financed by USDA Community Facilities loans and grants. These programs are excluded because they are not authorized under the National Housing Act (12 U.S.C. 1701
et seq.
) as specified by EISA.

D. Current Above-Code Standards or Incentives

Some HUD and USDA competitive grant programs covered by EISA (as well as other programs) already require grantees to comply with energy efficiency standards or green building requirements with energy performance requirements that exceed state or locally adopted IECC and ASHRAE 90.1 standards, while other programs provide incentives to do so. A list of current programs that require or incentivize a green building standard is shown in Table 3. This standard is typically Energy Star Certified New Homes for single family properties, Energy Star for Multifamily New Construction, or a green building standard recognized by HUD that includes a minimum energy efficiency requirement. Nothing in EISA or this notice precludes HUD or USDA competitive programs from requiring these higher standards or raising them further, nor from providing incentives for above-code energy requirements.

Table 3 includes a listing of current HUD and USDA programs with either requirements or incentives for funding recipients to build to standards above the current 2009 IECC and/or ASHRAE 90.1-2007 standards (see “Exceeds Current Energy Standard” column). Contingent on the energy standard selected, and the minimum energy efficiency requirements established for each standard, projects built to the energy or green building standards listed in Table 3 may also meet or exceed the 2021 IECC and ASHRAE 90.1-2019 standards discussed in this notice (see “Meets or Exceeds Proposed Standards” column). These green building or energy performance standards typically have multiple certification levels with varying energy baseline requirements (gold, green, platinum etc.); these baseline requirements are updated over time at some point after publication of newer editions of the energy codes. HUD and USDA intend to seek certifications from the standard-setting bodies as to which of these programs, or which certification levels, meet the 2021 IECC or ASHRAE 90.1-2019 standards referenced in this notice.

EN26AP24.094

EN26AP24.095

EN26AP24.096

E. Current Housing Market Affordability Trends

9
Table 3 includes HUD and USDA programs supporting new construction with energy code requirements. Does not include other HUD or USDA programs that may have appliance or product standards or requirements only,
e.g.,
Energy Star appliances or WaterSense products.

10
Pursuant to discussion of alternative compliance paths, Section VI, Implementation, some green building standards will meet or exceed the 2021 IECC/ASHRAE 90.1-2019, others may not, HUD and USDA will publish a list of those green building certifications that meet or exceed these codes.

HUD and USDA recognize the current affordable housing shortage across the United States, caused by high mortgage interest rates, increased construction costs driven in part by COVID-related supply chain shortages, and an inadequate supply of new housing sufficient to meet demand due to a range of regulatory barriers such as local land use laws and zoning regulations that may limit the production of affordable housing.
11

(Land use regulations that mandate home sizes and volumetric massing are particularly relevant to energy-efficiency because some local zoning policies restrict homes of smaller sizes, which inherently have the potential to be more affordable and better performing homes.) The publication of this notice occurs at a time when housing prices for both new and existing homes have risen significantly over the past three years, increases in mortgage interest rates have reached their highest levels in more than two decades, and it has become increasingly difficult for low-moderate income households to afford a home purchase. The National Association of Realtors' annual survey of homebuyers and home sellers reports that median homebuyer income increased to $107,000 in 2023, an increase of 22 percent from $88,000 in 2022.
12

Median home sales prices increased to $417,700 in the fourth quarter of 2023, a decrease of 14 percent over the prior year but a significant increase since the fourth quarter of 2020, when the median home sales price was $358,700.
13

These trends are mirrored in the FHA-insured market. In 2023, the median price for all FHA-insured purchases, including existing homes, was $290,000, and new construction was approximately $330,000—a nearly $100,000 cost increase in the three-year period since 2020,
14

although still well below the median home sales price for all new homes of $414,600.
15

11
White House Housing Supply Action Plan, President Biden Announces New Actions to Ease the Burden of Housing Costs, May 16, 2022.
www.whitehouse.gov/briefing-room/statements-releases/2022/05/16/president-biden-announces-new-actions-to-ease-the-burden-of-housing-costs/.

12
National Assn of Realtors,
2023 Profile of Home Buyers and Sellers,
November 2023.
www.nar.realtor/newsroom/nar-finds-typical-home-buyers-annual-household-income-climbed-to-record-high-of-107000.

13
St. Louis Fed, FRED Economic Data, St. Louis Fed, Median Sales Prices of Houses Sold for the United States, Q4 2023.
https://fred.stlouisfed.org/series/MSPUS

14
Internal FHA data on median home price for all FHA-insured purchases.

15
St. Louis Fed, FRED Economic Data, Median Sales Price for New Houses Sold in the United States, October 2023,
https://fred.stlouisfed.org/series/MSPNHSUS.

The shortage of affordable housing is driven by larger trends in the housing and mortgage markets. In light of these larger trends, it is important to note that a key finding of this notice is that given the relatively modest incremental costs of building to the new standards, the adoption of the proposed codes in this final determination will have a limited impact on overall affordability for low- or moderate-income buyers. Also, energy efficiency is one of the few features of a home that contributes to affordability, in that significant cost savings are projected to be realized from this investment. These savings persist over time. Investments in energy efficiency will also ensure that the next generation of Federally-financed new housing is built to a high-performance standard that realizes lower energy bills, improved comfort, and healthier living conditions for residents. These benefits are long-lasting and will be passed on to future owners.

F. Changes From the Preliminary Determination to the Final Determination

In response to the public comments received, HUD and USDA are adopting several changes in this final determination to incorporate public feedback on the preliminary determination, and address questions and concerns expressed by commenters.

1. Adjusted Economic Factors

In response to several comments about the economic factors used in the affordability analysis, HUD and USDA have updated several economic and cash flow factors to account for changes in the economy as well as the building industry since the original analysis was conducted by Pacific Northwest National Laboratory (PNNL) for DOE using 2020—2021 cost data and economic factors. These revisions address the distortions in the current housing market caused by COVID-19 and global supply chain issues, which significantly increased the cost of construction materials and energy, as well as significant increases in mortgage interest rates during this period.

Construction cost increase.
A supply chain cost increase factor has been applied to the incremental cost of adopting the new code to account for the increase in residential construction costs for 2020-23. The 37 percent increase utilizes Bureau of Labor Statistics' Producer Price Index for inputs to residential construction less energy, as reported by the National Association of Home Builders (NAHB).
16

16
David Logen,
Building Materials Prices Fall for Second Month Straight,
June 15, 2023.
https://eyeonhousing.org/2023/06/wbuilding-materials-prices-fall-wfor-second-month-straight/.

Energy price increase (2020-22).
An energy price increase factor was developed by averaging prices for electricity, natural gas, and heating oil for 2020 through 2022. The three-year averages were used to find the rate of increase of energy prices for each source over this period. These rates were averaged based on the residential energy mix for 2022. Data for calculating the energy price increase factor was sourced from the U.S. Energy Information Administration.
17 18 19

17
U.S. Energy Information Administration,
Natural Gas Prices. https://www.eia.gov/dnav/ng/ng_pri_sum_a_EPG0_PRS_DMcf_a.htm.

18
U.S. Energy Information Administration,
Petroleum & Other Liquids. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=M_EPD2F_PRS_NUS_DPG&f=M.

19
U.S. Energy Information Administration,
Electricity Data Browser. Average retail price of Electricity, Annual

Energy price escalator.
A new fuel price escalator of 1.9 percent is based on the estimated 30-year trends in the Energy Information Administration's (EIA) 2023 Annual Energy Outlook. This escalator applies to estimates of future energy price increases, over the baseline established under the Energy Price Increase described above. This escalator was developed from the growth rate for nominal fuel prices (natural gas, heating oil, and electricity) based on the share of energy mix for 2022, which was the most recently available annual data at the time.

Mortgage interest rate.
An updated nominal mortgage interest rate of 5.3 percent has been adopted, reflecting approximate two-year Freddie Mac average rates (February 2022-2024).
20

While Freddie Mac interest rates reached a twenty-year high of 7.79 percent for a 30-year fixed rate mortgage, as of November 2023, a moderating trend has begun that is projected to continue, and HUD has accordingly adopted an interest rate that is aligned with the rate currently established by DOE of 5 percent, that reflects the average of the recent 2022-24 two year period rather than rely on a specific rate from a specific point in time that may or may not continue at the same level in the future. In addition, a 6.5 percent example has also been provided (Table 16) to reflect mortgage rates of between 6 and 7 percent forecast for the next year, as well as a 3.5 percent downpayment rate that reflects the minimum FHA downpayment requirement.
21

20
The nominal interest rate used here aligns with a 3 percent real interest rate with a 2.24 percent inflation factor.

21
Economic, Housing and Mortgage Market Outlook—December 2023—Freddie Mac,
https://ww.freddiemac.com/research/wforecast/20231220-us-economy-wexpanded-in-2023.

Discount rate.
A 5.3 percent discount rate (equivalent to a 3 percent discount rate with a 2.24 percent inflation rate) has been adopted to match the mortgage interest rate. The discount rate reflects the time value of money. Following established DOE methodology, the discount rate has been set equal to the mortgage interest rate in nominal terms. The mortgage payment is an investment available to consumers who purchase homes using financing, which makes the mortgage interest rate a reasonable estimate for a consumer's alternative investment rate.

2. Adjusted Cash Flow and Financing Factors

In addition to an updated mortgage interest rate, several adjustments have been made to reflect typical financing factors utilized by FHA and USDA borrowers, as well as likely differences between the house type assumed by PNNL in their original calculations.

Down payment.
The down payment contribution for home purchases has been revised to better reflect the typical HUD and USDA borrower. The down payment requirement for FHA borrowers is a minimum of 3.5 percent, distinct from a typical 20 percent down payment requirement for conventional financing without private mortgage insurance (PMI), or the 12 percent down payment rate used by DOE-PNNL and utilized by HUD and USDA in the preliminary determination. The downpayment rate has been updated to 5 percent in the Final Determination.

