Federal Register, Volume 89 Issue 82 (Friday, April 26, 2024)

[Federal Register Volume 89, Number 82 (Friday, April 26, 2024)]
[Notices]
[Pages 33112-33182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08793]

[[Page 33111]]

Vol. 89

Friday,

No. 82

April 26, 2024

Part VII

Department of Housing and Urban Development

Department of Agriculture

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

Federal Register / Vol. 89 , No. 82 / Friday, April 26, 2024 /
Notices

[[Page 33112]]

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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.

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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

[[Page 33113]]

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

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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.
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\6\ 87 FR 32728 (May 31, 2022); 10 CFR part 460.
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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.
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\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.
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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:
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\8\ DOE State Portal, https://www.energycodes.gov/state-portal.
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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.
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[GRAPHIC] [TIFF OMITTED] TN26AP24.093

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

[[Page 33117]]

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.

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E. Current Housing Market Affordability Trends
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\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.
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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\
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\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.
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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\
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\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/.
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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}
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\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

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[[Page 33121]]

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\
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\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;

[[Page 33122]]

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

[[Page 33123]]

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.\22\
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\22\ 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.
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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.\23\
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\23\ 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.
[GRAPHIC] [TIFF OMITTED] TN26AP24.097

[[Page 33124]]

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.\24\ 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.\25\
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\24\ EPA. https://www.energystar.gov/about/federal-tax-credits/ss-45l-tax-credits-home-builders.
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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.\26\
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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.
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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.\27\ 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.\28\ 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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\27\ 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.
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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.\29\
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\29\ 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/).
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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.
[GRAPHIC] [TIFF OMITTED] TN26AP24.098

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),

[[Page 33125]]

as well as other programs administered by HUD and other Federal
agencies.\30\
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\30\ https://www.hudexchange.info/programs/build-for-the-future/funding-navigator/.
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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.\31\ 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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\31\ https://www.hud.gov/program_offices/comm_planning/cpdta.
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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.\32\
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\32\ Calem, Paul, et al, ``Appraising home purchase
appraisals.'' Real Estate Economics 49.S1 (2021): 134-168,
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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.\33\ 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

[[Page 33126]]

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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\33\ Victoria Doyle, Abhay Barghava, The Role of Appraisals in
Energy Efficiency Financing, Building Industry Research Alliance for
the Department of Energy, May 2012.
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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.\34\ 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.\35\
---------------------------------------------------------------------------

\34\ 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.
\35\ 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.
[GRAPHIC] [TIFF OMITTED] TN26AP24.099

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.\36\
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\36\ National Association of Realtors, Green MLS Implementation
Guide, https://green.realtor/sites/files/2019-02/2014%20NAR%20Green%20MLS%20Implementation%20Guide.pdf.
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The importance of this initiative cannot be understated. A key
concern from the housing, financing and appraisal industries has been
the lack of

[[Page 33127]]

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.'' \37\
---------------------------------------------------------------------------

\37\ Doyle, Victoria and Bhargava, Abhay, The Role of Appraisals
in Energy Efficiency Financing, Building Industry Research Alliance,
National Renewable Energy Laboratory.
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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.\38\ 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.\39\
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\38\ 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.
\39\ 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.\40\ 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.''
---------------------------------------------------------------------------

\40\ 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

[[Page 33128]]

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

[[Page 33129]]

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

[[Page 33130]]

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\
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\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.
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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\
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\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

[[Page 33131]]

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

[[Page 33132]]

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

[[Page 33133]]

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.\49\
---------------------------------------------------------------------------

\49\ 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.\50\ 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.
---------------------------------------------------------------------------

\50\ 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.