Mortgage Insurance.
The preliminary determination was silent on mortgage insurance requirements, which have now been included in the Final Determination's affordability analysis: FHA's 1.75 percent upfront mortgage insurance premium (MIP) and 0.55 percent annual MIP that took effect in March, 2023.

Adjustment for Home Size.
Cost and savings factors have been applied to the affordability analysis to better reflect the typical home FHA or USDA-sized home. These factors revise the analysis to better reflect the smaller home size of a typical FHA or USDA property (2,000 square feet (sf)) compared to a conventionally financed house modeled by PNNL (2,376 sf). While this is a 14 percent “smaller house”, lower cost and savings factors have been used to approximate the reduced cost and associated savings that are anticipated from the smaller-house size (5 percent and 3 percent respectively).

Note that the revised analysis largely indicates that the proposed standards, while better reflecting the status of the post-COVID housing market conditions, do not change the affordability determination. The relevant tables (Tables 13-20) have been updated with the revised affordability analysis.

3.
Updated State Code Adoption:
Since publishing the preliminary determination, multiple states have adopted new building code requirements, including the codes referenced in this notice,
i.e.
2021 IECC and ASHRAE 90.1-2019. HUD and USDA have accordingly updated the relevant tables in the Final Determination (Tables 11 and 23) to reflect the new landscape of energy code adoption at the state level, following the latest DOE determinations as of December 2023.

4.
Alternative Compliance Pathways:
HUD and USDA encourage the use of codes and standards that exceed the 2021 IECC and ASHRAE 90.1-2019. HUD and USDA are adding that future versions of the IECC and ASHRAE 90.1 codes, including the 2024 IECC, will be deemed to meet the code requirements of this notice subject to a positive efficiency determination by DOE. Additional information has been added to reflect the compliance paths for certain energy efficiency and green building standards, including EPA's Energy Star for New Construction and DOE's Zero Energy Ready Homes (ZERH) standards.

5.
Implementation and Compliance Timelines.
HUD and USDA have adjusted compliance timetables to better enable the industry to adapt to these code requirements, including an extended compliance period for persistent poverty rural areas where capacity to adopt above-code standards may be challenging.

6.
Inflation Reduction Act (IRA) Tax Credits and Rebates.
This notice addresses the availability of tax credits that are now available for builders to support the cost of building to Energy Star for New Construction and ZERH homes. Both Energy Star (Versions 3.2 single family and 1.2 multifamily) and ZERH specify the 2021 IECC as the minimum standard to qualify for these certifications. In addition, the notice references Home Energy and Appliance Rebates that when implemented by the states will provide an additional source of financing for increasing the energy efficiency of new homes. Note, however, that these tax credits and rebates are not factored into the cost benefit analysis in this determination.

II. Public Comments

HUD and USDA published a notice on May 18, 2023, announcing the preliminary determination that the 2021 IECC and ASHRAE 90.1-2019 do not negatively affect the availability or affordability of houses covered by EISA and seeking public comment (88 FR 31773). The public comment period was extended to, and closed on, August 7, 2023. HUD received and reviewed 120 public comments from a wide range of stakeholders, including one state (Montana); the two code bodies represented in this notice (the International Code Council and ASHRAE); multiple national associations representing mortgage lenders, home builders, environmental and energy efficiency advocates;

consumers; state energy offices; insulation and other building product trade associations; as well as individuals and other interested parties. The majority of the comments expressed support for HUD and USDA's preliminary determination. Of these supportive comments, most expressed support for HUD and USDA's methodology and conclusions and urged HUD and USDA to rapidly adopt the more recent IECC or ASHRAE 90.1 codes that have been promulgated since the publication of the 2009 IECC and ASHRAE 90.1-2007. In addition, several commenters suggested that HUD and USDA allow alternative compliance pathways for these standards through equivalent or higher state standards or one or more green building standards.

Other commenters highlighted the importance of energy standards in reducing greenhouse gas emissions and increasing the climate resilience of HUD and USDA-supported housing. This will help the country meet national climate goals. Many commenters noted that more efficient homes will reduce stress on the power grid during peak times.

Several commenters suggested that the preliminary determination will help to improve the health and comfort of those living in HUD and USDA-assisted housing in addition to saving on healthcare costs. Many commenters stated that the byproducts of burned methane gas contribute to premature mortality and increase the risk of health complications and respiratory diseases, and that updated energy codes will address health inequities.

In addition to the many supportive comments, several commenters expressed concerns or opposition to one or more features of the preliminary determination. The concerns raised were in four primary areas: the need to update the economic factors used in the preliminary determination to reflect current market conditions, including interest rates, inflation, and energy prices; the first cost estimates used by HUD and PNNL and larger concerns regarding the availability test; an “appraisal gap” in valuing the additional cost likely to be incurred when adopting these standards; and the proposed timetable for implementing the standards after a final determination is published.

In the preliminary determination, HUD and USDA sought public comment on all aspects of the determination but were especially interested in responses to eight questions posed in the preliminary determination. This section addresses responses to those questions first, then addresses public comments on additional aspects of the determination.

A. Impact of Higher First Costs Associated With Adopting the 2021 IECC on Availability of Covered Housing to Otherwise-Qualified Buyers or Renters

HUD and USDA requested comments on whether the higher first costs associated with adopting the 2021 IECC over the current 2009 IECC standard for USDA- or HUD-assisted housing, or relative to the most recent 2018 IECC, may lower homebuyer options, despite the significant life-cycle cost savings over the life of the mortgage described in this notice. In other words, whether adoption of the 2021 IECC may limit the availability of such housing to otherwise-qualified buyers or renters.

1. General Support for Preliminary Determination

The large majority of comments supported the findings of the preliminary determination. These comments generally agreed with HUD and USDA's methodology in arriving at the determination that the 2021 IECC and ASHRAE 90.1-2019 would, on balance, not negatively impact the affordability and availability of the housing covered by the determination. For the purpose of this notice, “affordability” is assumed to be a measure of consumer demand (whether a home built to the updated energy code is affordable to potential homebuyers or renters), while “availability” of housing is a measure of builder supply whether builders will make such housing available to consumers at the higher code level,
i.e.,
whether the higher cost per unit will impact whether that unit is likely to be built or not.

Several commenters agreed with the preliminary determination's finding indicating that the higher first costs associated with adopting the 2021 IECC over the current 2009 IECC would not lower homebuyer options or generally limit the availability of housing to otherwise-qualified buyers or renters. Many commenters agreed with the preliminary determination's analysis that the housing stock in question will remain available. One commenter noted that “[n]othing in the model codes would prevent builders from building homes that receive federal support. The codes are based on widely available, commercial technologies and provide multiple pathways for complying.” One commenter cited that these energy codes have already been adopted by many states and therefore will not affect availability. Several commenters emphasized that building housing to the 2021 IECC standard is essential and can be done while maintaining or improving affordability for consumers. Two commenters suggested that reduced energy bills would offset any additional first costs incurred from the new code requirements.

HUD-USDA Response:
HUD and USDA appreciate the support expressed by these commenters for the analysis included in the preliminary determination. These comments indicate confidence in HUD's and USDA's use of DOE and PNNL cost-benefit analysis of the subject codes. HUD and USDA conducted thorough affordability and availability analyses to assess the impact of adopting the 2021 IECC, ultimately finding that these codes will not negatively impact the affordability or availability of the covered housing.

2. Cumulative Costs Over 2009 IECC

One commenter noted that the significance of the costs is due to the baseline code being the 2009 IECC instead of the multiple, intermediary energy code updates. One commenter stated that HUD and USDA may overestimate the number of homes that will be impacted by the proposed standards as additional states and cities are likely to adopt either of the codes addressed in this notice in the near future (at which point they will come into compliance with the code requirements).

HUD-USDA Response:
The commenter's observation that these costs are higher because they are based on the 2009 edition of the IECC rather than a more recent edition is accurate in that these costs represent the cumulative cost of amendments to several editions of the code since the 2009 edition; the 2012, 2015, and 2018 editions, as well as the current 2021 edition.

Adoption by states of the 2021 IECC is an iterative process: while five states have already adopted a code that meets or exceeds the 2021 IECC, others have adopted an energy code more recent than the 2009 IECC, and a significant number of states are actively considering adoption of the 2021 standard or have already done so with amendments.

Where states have adopted more recent editions (
e.g.,
the 2018 edition), the incremental cost to meet the requirements of the 2021 standard is significantly lower, as shown in Table 19 in the final determination. Note, however, that the cumulative costs represented by the 2009-2021 figures also yield significant cumulative savings: 34 percent in improved energy

efficiency over this period, compared to just 8.3 percent over the most recent 2018 edition.

3. Proposals for Financing and Tax Credits

While generally supportive of the preliminary determination's findings, several commenters recommended measures that HUD and USDA could take to mitigate first cost impacts. Commenters suggested HUD and USDA provide programs and advance policy that allow for reduced downpayments, changes in amortization schedules, changes in underwriting standards, downpayment assistance, tax credits, and other forms of financing assistance. One commenter stated that tax credits and incentives further enable compliance and serve to reduce upfront costs to builders. Commenters also recommended that HUD and USDA identify programs and resources, at the state or federal levels, that will address first cost barriers and make information on accessing these resources available for low-income consumers. One commenter recommended HUD and USDA identify alternative solutions to advance energy efficiency measures that avoid the first cost impacts.

HUD-USDA Response:
HUD and USDA appreciate these financing proposals, both with possible HUD-USDA financing incentives, as well as action that HUD-USDA could take to maximize the use of new IRA or BIL tax credits, rebates, or other financing that will become available.

Proposals from commenters for “reduced downpayments or other forms of flexible financing” including for example, “changes in amortization schedules,” while potentially longer-term options for HUD and USDA consideration, are beyond the scope of this notice. However, regarding comments recommending “tax credits and other funding mechanisms that could reduce the impact of added first costs,” there are now significant new resources available through the Inflation Reduction Act (IRA) which provide unprecedented financial support for building energy efficient housing. HUD has already taken, and will continue to take, steps to train and educate builders and developers on how these may be used in conjunction with HUD financing.

The IRA makes available significant tax credits for builders that can potentially offset some of the incremental costs associated with building to the 2021 IECC. Though not considered in the preliminary determination's affordability analysis, energy efficient new homes the section 45L tax credit (45L) encourage builders to consider building and certifying to the Energy Star New Homes (up to $2,500 credit) or DOE's Zero Energy Ready Home (up to $5,000 credit) standards. Energy Star Version 3.2 is estimated to yield additional savings of at least 10 percent over the 2021 IECC, while the ZERH standard is designed to exceed the 2021 IECC by at least 15-20 percent depending on whether multifamily or single family. Note that the 2021 IECC is a minimum baseline requirement for both Energy Star Version 3.2, and DOE's ZERH Version 2 standard, currently in effect. Energy Star Version 3.1 currently qualifies (through December 31, 2024) for the IRA tax credit in those states that have not yet adopted the 2021 IECC.
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Energy Star Version 3.1 is modeled to perform at 10 percent above the 2018 IECC but it does not include a thermal backstop provision required under the 2021 IECC standard.

HUD and USDA recognize that qualifying for these tax credits will require builders to build to a higher overall energy efficiency standard than the 2021 IECC, and that while this will entail additional costs, these costs will be offset—in some cases entirely—when taking advantage of available tax credits. While DOE does not have estimates of the added cost of building to the ZERH standard, EPA provides cost estimates of the incremental costs that would typically be required over the 2021 IECC to build to the new Energy Star Version 3.2 standard. Table 4 provides estimates of these additional costs; the additional cost for building to Energy Star for New Homes ranges from $1,010 in Climate Zone 3 (Memphis) to $1,668 in Climate Zones 6, 7, and 8 (Fairbanks) for all-electric homes; and $1,176 to $2,815 for mixed fuel homes (natural gas + electric). Note that for Energy Star Version 3.2, estimated costs of $1,211—$1,463 in Climate Zones 1-3—where a significant share of housing likely to be impacted by this notice are located—are significantly lower than the $2,500 tax credit, thereby providing builders a significant incentive to build to this standard. These estimates demonstrate that building to Energy Star Version 3.2 in these Climate Zones will in fact lower builder outlays by between $1,000-$1,300 while achieving a higher energy efficiency standard than the 2021 IECC.
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Cost estimates for Energy Star from U.S. EPA,
National Version 3.2 Costs and Savings, https://www.energystar.gov/sites/default/files/asset/document/ENERGY%20STAR%20Version%203.2%20Cost%20%20Savings%20Summary.pdf.

EN26AP24.097

Both the Energy Star for New Homes and ZERH tax credits are also available for multifamily new construction. A $500 per unit tax credit is available for homes certified to eligible ENERGY STAR Multifamily New Construction (MFNC) program requirements, with a larger tax credit ($2,500 per unit) available when prevailing wage requirements are met.
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For ZERH homes, the tax credit is $1,000 per dwelling unit, unless the project meets prevailing wage requirements, in which case the 45L tax credit is $5,000 per dwelling unit.
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EPA.
https://www.energystar.gov/about/federal-tax-credits/ss-45l-tax-credits-home-builders.

In addition to these tax credits for new construction, the IRA expanded the Section 179(d) commercial building tax credits for multifamily buildings. The new law increased the maximum deduction from $1.88 to $5 per square foot and cannot exceed the cost of the improvement. However, the taxpayer must meet a prevailing wage and apprenticeship requirement.
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26
DOE, 179D Commercial Buildings Energy-Efficiency Tax Deduction Buildings,
https://www.energy.gov/eere/buildings/179d-commercial-buildings-energy-efficiency-tax-deduction.

In addition to the tax credits and deductions available through the IRA, there is another potential source of IRA funds that states may make available for new construction: Home Energy and Appliance Rebates that provide $4.5 billion in rebates for certain energy efficiency and electrification measures such as heat pumps, upgraded electrical service, or solar panels that may be leveraged to lower the first cost of construction for these measures. These funds will be administered by the states and are expected to become available in most states in 2024 or 2025.
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Home Electrification and Appliance Rebates will also be available to (1) low- or moderate-income households; (2) individuals or entities that own a multifamily building with low- or moderate-income households comprising at least 50 percent of the residents; and (3) governmental, commercial, or nonprofit entities that are carrying out projects for low- or moderate-income households or multifamily building owners.
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Rebates can be used to offset the cost of the following items: ENERGY STAR-certified electric heat pump water heater; ENERGY STAR-certified electric heat pump for space heating and cooling; ENERGY STAR-certified electric heat pump clothes dryer; ENERGY STAR-certified electric stove, cooktop, range, or oven (note: Energy Star-certified ovens are pending); electric load service center (
i.e.,
electrical panel); electric wiring; insulation, air sealing, and mechanical ventilation. For low-moderate income households, the rebates may be used for as much as 100 percent of the cost of installation.

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A separate $4 billion for HOMES rebates is for existing homes only, and does not cover new construction.

28
DOE, Home Energy Rebates: Frequently Asked Questions.
https://www.energy.gov/scep/home-energy-rebates-frequently-asked-questions.

In addition to these multiple new sources of funding for energy efficiency measures, there are also tax credits and financing sources for the addition of renewables through the IRA. Builders may be able to take advantage of certain EPA Greenhouse Gas Reduction Fund programs, especially the Solar for All initiative. Builders may also be able to utilize the Investment Tax Credit under Section 48 of the Internal Revenue Code focusing on investment in on-site renewable energy production through wind and solar, which has increased incentives for low-income communities, Tribal entities, and specifically for residential buildings.
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The section 48 investment tax credit offers an up to 30 percentage point credit (if prevailing wage and apprenticeship requirements are met) with an additional 10 percentage point credit for facilities in low-income and Tribal communities and additional 20 percentage point tax credit available for facilities that serve federally-subsidized housing or provide economic benefits to low-income households (information available at
https://www.whitehouse.gov/cleanenergy/clean-energy-updates/2023/08/10/treasury-issues-final-rules-and-procedural-guidance-to-drive-clean-energy-investments-in-low-income-communities-across-the-country/
).

When using solar energy for housing, creating an energy efficient home is a critical first step towards optimizing energy performance. Energy efficiency in homes has a point at which better energy performance requires the addition of a source of renewable energy. As shown in 2021 IECC Zero Energy Appendix, (Table 5 below), the maximum ERI score of 43-47 for the 2021 IECC, provides a reasonable backstop for energy efficiency and adding renewable energy. Since minimum ERI scores or equivalent HERS ratings are required for Energy Star for Homes, ZERH, and Passive House, to the 2021 IECC provides a sound baseline for home energy efficiency performance before the addition of renewable energy sources to get to net zero energy.

EN26AP24.098

HUD and USDA will work with DOE and states to maximize participation by HUD and USDA stakeholders in these programs. Steps that HUD has already taken to increase use of both the tax credits and rebates now available to support builders wishing to build more energy efficient housing include the new Climate Funding Navigator, which provides a user-friendly portal to all funding opportunities in the IRA and the Bipartisan Infrastructure Law (BIL),

as well as other programs administered by HUD and other Federal agencies.
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https://www.hudexchange.info/programs/build-for-the-future/funding-navigator/.

4. Proposals for Technical Assistance

One commenter recommended protecting homebuyers who may lose eligibility due to the proposed standards by providing technical assistance for state officials, builders, construction workers, and others; addressing differential rural impacts; making adjustments as needed to account for ASHRAE 90.1 standards; and expanding strong energy efficiency requirements to additional assisted housing programs.

HUD-USDA Response:
HUD and USDA appreciate the range of comments received that recommended training, technical assistance (TA), and information for builders and developers impacted by this determination. HUD and USDA intend to provide TA to support the implementation of the 2021 IECC and ASHRAE 90.1-2019. The agencies recognize that there may be an “information gap” regarding the latest codes in places where prior codes have been adopted by states or local jurisdictions, and that in some locations there may be a learning curve for builders to become familiar with the requirements of the latest editions of the codes. HUD has allocated FY 2022 Community Compass TA funds for this purpose and expects to implement an extensive TA and training effort to ensure that stakeholders are both aware of the new requirements and knowledgeable about the specific updates that are included in the new codes.
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This may include both webcasts as well as printed and/or online resources that builders, developers, and appraisers can use to familiarize themselves with the new code requirements. Additional on-call TA that responds to builder, consumer, lender, or developer questions may also be available. The specific topics that will be covered have not been identified at this point; however, the agencies will widely circulate any resources or webinars developed in support of the implementation of these new standards. HUD will also work with trade associations to promote these resources to their members, through targeted trainings or at regular association meetings, conferences, or training events. In addition, HUD and USDA will work with DOE and its state and local grantees to leverage $1.2 billion in IRA and BIL energy code TA funds: $330 million to adopt the latest building energy codes, $670 million to adopt building energy codes that meet or exceed the zero energy provisions in the 2021 IECC or other codes and standards with equivalent or greater energy savings, and $225 million to support code adoption and training.

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https://www.hud.gov/program_offices/comm_planning/cpdta.