---------------------------------------------------------------------------

[[Page 33134]]

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).\51\ 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.\52\
---------------------------------------------------------------------------

\51\ https://www.energycodes.gov/sites/default/files/2021-07/2021_IECC_Final_Determination_AnalysisTSD.pdf.
\52\ 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 of compliance, costs of materials,
and quantity of materials. However, the differences between these the
PNNL and Home Innovation estimates are unusually large: HUD and USDA
attribute such a large difference to two factors: Home Innovation's
assumption of a high profit margin and differences between the
configuration of the model homes used by PNNL and Home Innovation
respectively.
The representativeness of the Home Innovation and PNNL data are not
equivalent. The set of prototypes PNNL uses in its analysis are
designed to represent the majority of the new residential building
construction stock in the United States using a combination of U.S.
Census, RECS, and Home Innovation data. DOE's established methodology
uses a suite of representative residential prototype buildings,
including a single family and a low-rise multifamily residential
building, each with four different foundation types (i.e., slab-on-
grade, vented crawlspace, heated basement, unheated basement) and four
heating system types (i.e., gas furnace, electric resistance, heat
pump, fuel oil furnace). The Standard Reference House by Home
Innovation is primarily based on the results of the 2008-2009 Annual
Builder Practices Survey (ABPS). The ABPS is an annual national survey
of builders that gauges national and regional building practices and
material use. This survey represents a comprehensive source of general
housing characteristics in the United States and contains information
on building square footage, wall square footage, climate-based
foundation type, climate-based wall construction type, and other
residential construction characteristics. The parameters represent the
average (mean) values from the survey for building areas and features
not dictated by the 2006 IECC.
The Home Innovation study calculates the unit cost of any change
and adds to that an overhead and profit premium of approximately 27
percent. For example, the incremental cost to the builder of installing
a square foot of ceiling insulation is 59 cents per square foot, which
is derived by inflating the 46-cent incremental cost by the overhead
premium. The total incremental cost to the producer is given by the
inflated unit cost of 59 cents and the quantity (1,875 square feet of
ceiling insulation) to settle on an estimate of $1,106. The cost paid
by the consumer is assumed to be the cost to the producer plus a return
of 23.5 percent on the change in costs. The cost to the consumer of
requiring thicker ceiling insulation would then be $1,366 (1.235 x
$1,106).\53\ Adding these markups on incremental costs would inflate
the cost estimate by 57 percent (1.27 x 1.235).
---------------------------------------------------------------------------

\53\ HUD expects that builder profits would diminish rather than
increase from this regulation. The NAHB implies the reverse: that
the increase in revenue is greater will be greater than the cost. It
is more likely that profit rates will fall.
---------------------------------------------------------------------------

The design of the home plays a role by determining the quantity of
insulation. The model single family homes of PNNL are similar in terms
of living space (floor area). The Home Innovation model is less dense,
however, and has more of its floor area in the first floor than the
second floor. A low-density design leads to larger areas exposed to the
exterior and in need of insulation. For example, although the floor
area of the Home Innovation home is only 5 percent greater, the ceiling
area requiring insulation is 56 percent greater.
The profit assumption combined with the design of the home would
lead to cost estimates approximately 2.2 times larger than the PNNL
analysis. (The PNNL cost estimates include a 15 percent overhead and
profit.)
While HUD and USDA continue to rely on PNNL construction cost
estimates, the agencies recognize that construction costs have
increased since the original analysis was conducted of the 2021 IECC.
Accordingly, a supply chain cost increase factor of 37 percent has been
applied to the incremental cost of adopting the new code to account for
the increase in inputs for residential construction over the 2020-23
period. The 37 percent increase is derived by from the Bureau for Labor
Statistics' Producer Price Index for inputs to residential construction
less energy and cited by the NAHB in their monthly Eye on Housing
blog.\54\ Tables 13-15 in the Final Determination have been updated to
reflect this cost increase.
---------------------------------------------------------------------------

\54\ Producer Price Index Report, https://www.bls.gov/news.release/ppi.nr0.htm. See NAHB, Eye on Housing, Building
Materials Prices Fall for Second Month Straight, https://eyeonhousing.org/2023/06/building-materials-prices-fall-for-second-month-straight/.
---------------------------------------------------------------------------