5. Appraisal Gap in Valuing Energy Efficiency Improvements in Home Appraisals

Four commenters raised concerns over challenges with the appraisal process that could impact the ability of FHA and USDA home buyers to afford the added cost of the IECC code. The commenters noted that the analysis included in the preliminary determination assumed construction and production costs would be passed on to homebuyers. Multiple commenters identified the issue of an appraisal gap for energy-efficient homes. The gap arises from the limited ability of the traditional appraisal process to properly account for energy efficiency measures, such as those required by the 2021 IECC, into the valuation of the property. They pointed out that a home may appraise for a value that is less than the cost of materials and labor and that energy efficiency enhancements are often not accounted for in the appraisal. Several commenters stated that this results in development costs exceeding home values, making appraisal practices a major obstacle. One commenter suggested that HUD and USDA establish effective energy-efficient mortgage programs in response.

HUD-USDA Response:
The appraisal gap issue discussed by the commenters is larger than just an energy codes issue, as it not only addresses broader issues of how the market values energy efficiency but also how the market values homes generally in underserved markets. HUD and USDA agree that the valuation of energy efficiency in appraisals could act (depending on location) as a market barrier to the adoption of energy-efficient codes. HUD and USDA reviewed these arguments in a section on “market barriers” in the Regulatory Impact Analysis (RIA) and provided empirical evidence in a section on capitalization of energy efficiency. From a broader regulatory perspective, there are at least three separate issues that could impact appraisals: (1) cost pass-through rates, which depend on the flexibility of buyers and sellers; (2) imperfect valuation by buyers and sellers due to limited information and thin markets; and (3) the role of experts, including appraisers, in valuing energy-efficient improvements.

•
Pass-through rate:
HUD assumed in much of the analysis that the pass-through rate of costs from builders to buyers was equal to one,
i.e.,
builders pass on the full cost of construction to the buyer. However, another acceptable scenario would have been to assume a pass-through rate less than one, where the buyer will only bear a portion of the costs. HUD mentioned in the RIA that the pass-through rate would vary with the price elasticity of demand and supply.

•
Imperfect information:
HUD explored the possibility that energy efficiency may not be perfectly capitalized in the value of a home. If the value of energy efficiency is not transparent to a prospective buyer, then insufficient capitalization reduces the incentive to build energy-efficient housing. In addition to imperfect information, thin markets (few buyers and sellers) could lead to an undervaluation of less common goods (such as above-average energy efficiency).

•
Role of the appraiser:
A well-informed appraiser is expected to perform valuation services competently and assess the market value of an energy-efficient building relative to other buildings. Increasing education and awareness of energy-efficient improvements for appraisals will contribute to stronger valuations as market and cost data become more available.

HUD and USDA therefore understand that lenders, buyers, and builders of energy efficient housing may be impacted in the short-term, particularly in markets where comparable sales are not yet available, and that intervention can be helpful in certain areas to raise awareness of the value of these improvements. One study finds that approximately 1-in-10 homes are undervalued, while thirty percent are appraised at their sales price.
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Calem, Paul, et al, “Appraising home purchase appraisals.” Real Estate Economics 49.S1 (2021): 134-168,

A study of home appraisals conducted for DOE by the Building Industry Research Alliance identified several barriers to valuing energy efficiency improvements in residential appraisals.
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These included: (1) lack of comparable sales, surveys of property performance and return expectations in most markets (where limited data is available, appraisers may resort to “assessing arbitrary values” for energy efficiency improvements); (2) variations

in occupancy behavior, plug loads and/or weather conditions that could impact the actual energy consumption of a household relative to modeled or estimated energy use; (3) knowledge gaps in the lending and housing industries, both on the part of appraisers and underwriters; (4) lack of energy efficiency appraisal training and education (all states require education, experience and licensing for appraisers but energy efficiency requires a different kind of knowledge, and appraiser licensing does not recognize this specialty as distinct); and (5) “resistance to change” by the appraisal industry with the current appraisal methods developed in the 1940s that provide market valuations for aesthetic and structural improvements (the proverbial “granite countertop”) but do not necessarily recognize energy efficiency as a factor in homeownership cost or property value.

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Victoria Doyle, Abhay Barghava,
The Role of Appraisals in Energy Efficiency Financing,
Building Industry Research Alliance for the Department of Energy, May 2012.

These are inherent limitations in the appraisal industry's current approach to valuing energy efficiency, but there are also important developments that are addressing these barriers. These include the introduction of sustainable building science education and certifications such as the Appraisal Institute's Sustainable Buildings Professional Development Programs that include Introduction to Green Buildings, Case Studies in Appraising Residential Green Buildings, and Case Studies in Appraising Commercial Green Buildings. The National Association of Realtors has expanded its curriculum for the General Accredited Appraiser program to include an introduction to energy-efficient homes, and there is also now a “Green Designation” for real estate practitioners including Realtors.

At the same time, to the extent that an appraisal overlooks or does not appropriately value one or more features or improvements of a home, buyers can dispute an appraisal that they feel did not consider all relevant information, so an incentive exists for lenders to engage appraisers who have sufficient competency to appraise energy efficient properties. Sellers in turn have an incentive to provide information that would generate buyer interest in the added improvements.

Information prepared jointly by the Appraisal Institute, the Building Codes Assistance Project, and National Association of Home Builders provides practical solutions, such as how to communicate energy efficiency and where to find qualified appraisers.
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An appraiser who lacks experience in valuing an energy-efficient building may find that they are passed over for more qualified appraisers with more training. An analysis of energy-efficient buildings in the American Economic Review indicated that the diffusion of energy-efficient technology is enhanced by educating building professionals.
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Appraisal Institute, New Appraisal Guidance Addresses Green Housing, 2015,
https://nationalmortgageprofessional.com/news/56670/new-appraisal-guidance-addresses-green-housing
See also
https://www.appraisalinstitute.org/education/education-resources/green-resources.

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Kok, Nils, Marquise McGraw, and John M. Quigley. “The diffusion of energy efficiency in building.” American Economic Review 101.3 (2011): 77-82.

In response to the comments received, HUD reviewed the FHA-insured portfolio from fiscal year 2020 through 2023 to ascertain the extent to which the appraised value of new homes is below, equal to, or above the sales price of the home. One key data point is that, for many FHA borrowers, home appraisal valuations exceed sales prices: 87 percent of 450,000 FHA-insured new home purchases over the past four years had appraisals that exceeded the sales price, and, for 32 percent of new home purchases, appraised values exceeded the sales price by $5,000 or more. The above sales price appraisals indicate that for a significant share of FHA borrowers, even first-time home buyers, there may be a sufficient cushion in the appraisal valuation to allow for some or all of the added cost of an energy-efficient new home, ranging from $2,945 to $7,115 depending on climate zone. While the sales price-home valuation differential shown in Table 6 does not specifically address energy efficiency valuations, the $5,000 or more above-sales price appraised value is important because this buffer is sufficient to cover all or most of the additional cost of the energy improvements, despite any superadequacy or other market failure to recognize the value of the energy improvements.

EN26AP24.099

Another important development that can support the recognition of energy efficiency in home appraisals has been the growth of regional Multiple Listing Service (MLS) databases that include energy efficiency and other sustainable measures in their listings. The National Association of Realtors (NAR) published its Green MLS Toolkit as an educational resource for homebuyers, homeowners, realtors, and appraisers to use to develop a better understanding of energy-efficient homes.
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National Association of Realtors, Green MLS Implementation Guide, https://green.realtor/sites/files/2019-02/2014%20NAR%20Green%20MLS%20Implementation%20Guide.pdf.

The importance of this initiative cannot be understated. A key concern from the housing, financing and appraisal industries has been the lack of

data or access to supporting documentation for valuing energy efficiency improvements. A Green MLS mediates this concern, documenting both measures that are visible and apparent, as well as high-impact energy efficiency measures that are less visible, such as wall insulation and/or low-e windows. The development of the Green MLS Toolkit is “pivotal for the proper valuation of efficiency. . .For appraisers, a Green MLS supports an apples-to-apples comparison for energy efficient features; without a Green MLS, the appraiser may not have sufficient information and data to support an assessment of energy efficiency improvements.”
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Doyle, Victoria and Bhargava, Abhay, The Role of Appraisals in Energy Efficiency Financing, Building Industry Research Alliance, National Renewable Energy Laboratory.

Another significant development has been the development of the Residential Energy Efficiency and Green Addendum for use with the Uniform Residential Appraisal Report, one of the most commonly used forms for completing a home appraisal. It provides standardized reporting and analysis for single family home valuations. The 3-page form provides appraisers the opportunity to recognize energy improvements as part of a home evaluation assessment, including appliance efficiency or insulation levels, whether the home achieves an energy efficiency certification such as Energy Star or other green building standards, and other salient characteristics of the home. By enabling appraisers to collect and document the additional information needed to form an Opinion of Value on a high-performance home, appraisers will be better equipped to identify recent comparable sales. If the home has a HERS rating, RESNET or other third-party energy raters can verify and pre-populate the Addendum for the appraiser. This removes the responsibility of the appraiser to attempt to provide an energy assessment of home performance as it relates to other homes when they lack the training and certifications to do energy assessments.

There is also growing evidence that new energy-efficient homes are in demand and valued at higher prices than other homes. A new study conducted by Freddie Mac reported on 70,000 homes rated under RESNET's HERS between 2013 and 2017.
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The report's goal was to “understand the value and the loan performance associated with energy-efficient homes to support the consideration of energy efficiency in mortgage underwriting practices.” The findings include analysis of property value, loan performance, default risk, borrower characteristics, and demographics. The report found that HERS rated homes sold, on average, 2.7 percent more than comparable unrated homes. In addition, homes that received lower (
i.e.,
more energy efficient) HERS Index Scores sold for 3-5 percent more than homes with higher HERS Index Scores. The study also looked at loan performance, with several important findings: the default risk of energy-rated homes is not on average different from un-rated homes—and loans in a high debt-to income (DTI) range (45 percent and above) that have energy ratings “appear to have a lower delinquency rate than unrated homes.” In rural areas, there are reports of energy efficient and resilient homes commanding higher sales prices: two homes of two bedrooms and one bath each, built by Habitat for Humanity to high performance standards of Phius and ZERH as well as to the hurricane standard of FORTIFIED in Opelika, Alabama appraised at the equivalent amount of the standard Habitat for Humanity home of three bedrooms and two bathrooms.
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Argento, Robert et al, Energy Efficiency: Value Added to Properties and Loan Properties,
https://sf.freddiemac.com/docs/pdf/fact-sheet/energy_efficiency_white_paper.pdf.

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Rural Studio,
https://ruralstudio.org/auburn-opelika-habitat-homes/.

The cost and income approaches to valuation may help assign a contributory value to energy efficiency features of a home. The FHA Single Family Housing Policy Handbook 4000.1 provides for three types of home appraisal approaches applied to one-to-four-residential unit properties: the sales comparison approach, the cost approach, and the income approach.
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However, the Handbook states that “(t)he Appraiser must obtain credible and verifiable data to support the application of the three approaches to value. The Appraiser must perform a thorough analysis of the characteristics of the market, including the supply of properties that would compete with the subject and the corresponding demand. The Appraiser must perform a highest and best use of the Property, using all four tests and report the results of that analysis.”

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https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh.

HUD and USDA are considering taking several steps to address the appraisal gap issue:

First, FHA will provide outreach and training to market participants, including lenders and appraisers detailing the impact of this Final Determination and promoting awareness and education about energy efficient improvements. This will include training for both underwriters and appraisers on how the cost or income approaches can be used as part of appraisals in certain markets.

Second, HUD will work with USDA to provide a package of training through HUD's Community Compass Technical Assistance program aimed at educating appraisers and lenders about acceptable methods and techniques for accurately appraising energy efficient homes financed with an FHA-insured mortgage, including the proper use of the cost and income approaches. HUD has allocated FY22 funding to support this technical assistance.

Third, FHA's four Homeownership Centers (HOCs), which already provide training for appraisers and lenders, will include targeted training for the roster of FHA-approved appraisers, with an emphasis on places with a high volume of FHA-insured new home sales in the south and southwest.

Ultimately, the extent and impact of the appraisal gap for energy efficiency measures is a concern but does not change HUD and USDA's overall determination. While the appraisal gap indicates a failure in the market to keep pace with innovative energy efficiency measures, the gap does not exist in all markets, and its impacts can be alleviated by interventions such as increased market awareness, appraiser education, and resources such as the Green MLS for greater transparency and the Green Addendum to appraisal reports, as well as by the higher valuation of new construction that can cover some or all of the costs of the energy efficient improvements. The resources outlined in this notice, along with HUD and USDA efforts outlined above, will aid in closing the gap for FHA borrowers and should serve as further motivation to overcome market barriers that impede efficiency.

6. Delegation of Legislative Power

Two commenters stated that the Cranston Gonzalez Act is either an improper delegation of legislative power to a private entity, the International Code Council and ASHRAE which promulgate the IECC and ASHRAE-90.1 respectively, or an improper divestment of the executive power to a private entity, and that HUD and USDA should rescind the preliminary determination until Congress passes legislation that affirms what standards should apply.

HUD-USDA Response:
In issuing this determination, HUD and USDA are following the statutory directive of 42 U.S.C. 12709(d). The Cranston Gonzalez

National Affordable Housing Act of 1990 (Cranston-Gonzalez), as amended by the Energy Independence and Security Act of 2007 (EISA) (Pub. L. 110-140), requires HUD and USDA to establish energy efficiency standards for housing specified in 42 U.S.C. 12709(a)(1).

The original efficiency standards were required to meet or exceed the requirements of the 2006 International Energy Conservation Code (2006 IECC) and the American Society of Heating, Refrigerating, and Air-Conditioning Engineers Standard 90.1-2004 (ASHRAE 90.1-2004). (42 U.S.C. 12709(a)(2)). If the requirements of the 2006 IECC or the ASHRAE 90.1-2004 are revised, HUD and USDA must, within a year, amend their standards to meet or exceed the revised requirements of the 2006 IECC or the ASHRAE 90.1-2004, or issue a determination that compliance with the revised standards would “not result in a significant increase in energy efficiency or would not be technologically feasible or economically justified” (42 U.S.C. 12709(c)).

If HUD and USDA have not adopted the revised standards or made the determination under 42 U.S.C. 12709(c), then all new construction and rehabilitation of specified housing must meet the requirements of the revised IECC and ASHRAE 90.1 standards if HUD and USDA determine that the revised codes do not negatively affect the availability or affordability of certain housing stock specified in 42 U.S.C. 12709(d)(1) and DOE determines that the revised codes would improve energy efficiency. 42 U.S.C. 12709(d)). The present HUD/USDA determination fulfills HUD and USDA's statutory directive to determine whether the updated standards negatively affect availability and affordability. The commenter's stated interpretation of the Act does not dismiss HUD and USDA's statutory requirement to make this determination.

7. Lower Availability of Affordable Homes for Home Buyers

Several commenters shared concerns that the higher first or incremental costs associated with adopting the 2021 IECC over the current 2009 IECC would lower homebuyer options and/or limit the availability of housing to otherwise-qualified buyers or renters. Two commenters suggested that these high standards will result in fewer FHA and USDA constructed properties and limit the supply of housing in a way that contradicts HUD's mission.

HUD-USDA Response.
The agencies appreciate the concerns raised by the commenters but do not agree that the higher standards will result in fewer FHA- and USDA-financed properties. HUD and USDA conducted thorough and extensive analyses on the impact of the 2021 IECC on affordability and availability, using established cost and savings methodologies that have been developed by DOE for multiple code cycles. The agencies determined that the codes will not negatively impact the affordability or availability of the covered housing. HUD and USDA recognize that, as of December 2023, only five states have adopted a code that meets or exceeds the 2021 IECC. Nevertheless, in those states, affordability and availability will, by default, not be impacted by HUD and USDA's adoption of the 2021 IECC because no additional requirements would be put in place above those already adopted by the state. In addition, while the number of states that have already adopted the codes is currently limited, the number is growing rapidly, with more than 20 states actively considering adoption of the 2021 IECC. State adoption of ASHRAE 90.1-2019 is more advanced than the IECC: ten states and the District of Columbia have adopted a code that meets or exceeds this standard, and a similar number of states (twenty or more) are currently considering its adoption. Additionally, many local jurisdictions have gone beyond the statewide residential or commercial code by adopting the 2021 IECC or ASHRAE 90.1-2019.
41

41
Department of Energy, Municipal Building Codes and Ordinances. Updated December 2023.
https://www.energycodes.gov/infographics#Municipal.

Nevertheless, the agencies recognize that it will be necessary for builders who are accustomed to the requirements of the 2009 IECC and ASHRAE 90.1-2007—the current HUD and USDA standards—to familiarize themselves with the verification methods incorporated into the subsequent versions of the code (including blower door and duct testing). HUD and USDA will provide technical assistance and training resources to aid in the implementation of these new standards, as described in more detail in section A.2. above. These resources will address elements of the verification requirements for the 2021 IECC that could be unfamiliar to some builders. As these builders become familiar with these requirements and construction practices, the energy improvements required by the more current codes will strengthen the quality of the built product and will benefit consumers in the long term as a result of high-quality construction.

8. Affordability and Availability Impacts in Rural Communities

Three commenters expressed concern regarding the specific impact that the proposed code requirements would have on rural areas. One commenter suggested that challenges related to adoption or implementation of the 2021 IECC and ASHRAE 90.1-2019 standards would be more significant for rural areas “because materials or workers may need to be transported from elsewhere, [and] [r]ural residents may not have easy access to specialized materials or specific worker skills when energy-efficient construction requires them. That is particularly likely in remote rural areas.” One commenter, from the Umatilla Indian Reservation, stated that the reservation's rural location makes it particularly difficult to find contractors and access green products.

Another commenter, a trade association of rural housing organizations, also stated that rural areas would have a higher cost differential for a mortgage between the 2009 IECC and 2021 IECC than the $5,500 increase indicated in the preliminary determination due to construction costs that might be higher in rural areas. Factors that contribute to this higher cost include difficulty sourcing materials and limited access to an appropriately trained workforce for energy efficient construction projects. In addition, the commenter noted that the cost to the homeowner may be higher under USDA's Section 502 direct loan program, since the PNNL cash flow projections assumed a downpayment of 10-12 percent whereas Section 502 typically requires no downpayment and will therefore yield a higher mortgage amount.

Two commenters suggested that few contractors have the knowledge and resources to meet the proposed standards, and that it will be difficult to find a contractor to build to the proposed standards in states that have not or will not adopt the 2021 IECC.

One commenter pointed to specific challenges likely to be encountered by non-profit affordable housing developers: they suggested that affordable nonprofit housing developers will have trouble producing new rental and homeownership housing units in Appalachian communities with the proposed standards due to the “increased costs to construct homes, the unique nature of [these] housing markets, and the difficulty in implementing the standard.” As a result, the commenter argued that there

will be very few (if any) affordable new homes on the market that can be acquired by low to moderate income homebuyers or developers. The commenter urged HUD and USDA to consider the ability of their nonprofit partners to “produce the same quantity of housing after increased costs in without any increase in funding support.”

HUD-USDA Response:
The concerns noted by the commenters fall into three broad areas: the increased costs to build homes to the proposed standard in rural areas; the “nature of rural economies and housing markets;” and operational, technical, and other difficulties in implementing the standard.