2. Builder vs. Consumer Costs
One commenter asserted that the PNNL analysis relied on by HUD and
USDA is based on costs experienced by the builder and does not account
for the full costs experienced by the homeowner, including mark-ups
such as builder profit margin.
HUD-USDA Response: Profit margin is already included in the DOE/
PNNL Methodology. The PNNL methodology for evaluating the impacts of
building energy codes defines first cost as the marginal retail cost of
implementing a

[[Page 33135]]

code change. This includes the price experienced by the home buyer,
including materials, labor, equipment, overhead, and profit. A factor
of 15 percent is included for overhead and profit.
3. Reliance on Simple Payback vs. Life Cycle Cost Savings
Another commenter cited an independent cost analysis by ICF of the
Home Innovation report. The ICF analysis concluded that the Home
Innovation analysis only evaluates cost effectiveness with a simple
payback metric, which ignores many longer-term factors in the economic
performance of an energy efficiency investment.
HUD-USDA Response: Beyond the specific figures cited by the
commenter, the Home Innovation cost analysis is based solely on a
simple payback metric which divides an incremental cost by the
associated consumer cost savings to identify the time, typically in
number of years, required to ``pay back'' the initial investment. While
being a straightforward metric and relatively simple to calculate, it
is not deemed sufficient to capture the full range of costs and
benefits experienced by the home buyer. A life-cycle cost analysis is
preferred as the widely accepted means of evaluating incremental costs
of construction, including updated building energy efficiency
standards, against expected consumer cost savings. The life-cycle
approach accounts for the incremental costs of construction and
consumer cost savings, as well as other costs and impacts experienced
by the homeowner, including maintenance and replacement costs
associated with a given measure. The Congressionally-recognized energy
code development and consensus bodies, the International Code Council
(ICC) and ASHRAE 90.1, both rely upon a life-cycle based approach for
evaluating the cost impacts of their updated codes. As the Home
Innovation analysis relies solely on simple payback, it is not directly
comparable to the life-cycle cost analysis developed by PNNL and used
in this notice by HUD and USDA. That said, USDA and HUD do include
simple paybacks in their analysis, but provide it as a supplemental
rather than primary measure of affordability.
4. Financing and Economic Factors Do Not Reflect Current Market
Conditions
Several commenters raised concerns about certain economic factors
used for the cash flow and Life Cycle Cost savings analysis in the
preliminary determination and the RIA. The main concerns were with
savings estimates, interest rates, down payments, discount rates,
payback period, and applicability for typical FHA and USDA borrowers.
One commenter suggested that HUD and USDA should conduct additional
analysis on the costs of compliance for their federal programs.
Commenters stated that the PNNL analysis assumed an inflation rate of
1.4 percent and a mortgage rate of 3 percent while, as of July 2023,
the inflation rate is 3.0 percent and mortgage rates are 6.97 percent.
They also stated that the PNNL use of a 12 percent downpayment does not
reflect the average downpayment for an FHA or USDA borrower, which are
stated as 4.5 percent and zero percent respectively.
One commenter also suggested the cost effectiveness analysis used
in the preliminary determination does not reflect the typical FHA and
USDA borrowers for single family homes. The commenter suggested that
``HUD and USDA should conduct an independent analysis of the cost
impact on the typical lending profiles for the borrowers that use their
programs and customize the analysis to represent their clients more
accurately.''
HUD-USDA Response: Regarding comments received on the economic
factors used in the analysis, HUD and USDA address the effect of the
relationship between the mortgage interest rate and the consumer's
discount rate on mortgage affordability on page 31 of the RIA.
Additionally, HUD and USDA did consider the differences in monthly
mortgage payments and insurance premiums between HUD and USDA borrowers
and the average borrower in PNNL's analysis. See pages 33-43 of the RIA
for cash flow impacts to FHA and USDA borrowers.
At the same time, the agencies understand the significance of
COVID-19 and global supply chain issues on factors such as inflation,
interest rates, and energy prices. This issue is not unique to this
final determination, as the ICC and DOE have also updated the economic
factors proposed for determining the cost effectiveness of the 2024
IECC, as outlined below in Table 7.\55\ These factors were agreed to by
all stakeholders in the consensus process, including the home building
industry.
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\55\ 2024 IECC Residential Cost Effectiveness Analysis Proposal,
https://www.iccsafe.org/wp-content/uploads/IECC_res_cost_effectiveness_proposal_final.pdf.
[GRAPHIC] [TIFF OMITTED] TN26AP24.100

[[Page 33136]]

HUD and USDA have used similar or equivalent sources, updated to
reflect 2023 costs and fuel price escalators and mortgage interest
rates to revise the economic factors used in the preliminary
determination's affordability analysis to reflect current market
conditions (Tables 13-16). This acknowledges the unusual circumstances
of the recent four-year 2020-23 period, both with regard to increased
mortgage interest rates as well as COVID-related supply chain shortages
and associated cost increases. With these revisions, HUD and USDA have
adopted a modified DOE methodology for the analysis. The analysis is
based on the original cost effectiveness results from PNNL; however, it
has been updated as described in response to several public comments.
The economic parameters that have been revised are listed below in
Table 8.
[GRAPHIC] [TIFF OMITTED] TN26AP24.101

These revisions better reflect impacts on HUD and USDA borrowers
and also account for the higher cost of construction materials and
labor, as well as increased energy prices over the past three years, as
follows:
Economic Factors:
Construction cost increase (2020-23). A supply chain cost
increase factor of 37 percent has been applied to the incremental cost
of adopting the new code to account for the increase in residential
construction costs 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.\56\
---------------------------------------------------------------------------

\56\ ``Building Materials Prices Fall for Second Month
Straight,''[bond] Eye On Housing, https://eyeonhousing.org/2023/06/building-materials-prices-fall-for-second-month-straight.
---------------------------------------------------------------------------

Energy price increase (2020-22). An energy price increase
factor was developed by averaging price for electricity, natural gas,
and heating oil for 2020 through 2022. The three-year averages were
used to establish the rate of increase based on PNNL's original energy
prices for each source. Finally, 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.\57\
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\57\ EIA, Natural Gas Prices: Average Residential Price, https://www.eia.gov/dnav/ng/ng_pri_sum_a_EPG0_PRS_DMcf_a.htm; Heating Oil
Prices: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=M_EPD2F_PRS_NUS_DPG&f=M; Electricity
Prices: Electricity data browser--Average retail price of
electricity, https://www.eia.gov/electricity/data/browser/#/topic/
7?agg=0,1&geo=vvvvvvvvvvvvo&endsec=vg&linechart=~ELEC.PRICE.US-
RES.A&columnchart=ELEC.PRICE.US-ALL.A&map=ELEC.PRICE.US-
ALL.A&freq=A&start=2001&end=2022&ctype=linechart<ype=pin&rtype=s&pi
n=&rse=0&maptype=0.
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Energy price escalator. A new fuel price escalator is
used, based on the estimated 30-year trends in the Energy Information
Administration's (EIA) 2023 Annual Energy Outlook.\58\ While the energy
price increase reflects historical increase in energy prices from 2020-
23 and is used to estimate first year energy savings, the energy price
escalator estimates future changes to energy prices over the full
period of the analysis, changing the price for future years to align
with the expected movement in energy prices over the 30-year mortgage.
The escalator is set based on the projections with prices in nominal
dollars.
---------------------------------------------------------------------------

\58\ EIA, U.S. Energy Information Administration--EIA--
Independent Statistics and Analysis, https://www.eia.gov/outlooks/
aeo/data/browser/#/?id=3-AEO2023®ion=1-
0&cases=ref2023&start=2021&end=2050&f=A&linechart=ref2023-
d020623a.3-3-AEO2023.1-0~ref2023-d020623a.5-3-AEO2023.1-
0&map=ref2023-d020623a.3-3-AEO2023.1-0&ctype=linechart&sourcekey=0.
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Cash Flow and Financing Factors:
Mortgage interest rate. A 5.3 percent nominal mortgage
interest rate has been adopted, using DOE's established cost
effectiveness methodology. HUD and USDA have based their analysis and
the economic parameters on DOE's methodology wherever possible, despite
incorporating some modifications to reflect the current economic
landscape.
Discount rate.\59\ A 5.3 percent nominal discount rate (3
percent real discount rate) has been adopted for the purpose of this
Notice. 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. Mortgage payment is an