In response to the comment about the potential impact of HUD and USDA energy code adoption on housing on Indian reservations, with the exception of the Section 248 program, which has a small loan volume (only eight outstanding loans, no new endorsements since 2008), HUD and USDA note that Indian housing programs are excluded from this notice because they are not covered under the requirements of the governing statute: they neither constitute “assisted housing” nor are authorized under the National Housing Act (12 U.S.C. 1701
et seq.
) as specified in EISA. For example, the Section 184 guaranteed loan program is authorized under Section 184 of the Housing and Community Development Act of 1992 (42 U.S.C. 1715z-13a).

Increased Costs in Rural Areas

HUD and USDA agree that there are increased first costs associated with building to the higher energy standards outlined in the preliminary determination but conclude that the initial investment will benefit both Appalachian and all rural communities across the U.S. through energy cost savings to residents and as well as health, comfort, and durability of higher-performance housing. Rural communities will especially benefit from more energy efficient homes in that rural households are typically overburdened with higher energy costs as a percentage of household income. Nationally, the median rural household energy burden is 4.4 percent, almost one-third higher than the national rate of 3.3 percent and about 42 percent above the median metropolitan energy burden of 3.1 percent.
42

One commenter cited a Virginia Tech report on Appalachian housing costs that concluded that “utility costs contribute to housing costs substantially” in Eastern Kentucky, Southern West Virginia and the western section of Appalachian Alabama, where both owners and renters saw the highest costs relative to metropolitan areas.
43

For some low- or very-low income households, the energy bill may be greater than the cost of the mortgage. Energy bills fluctuate and are only billed post-usage, often leading to unexpected increases in these bills, which can create serious financial stresses on lower income households.

42
Lauren Ross et al, the High Cost of Energy in Rural America, ACEEE, 2018.
https://www.aceee.org/press/2018/07/rural-households-spend-much-more.

43
Virginia Center for Housing Research at Virginia Tech,
Housing Needs and Trends in Central Appalachia and Appalachian Alabama,
2018.

At the same time there are good examples in rural America of how better performing homes can alleviate the impact of higher energy costs experienced by lower income households. One such example is a USDA Rural Community Development Initiative (RCDI) grantee, Mountain T.O.P., a faith-based organization in Grundy County, Tennessee. Based in one of Appalachia's persistent poverty counties where a significant share of the housing stock is dilapidated, the organization worked closely with the Rural Studio Front Porch Initiative to build Mountain T.O.P.'s capacity to replace homes with new, high-performance homes to address the high energy burden in their community.

Despite the long-term affordability benefits of building high performance, energy efficient homes, rural areas may face first cost (and other) constraints in adopting construction standards or codes above prevailing local codes. HUD and USDA do not, however, agree that there is a broad and consistent impact for all rural areas across the nation. Geographic distance may play a role in creating challenges for construction projects in rural areas when there are not locally available skilled workers, but this is true of all building construction, regardless of the specific codes that are in place.

While both HUD and USDA programs serve rural areas, USDA is especially focused on rural housing through its Rural Housing Service programs. USDA's Single Family Direct Loan program is the only direct mortgage product offered by the federal government; USDA can and does work intensively through its underwriting process to assist rural, low-income borrowers to become and to remain homeowners. This program offers 100 percent financing, zero downpayment and the ability to amortize beyond 30 years in addition to having an interest rate that is below market. It is also able to offer additional subsidies based on need. Borrowers of this program, of all the single family borrowers impacted by this notice, are likely to benefit the most from the proposed adoption of the 2021 IECC, and the addition of homes built to higher performance quality will generate long-term benefits to rural locations where housing quality has lagged behind.

One commenter raised a concern that Direct Loan borrowers would see higher costs since downpayment requirements can be as low as zero, and to the extent that the additional costs would need to be financed, this would make these loans less affordable. USDA believes that this concern is misplaced since, by eliminating the downpayment requirement, the Section 502 loan in fact removes a significant potential barrier to financing the added first costs of the IECC, and, given the very low interest rates associated with this product, this seems like an optimal financing vehicle available to rural borrowers for energy efficient housing.

The commenter also raised concerns regarding appraisals, and the “appraisal gap” in rural areas. These concerns are addressed in the larger appraisal discussion in section A.3 of this notice. The limitations of the current appraisal process are broadly applicable, but the gap may be higher in rural areas due to fewer available sales comparisons in these areas, as well as fewer appraisers qualified to assess energy efficient or other green features of a home,
e.g.,
solar. The agencies acknowledge that the current appraisal system in the U.S. for single family homes is not generally set up to fully account for energy efficiency or renewable energy but have proposed potential actions that can help close the gap for FHA and USDA borrowers, as discussed in-depth in section A.3 above.

Technical Capacity Issues in Rural Areas

Other difficulties besides the added cost noted by commenters included limited technical capacity and the need for workforce training in rural areas. HUD and USDA believe that contractors have or are capable of obtaining the knowledge and resources to meet the proposed standards before commencement of the applicable compliance period. The commenter does not provide evidence as to the basis of this proposition. As discussed elsewhere in response to similar comments, the agencies recognize that there will be places where builders may

not be familiar with energy code requirements, but these are likely to be more the exception than the rule, especially with regard to larger home builders who build a significant portion of homes, and unequivocally with regard to multifamily housing.

HUD and USDA agree that remote rural areas may not always have the proper skilled professionals to execute certain types of construction and that training may be needed. Training and support are planned by the two agencies to assist rural America in achieving homeowner financial sustainability through building to the most current energy codes. Trainings on standards that exceed energy codes (Energy Star New Homes, Zero Energy Ready Homes) are also available from EPA and DOE, while additional tax credits for affordable multifamily housing as well as electrification rebates are also becoming available to build energy efficient housing, discussed in more detail in section A.3 above.

HUD and USDA also agree that building codes that require on-site inspection are more challenging in rural areas than where building sites are located in close proximity to HERS rater, building inspector or verifier, but given that HUD and USDA already require the 2009 IECC these issues will not materially change with the adoption of an updated code. The increase in energy codes from the 2009 IECC to the 2021 edition will indeed require learning and implementation of new skills and project delivery methods, but these are relatively modest and likely limited to energy modeling, blower door testing, and duct leak testing. Note that these testing methods have been in place at least since the 2012 edition of the IECC.

As discussed in response to other comments in this notice, HUD will partner with USDA in implementing a training and technical assistance program to facilitate implementation of the energy codes requirements, including trainings on these blower door and duct testing skills. Additionally, USDA is exploring the feasibility of and potential for remote-hybrid inspections with RESNET and others, in which third-party verification may be completed remotely with the on-site assistance of individuals who have received minimum training to perform testing tasks such as blower door testing, duct leakage testing and infrared camera techniques but who may not yet be fully certified home raters.
44

44
Third-party verification is an increasingly common mechanism for enforcing building codes in localities with a limited number of code officials capable of doing so. A third-party code verification program utilizes private sector organizations to verify energy code compliance by providing plan review and analysis, performance testing, and field inspections. More information on third-party verification is available at
https://www.eepartnership.org/wp-content/uploads/2015/07/Third-Party-Verification_Best-Practices_10-15-14-final.pdf.

Finally, in recognition of the specific capacity constraints identified in Appalachia and other high needs rural areas to adopting these standards, HUD and USDA will provide a longer lead time for adoption of the IECC and ASHRAE 90.1 standards in these areas, as outlined in the Implementation section of the Final Determination, section VI. An additional year of compliance will be provided in persistent poverty rural areas, as defined by USDA's Economic Research Service, including persistent poverty census tracts located in rural (non-metro) counties.
45

45
USDA, Economic Research Service, Poverty Area Measures, Descriptions and Maps,
https://www.ers.usda.gov/webdocs/charts/105111/persistentcountytracts.png?v=7741.2.
See also USDA ERS definition of rural (non-metro) counties at
https://www.ers.usda.gov/topics/rural-economy-population/rural-classifications/.

9. Limited Cost Effectiveness of Individual Code Measures

One commenter suggested that HUD and USDA should evaluate the cost effectiveness of individual measures in the 2021 IECC and amend those measures that do not provide value to the consumer. Relying on the overall cost-effectiveness “masks the extremely low-cost effectiveness of some of the individual measures by averaging the results with the measures that are more cost effective.” The commenter identified two specific measures as not meeting any reasonable cost effectiveness test: ceiling insulation requirements of R-60 in Climate Zones 3-8 and R-49 in Climate Zones 1-2; and wall insulation requirements of R-20+5 or R-13+10 in Climate Zones 4-5. The commenter indicated that on their own these measures do not meet “any reasonable cost-effectiveness test” and provided data showing paybacks of 63-150 years on these items.

The commenter noted that these two problematic measures were considered by the 2024 IECC consensus committee. These were realigned to their 2018 levels in the draft 2024 IECC or were provided an opt-out provision in exchange for an additional three credits in Section R408 (Additional Efficiency Requirements). The commenter recommended that in lieu of evaluating all individual measures in the 2021 IECC, the agencies should allow similar amendments to the 2021 IECC as has been approved for the 2024 IECC. Another commenter suggested that HUD and USDA review the determinations made on both codes and identify provisions that do not increase energy efficiency and exclude them as requirements.

HUD-USDA Response.
The statutory requirement (Section 109(d) of the Cranston Gonzalez Act of 1990) for this notice requires HUD and USDA to make a determination on the latest ASHRAE 90.1 or IECC code editions as published. It does not allow for selecting only the most cost-effective measures in the code. The overall efficiency of the code relies on a package of measures considered and adopted by consensus during the code development process, with the more cost-effective measures essentially supporting less cost-effective measures. Therefore, HUD and USDA do not have the ability to pick and choose between specific amendments to the code. In addition, the conventional practice by DOE has been to consider the combined costs and savings for the entire code, rather than for each amendment separately. HUD and USDA believe that it is sound policy to align with DOE practice and cost-benefit methodologies for the purpose of this notice.