[[Page 33137]]

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.
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\59\ Methodology for Evaluating Cost-Effectiveness of
Residential Energy Code Changes, U.S. Department of Energy, https://www.energycodes.gov/sites/default/files/2021-07/residential_methodology_2015.pdf.
---------------------------------------------------------------------------

Down payment. Down payment has been revised from 12
percent used by PNNL to 5 percent to better reflect the HUD and USDA
borrower. Note that this is somewhat higher than the minimum down
payment required for FHA-insured mortgages of 3.5 percent, but the
average down payment for new construction loans is somewhat higher than
the minimum.
Other closing costs. A 1.75 percent upfront mortgage
insurance premium (MIP) to reflect current FHA requirements, a 0.55
percent annual MIP, and one percent variable closing costs are also
included in the analysis.
FHA Typical Home Adjustment Factor. An FHA cost adjustment
factor and an FHA savings adjustment factor of 5 percent and 3 percent
respectively were added to adjust the PNNL analysis to better reflect
the smaller home size of a typical FHA or USDA property (2,000 sf)
compared to a conventionally financed house modeled by PNNL (2,774 sf).
The relevant tables in the final determination have been updated to
reflect these revised economic factors. Nationally, the updated
economic factors have a minor adverse impact on the affordability of
adopting the 2021 IECC. By way of illustration, Table 9 presents the
new analysis included in the Final Determination using the revised
economic factors (Table 13).
[GRAPHIC] [TIFF OMITTED] TN26AP24.102

The revised economic factors provide a revised estimate of average
costs and benefits as outlined in the preliminary determination, both
nationally and for individual climate zones. The average per-unit
incremental cost increases to $7,229 (compared to $5,555 in the
preliminary determination) due to the supply chain cost increase factor
of 37 percent; however, the increase is moderated by the inclusion of
the 5 percent FHA cost reduction factor to reflect the smaller FHA-
sized house relative to the larger market as described above. Estimated
annual energy savings increases to $963 (compared to $751 in the
preliminary determination) due to the energy price increase factor of
32 percent. Net life cycle cost savings become $15,071. With these
revisions, simple payback period increases slightly from 7.6 years
shown in the preliminary determination to 7.7 years in the final
determination. Due to the revised down payment rate of 5 percent
reflecting the average FHA borrower's downpayment, years to positive
cashflow is reduced to 1.5 years (compared to 2 years in the
preliminary determination). Accordingly, HUD and USDA's analysis still
demonstrates the affordability of the 2021 IECC.
5. Timeframe of Analysis
One commenter recommended calculating energy cost savings over the
economic lifespan of a building, which is 75 years, instead of over a
typical 30-year mortgage period, which would show greater energy cost
savings.
HUD-USDA Response: HUD and USDA based the lifetime of the
investment for the preliminary determination on the typical length of a
mortgage, which is 30 years. This is the well-established cost estimate
methodology established by DOE in consultation with the ICC and
associated stakeholder input. The commenter is correct, and HUD and
USDA agree, that these improvements will yield improved home quality
and energy efficiency well beyond the 30 years, potentially for the
life of the building, but there are no established estimates for
accurately or reliably estimating these longer-term benefits. It is
also likely that homeowners will upgrade their homes with more
efficient equipment or improved building measures such as higher
performance windows. While DOE's analysis includes replacement costs
over the period of a typical mortgage, estimates of efficiency gains
beyond that period are not included in the modeling here.

D. Impact of Manually Operated Bathroom Fans Allowed Under the IECC on
Indoor Air Quality and the Health of Occupants

HUD and USDA requested comments on anecdotal reports that because
manually operated bathroom fans allowed under the IECC to meet
ventilation requirements rely on occupant action to operate them, these
may impact indoor air quality and the health of occupants.
There were no comments, supportive or otherwise, that directly
addressed the possible health concern caused by the use of manually
operated bathroom fans to meet IECC ventilation requirements.