Even if allowed under the statutory constraints of this notice, unpacking the code to consider each amendment individually contradicts standard practice when implementing energy efficiency measures. Energy codes typically consider a bundle of measures that enable longer-payback measures to balance out shorter-term measures and enable the savings of the shorter payback items to pay for those that on their own may be less cost-effective. For example, codes combine shorter payback lower-cost lighting measures with more efficient windows that typically have longer paybacks when installed in isolation from other measures. In addition, the agencies believe that the combination of mandatory and optional measures as well as two performance paths provide builders with a great deal of flexibility in complying with the 2021 IECC.

HUD and USDA are aware that the two insulation amendments to the 2021 IECC cited by the commenter have been incorporated in the draft 2024 IECC, which is currently scheduled for publication in early 2024. As noted above, these amendments would roll back ceiling and wall insulation requirements for certain climate zones to the 2018 level, or provide for an opt-out, in exchange for an additional three energy efficiency credits. While HUD and USDA are not able to accept

individual amendments such as this one to the 2021 IECC, if, after publication of the 2024 IECC, DOE determines that the revised code is more energy efficient than the 2021 IECC, housing built to comply with the 2024 IECC in its entirety will meet the requirements of the 2021 IECC.

HUD and USDA note that PNNL has conducted a preliminary analysis of the savings associated with the proposed 2024 IECC, and that DOE's preliminary cost-benefit analysis indicates that the 2024 IECC will exceed the energy efficiency of the 2021 IECC by approximately 6.7 percent. Energy cost savings are estimated to increase by approximately 6.4 percent.
46

46
PNNL for DOE, Energy Savings Analysis 2024 Residential IECC Interim Progress Indicator.

The savings result from the following measures: Additional energy efficiency credits (10 energy credits); Fenestration Table—Improved Window and Skylight U-factors in Climate Zones 4C—8; Ceiling Insulation changes in Climate Zones 4-8 from R-60 to R-49; Climate Zones 6-8 to 2.5 ACH50; Pipe Insulation Requirements update (1 inch thickness = R7); Heat Recovery Ventilator required in Climate Zone 6.

10. Understated Impact on Low-Rise Multifamily

One commenter suggested that the Regulatory Impact Analysis (RIA) is “seriously flawed” because it inadequately considers the impact of the 2021 IECC on low-rise multifamily construction and fails to give appropriate regard to the potential impact on the availability of affordable housing for low-to-moderate income renters. Another commenter questioned the use of a 30-year period of analysis, which the commenter says ignores investment and construction cost considerations for rental apartment investors that work on shorter investment horizons of a 10-year maximum.

HUD-USDA Response:
As stated in the preliminary determination, the 2021 IECC may impact an estimated 170,000 housing units of HUD- and USDA-financed or -insured housing, which includes single family and low-rise multifamily housing. The majority of impacted units will be single family (86 percent); additionally, single family housing faces a greater estimated incremental cost when compared to low-rise or high-rise multifamily. As such, it is reasonable for the bulk of the analysis to center on the most significantly impacted housing type; however, HUD and USDA recognize the need to provide additional detail on availability impacts to low-rise multifamily housing. HUD estimates approximately 27,000 low-rise multifamily units may be impacted by this notice; all are HUD-financed since USDA multifamily programs are not covered by this notice.

When considering impacts on the availability of affordable housing, the economic rationale remains consistent when considering impacts for each housing type; the percentage change in the quantity of housing depends on the price elasticity of demand, price elasticity of supply, and incremental cost. The 1.5 percent reduction cited in the Regulatory Impact Analysis (p.80) applies broadly to housing, meaning that this rate holds for both single family and low-rise multifamily. As such, the maximum number of negatively impacted units is 405 units out of the 27,000 units of low-rise multifamily housing that are estimated to be impacted by this notice.

Existing energy efficiency programs make building to a higher standard more accessible for subsidized housing compared to market-rate housing. A report from DOE's Office of Scientific and Technical Information found that low-rise multifamily buildings were often designed to higher standards in order to qualify for additional energy efficiency certification programs.
47

The Low Income Housing Tax Credit program often requires above-code energy efficiency measures through state Qualified Allocation Plans, resulting in many affordable low-rise multifamily projects that are already being built to higher above-code standards,
e.g.,
Energy Star for New Construction or Passive House.

47
DOE, Office of Scientific and Technical Information, Residential Building Energy Efficiency Field Studies: Low-Rise Multifamily (Technical Report),
https://www.osti.gov/biblio/1656655/.

As far as impacts on renters, the energy efficiency improvements required by the most recent energy codes will provide health benefits in addition to reductions in energy expenditures for families living in rental housing, circumventing the split-incentive issue of landlords being unwilling or uninterested in improving the quality of rental housing for their tenants.

A 30-year period is used in HUD and USDA's affordability analysis following the well-established methodology developed by DOE for assessing the cost effectiveness of the IECC.
48

HUD's Regulatory Impact Analysis provides additional detail (p. 25). In response to the comments that investors in rental apartments typically rely on a 10-year timeline, HUD and USDA added Tables 17 and 18 to the final determination. These show the cash flow for single family and low-rise multifamily housing, respectively. For each building type, the cash flow is positive by the end of the second year, and the simple payback for the national average occurs after 7.7 years in both cases.

48
PNNL, Methodology for Evaluating Cost-Effectiveness of Residential Energy Code Changes, prepared for DOE,
https://www.energycodes.gov/sites/default/files/2021-07/residential_methodology_2015.pdf.

Additionally, it should be noted that this is only applicable to low-rise multifamily; mid-rise and high-rise multifamily buildings are required to meet the ASHRAE 90.1-2019 standard, which shows national average cost increases of only $208 per dwelling unit and negative cost increases for certain states and climate zones (meaning adopting the new standard saves money). Nationally, the simple payback is immediate with 40 states receiving immediate payback and South Dakota having the longest payback period of 1.6 years.

B. Current Status and Anticipated Timetable for State and Local Adoption of the Next Revision of the IECC and/or ASHRAE Codes

HUD and USDA requested comments from code officials on the current status of code adoption in their states, and the anticipated timetable for adopting the next revision of the IECC and/or ASHRAE 90.1 codes. No comments were submitted on the specific question of proposed timetables for state and local adoption of subject codes. However, multiple comments were received that expressed concerns regarding the interaction or alignment between the HUD and USDA proposal and state and local adoption of prior codes. These are discussed below.

1. Alignment of HUD and USDA Standards With State and Local Codes

Several commenters shared concerns regarding the transition that would be required to implement the 2021 IECC and ASHRAE 90.1-2019. Commenters cited the lack of alignment with state or local home rule adoption of these codes. One commenter suggested that the proposed standards would conflict with local building codes, causing delays in construction and significant cost impacts. One commenter suggested that HUD and USDA align implementation of the 2021 IECC with state and local government efforts for updating their energy codes to avoid placing major challenges on builders and local code enforcement officers. One commenter suggested that HUD and USDA accept

the two most recent versions of the IECC and ASHRAE 90.1 standards to help alleviate compliance issues for states and localities with code requirements below the proposed standards.

HUD-USDA Response:
The statutory framework for this notice requires HUD and USDA to align their codes with the latest editions of the specified codes,
i.e.,
the 2021 IECC and ASHRAE 90.1-2019. The statutory requirement at Cranston Gonzalez Section 109(d) does not provide for substituting state-adopted codes (or previous editions as suggested by one commenter) for this cohort of HUD- and USDA-financed new buildings. The intent of the statute is for HUD and USDA to adopt the latest edition of the codes independent of the codes that states have adopted, provided that these do not negatively impact the affordability and availability of the subject homes.

HUD and USDA recognize that this above-code requirement (in states or localities that have not yet adopted the latest editions of the codes) will require builders, developers, and designers to familiarize themselves with the requirements of the new codes. However, the agencies note that it is
not
expected that local code officials will be required to ensure compliance with or enforce the proposed standard. The agencies will not rely on local code officials to certify compliance with the HUD and USDA requirements, and therefore local building inspectors will not be expected to familiarize themselves with the HUD and USDA requirements should they differ from the prevailing state or local code. Rather, HUD and USDA will rely on existing builder self-certification requirements and will also put in place a technical assistance and training program to educate and inform builders, architects, engineers, and developers about the requirements of the standard.

Additionally, there are some jurisdictions that do not adopt building codes at all, and federal agencies must provide prudent guidance and protection of consumers, taxpayers, and housing assets by requiring an industry-accepted code as a standard for all types of project development.

As noted, HUD and USDA's statutory requirement to consider adoption of the latest editions of the code does not allow acceptance of the previous 2018 IECC and ASHRAE 90.1-2016 editions as a compliance pathway, as suggested by one commenter, since these editions have been determined by DOE to be less efficient than the current standards. However, as has been standard practice, all subsequent versions of the IECC and ASHRAE 90.1 that have been determined by DOE to meet or exceed the energy efficiency of the 2021 IECC and ASHRAE 90.1-2019, are sufficient to meet the requirements that will go into effect as a result of this notice. Additionally, there are now significant federal incentives and encouragement from federal agencies for builders to achieve even higher energy performance through, for example, the Department of the Treasury's section 45L tax credit of up to $2,500 for homes that are certified as meeting the requirements of the EPA's Energy Star Single Family Homes or the Energy Star Multifamily Homes National Program (but do not meet the ZERH standards) and up to $5,000 for homes that are certified as meeting the requirements of DOE's ZERH program. Both the EPA's Energy Star Programs and DOE's ZERH's programs require minimum compliance with the most current energy code (2021 IECC) and energy performance of at least 10 percent better. It is anticipated that many builders will take advantage of these tax incentives—as well as rebates that will become available in 2025 or earlier for electric heat pumps and other building electrification measures—and in the process achieve energy efficiencies that are well above the 2021 IECC. Additionally, 45L tax credits of up to $2,500 per unit for Energy Star Multifamily New Construction and up to $5,000 per unit for DOE Zero Energy Ready Homes for multifamily homes are available for multifamily builders that meet prevailing wage requirements.