[[Page 33138]]

However, several comments were received on moisture management, and
ventilation issues. One commenter reiterated the importance of moisture
management in energy efficient buildings and recommended the use of
energy recovery ventilation (ERV) or heat recovery ventilation (HRV)
equipment. Another commenter indicated that ``HUD must ensure that that
the benefits of the proposed standards do not come at the expense of
resident health,'' noting that updated energy codes require more
tightly sealed envelopes that, if not accompanied by appropriate and
well-maintained ventilation, may create the risk of moisture retention
and mold, accumulation of indoor air pollutants, and other causes of
building related illness. The commenter proposed that HUD should
``fully fund and vigorously implement'' time-of-construction
inspections to enforce ventilation requirements such as ASHRAE 62.1 and
62.2, as well as on-going NSPIRE inspections.
HUD-USDA Response: HUD and USDA share the commenter's commitment to
resident health in energy efficient buildings. The 2021 IECC sets
maximum air leakage of 5.0 ACH50 (5 air changes per hour) or 0.28 CFM/
sf as measured by a blower door test, or 3.0ACH50 when following
prescriptive requirements (allows for 0.30 CFM/sf enclosure area for
attached dwelling units and buildings that are 1,500 sf or smaller).
The IECC requires compliance with Section M1505 of the International
Residential Code (IRC), which sets minimum ventilation rates for whole
house ventilation systems as well as local exhaust rates. ASHRAE 90.1
for multifamily buildings references ASHRAE 62.2, Ventilation and
Acceptable Indoor Air Quality in residential buildings.
Regarding energy or heat recovery systems, the 2021 IECC requires
such systems for Climate Zones 7 and 8 (colder climate zones), but
these are optional in other climate zones. Heat Recovery Systems (HRVs)
supply continuous fresh air from outside the home and recover between
60-95 percent of heat in exhaust air, thereby contributing
significantly to the energy efficiency of a building. Energy Recovery
Systems (ERVs) can exchange both heat and moisture, thereby keeping
humidity levels relatively stable.

E. Potential Fire Code Issues Associated With Air-Sealing Requirements
for Attached Single Family Homes or Low-Rise Multifamily Properties

HUD and USDA asked for comments on potential challenges to meeting
both the more stringent air sealing requirements introduced in the 2012
IECC (3 ACH 50 in certain climate zones) as well as fire code
specifications in attached row-house, town home or multifamily
settings. This had been identified as a possible barrier when 3ACH 50
was originally proposed in the 2012 IECC.
Several commenters indicated that the 2021 IECC air leakage
requirements of 3 air changes per hour or 5 air changes per hour at 50
pascals depending on the climate zone should not present fire code
issues for single family attached homes or low-rise multifamily
properties. Commenters experienced on the issue indicated that they
have no knowledge of any challenges meeting the 2021 IECC air leakage
requirements and fully complying with the fire code. One commenter
included that 28 states and more localities have implemented the code
without any fire code issues. Another commenter stated that
technologies exist to comply with air leakage and fire code
requirements without challenges.
HUD-USDA Response: Air sealing of area separation wall assemblies
in multifamily buildings had been identified by DOE and others as a
barrier that limits the ability of builders to cost effectively achieve
higher energy efficiency and quality levels in multifamily housing.\60\
---------------------------------------------------------------------------

\60\ Department of Energy, Building America Expert Meeting: Code
Challenges with Multifamily Area Separation Walls, 2015.
---------------------------------------------------------------------------