2. Adoption of Earlier Versions of the Energy Codes

One commenter stated that requiring the IECC 2021 breaks with the precedent established by HUD and USDA in 2015 of selecting an attainable code standard for states rather than the most recently published version. The commenter pointed out that in 2015, HUD established the baseline requirement of 2009 IECC despite newer versions having been published by that time; the commenter recommended that HUD and USDA delay this update until more states adopt the most recent versions of the codes or opt for the 2018 IECC as the requirement.

HUD-USDA Response.
The authorizing statute for this notice requires HUD and USDA to adopt the most recent edition of the IECC and does not provide for consideration of prior editions; the delayed adoption of the 2009 IECC by HUD and USDA in 2015 was a function of the length of time the regulatory process took to publish a final determination on the 2009 IECC, not to establish a precedent for future adoption.

Further, the statute does not allow HUD and USDA to tie adoption by HUD and USDA of the most recent edition of the code to the number of states that have adopted that code. Specifically, section 109(d) of Cranston-Gonzalez (42 U.S.C. 12709) provides that revisions to the IECC or ASHRAE 90.1 codes will apply to the housing specified in the statute if: (1) either agency “make(s) a determination that the revised codes do not negatively affect the availability or affordability” of such housing. HUD and USDA therefore do not have the statutory authority to delay adoption of the most recent code until “more states” have adopted the code. The agencies note, however, that the number of states considering or adopting the revised standards is growing and is expected to grow further as a result of newly available IRA or BIL funding from DOE to support state adoption of the 2021 IECC or higher energy standards. As of December 2023, while only five states have already adopted the 2021 IECC, more than 20 additional states are actively considering its adoption.

HUD and USDA recognize that this presents challenges for developers and builders with regard to adopting a standard that may be above the prevailing locally adopted state or local code, but the governing statute for this notice limits the factors to be considered by HUD and USDA to “affordability” and “availability;” it does not provide for accepting alternative state or local codes as a compliance path. If HUD and USDA were to wait until more states had adopted the 2021 IECC, this would undermine the purpose of the governing legislation, which is to strengthen the standards for HUD- and USDA-financed new construction separately from state adoption provided that these were found to meet the affordability and availability standards.

3. IECC and ASHRAE 90.1 Alignment With State and Local Code Amendments

One commenter noted that the adoption of the 2021 IECC and ASHRAE 90.1-2019 creates “hurdles in states that have not yet adopted these versions of the codes or have amended the codes so they are not deemed equivalent.” The commenter suggested that HUD and USDA should “conduct further due diligence on these issues” to better understand the practical impact of updating the code requirements.

One commenter suggested that HUD and USDA postpone issuing the final determination until a critical mass of states adopt the 2021 IECC and ASHRAE 90.1-2019 standards. The commenter stated that prematurely enforcing these new standards will lead

to jurisdictions being unprepared to review or verify compliance; construction trades being untrained in implementing the new energy efficiency measures; builders, developers, and designers not being ready to transition to the new standards; third-party verification organizations being unprepared to certify compliance; appraisers not being able to recognize the added costs in valuations; and coordination with other code requirements at the jurisdictional level having limited time, leading to non-compliance and performance issues.

HUD-USDA Response.
As noted in the above response, HUD and USDA recognize the potential challenges regarding compliance with the statutory requirement to adopt the most recent edition of the codes that may exceed the standards adopted by a state or locality. The preliminary determination provided an extensive discussion and analysis of the impact that adoption of the 2021 IECC would have on the availability of agency-financed housing. In places which have a significant share of FHA-insured or HUD-financed housing, including California (7,977 total units), Florida (22,607 total units), Georgia (9,736 total units), North Carolina (8,432 total units) and Texas (41,230 total units), HUD and USDA have determined that builders are more likely to build to the standards covered under this notice.

HUD and USDA also note that state adoption is an ongoing process: as of December 2023, only five states have adopted a code that meets or exceeds the 2021 IECC; however, five additional states have adopted the 2021 IECC, although with weakening amendments. Additionally, a significant number of states are currently actively considering the adoption of this standard (with or without amendments). Some 20 states are currently considering adoption of the 2021 IECC; when combined with the 10 states that have already adopted the 2021 IECC, or codes that meet or exceed the 2021 IECC, these states represent approximately 50 percent (an estimated 80,000 units) of HUD and USDA financed units projected to be impacted by this determination.

In summary, while the statute specifically limits HUD and USDA's ability to tie code requirements to the level or extent of state adoption of these requirements, from a practical point of view the pipeline of states currently considering or projected to adopt the 2021 IECC discussed above indicates that by the time the HUD and USDA 2021 IECC requirement takes effect, many more states will in fact have adopted the 2021 IECC or its equivalent, thereby aligning the HUD and USDA standard more directly with state or local code adoption. Additionally, HUD and USDA will put in place a technical assistance and training program to better enable builders, architects, and engineers to meet the 2021 IECC and ASHRAE 90.1-2019 standards.

C. Cost-Benefit Methodology Utilized by Pacific Northwest National Laboratory (PNNL) as Described in the Preliminary Determination

HUD and USDA requested comments on the methodology developed by PNNL and used by the agencies for their affordability analysis. Most comments received in response to this question were in support of the PNNL cost-benefit analysis. One commenter presented their own analysis, conducted by ICF, which aligns with the PNNL analysis and found that the 2021 IECC is cost effective when compared to the 2018 IECC across all climate zones.

However, some commenters shared concerns regarding the methodology used in the cost-benefit analysis. Among these concerns, two commenters expressed that the PNNL study overestimated the value of future savings, particularly for low-income buyers. Others raised concerns with the incremental costs, as well as the economic factors used to estimate cash flow and life cycle savings. One commenter presented an analysis prepared by Home Innovation Research Labs (Home Innovation) disputing PNNL's analysis, showing significantly higher cost estimates than the PNNL costs used by HUD and USDA for their analysis.

HUD-USDA Response:
HUD and USDA acknowledge the many supportive comments on the cost-benefit analysis included in the preliminary determination. This analysis accurately reflected the economic landscape at the time of development in 2020. In addition, HUD and USDA reviewed the independent cost-benefit studies referenced in the public comments, one of which, by ICF, affirms PNNL's analysis and one of which (Home Innovation) disputes PNNL's analysis.

In general, HUD and USDA affirm the original analysis and methodology conducted by PNNL used by the agencies in the preliminary determination; however the agencies recognize that significant time has elapsed since the analysis was conducted in 2020 and have accordingly revised their analysis to include updated economic factors that better reflect current market conditions, including a significant increase in construction costs to reflect the supply-chain and other factors that have impacted construction costs from 2020-23. The appropriate tables have been revised in the final determination.
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The final determination uses the same cost effectiveness methodology as the RIA, which HUD developed based on PNNL's incremental cost and energy cost savings figures. A key difference between the methodologies is that PNNL includes residual value and replacement costs in their calculation. Page 25 of the RIA explains why these factors are not included in this alternative methodology.

1. Construction Cost Estimates

One commenter stated that the construction costs used in the PNNL analysis are substantially lower than the current market costs. The commenter included a summary of alternative cost estimates based on Home Innovation's analysis which demonstrates a much more significant (negative) impact on affordability.
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The commenter also stated that the cost effectiveness analysis should consider the amount paid by the consumer as well as the builder,
i.e.,
should include builder gross profit margins as a cost factor.

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Home Innovation Research Labs, 2021 IECC Residential Cost Effectiveness Analysis, June 2021,
https://www.homeinnovation.com/-/media/Files/Reports/2021-IECC-Residential-Cost-Effectiveness-Analysis.pdf.

HUD-USDA Response:
The analysis produced by PNNL was developed with a methodology that underwent a rigorous public comment and peer review process, has been used for cost-benefit analysis of the revised editions of the IECC and ASHRAE since the 2006 IECC. The Home Innovation report and a response report developed by ICF are independent, third-party studies that include additional data and analysis but are not peer reviewed nor do they follow a federally approved methodology. HUD carefully reviewed the cost estimates provided in the Home Innovation report. The agency recognizes that the incremental cost estimates in the Home Innovation report are two to three times higher than those estimated by PNNL, but ultimately determined that the current analysis' approach and findings most accurately represent accepted means of assessing building energy code impacts, including anticipated cost impacts. Additionally, there are other entities (ICF) that estimate lower cost increases than those calculated by DOE/PNNL.

It is important to note that both independent studies show consensus with the PNNL energy savings estimates used by HUD and USDA in their determination. Home Innovation concluded that energy savings from adopting the code would range from 6.4 percent to 11.6 percent depending upon the additional option chosen. For the basic package plus the water heater option, Home Innovation found a reduction of 9.7 percent of energy expenditures. This range is similar to the estimate reported by PNNL of 8 percent for single family homes (see RIA Figure 11).
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However, the cost-effectiveness analysis conducted by Home Innovation estimates significantly higher incremental costs for the 2021 IECC over the 2018 IECC, ranging from $6,548 to $9,301 per house on average, compared to the government estimate of $2,372 per home; while the Home Innovation savings estimates are the same as those estimated by DOE, the higher estimated cost in the Home Innovation report result in significant differences in estimated simple payback periods for the initial investment.
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https://www.energycodes.gov/sites/default/files/2021-07/2021_IECC_Final_Determination_AnalysisTSD.pdf.

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https://www.nahb.org/-/media/NAHB/advocacy/docs/top-priorities/codes/code-adoption/2021-iecc-cost-effectiveness-analysis-hirl.pdf.

With regard to construction cost estimates, the agencies would expect there to be slight differences in the cost estimates given the variety of building types, methods

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-08793. Public record. Not legal advice.