Air leakage through these assemblies could also be a barrier to
achieving air leakage limits mandated by the IRC and IECC. More
specifically, fire blocking sealants approved for use to seal framing
penetrations within a dwelling are not allowed to be used to seal the
perimeter of \3/4\ inch air space required in UL 263 (also ASTM E119)
area separation walls. This unsealed perimeter condition makes these
walls porous to airflow coming from the exterior or from attached
garages.
Training materials from the Energy Efficient Building Association
(EEBA) also indicate that the 3 ACH 50 air sealing requirement may be a
challenging target for townhomes or where there are common walls
between units, and that there is a lack of clarity in how to air seal
the wall between these units without violating the fire-rated
assembly.\61\ EEBA indicated that there have been some breakthroughs
recently with retesting fire-rated wall assemblies with specific foams
and sealants to show that they will perform, and several options are
now listed in the UL database. Based on the comments received, this
issue seems to have been resolved.
---------------------------------------------------------------------------

\61\ Energy Efficient Building Association (EEBA), Air Sealing
Requirements for IECC 2021 with Building Code Expert Joe Nebbia;
Excerpts from Module 6 of an 8-Part IECC 2021 Code Series, https://www.eeba.org/air-sealing-requirements-for-iecc-2021-with-building-code-expert-joe-nebbia.
---------------------------------------------------------------------------

F. Time Required for Builders and Building Designers To Familiarize
Themselves With the New Codes and Training or Technical Support That
May Be Required

HUD and USDA requested comments on the time required for builders
and building designers to familiarize themselves with the new codes,
the training or technical support that may be required by building
professionals and local code officials on the new requirements of the
2021 IECC and ASHRAE 90.1-2019 standards, workforce training needs, and
any other issues related to implementation of these standards. Comments
on particular challenges or issues facing rural areas in adoption and/
or implementation of these codes were also requested.
1. Implementation Timeline
Several commenters indicated that HUD and USDA should implement the
new 2021 IECC and ASHRAE 90.1-2019 standards in a way that accommodates
time requirements, training and technical support requirements, and
other issues necessary for builders and building designers to meet the
new codes.
One commenter noted that implementation of these standards has
already begun in certain states and localities. One commenter suggested
that the implementation timeline should align with state activities and
federal incentives to best ensure the intended benefits are achieved.
Another commenter suggested that an implementation timeline of at least
two years be adopted to enable builders and code enforcement officials
to become familiar with the new standards.
Some of the commenters suggested approaches to most easily support
the implementation of the 2021 IECC and ASHRAE 90.1-2019 standards.
Several commenters advised HUD and USDA to recognize and consider key
market dynamics, including supply chain issues and contractor education
and training in the development of an implementation timeline. One
commenter suggested that HUD and USDA should clarify compliance
requirements for builders and conduct training for builders,
developers, designers, and construction workers on the new codes.

[[Page 33139]]

One commenter suggested that extending the implementation timeline,
particularly for FHA-insured and USDA-guaranteed loans, would improve
the implementation process of the new requirements. The commenter
stated that such an extension may be necessary to align the proposed
HUD and USDA requirements with the Inflation Reduction Act section
50131 funding, which serves to assist jurisdictions in the adoption and
effective implementation of energy codes that meet or exceed the 2021
IECC.
HUD-USDA Response: HUD and USDA agree that the implementation time
period for new editions of the codes needs to have some flexibility to
allow for proper training and education of builders on the requirements
of the most recent editions of the IECC and ASHRAE 90.1. Note, however,
such training is already offered by, for example, the Regional Energy
Efficiency Organizations (REEOs), such as SPEER in Texas and Oklahoma,
and there are already builders that are using these codes. Some states
have also already required them or exceeded them. In addition, DOE is
offering new funding for energy codes training for the building
industry, states, and local municipalities.
HUD and USDA also agree that alignment with existing or new sources
of funding that can assist in the effective implementation of the
energy codes will be useful. This transition will have some learning
curves. The agencies anticipate gradual adoption beginning for some
programs at the publication of this notice and full implementation
within all programs covered by this final notice by the date of January
1, 2025, or later for certain programs.
HUD and USDA also agree that there is a need to align federal
incentives that can assist builders to become trained in these codes.
HUD and USDA are working with DOE and the states to leverage the
unprecedented levels of funding through the Bipartisan Infrastructure
Law (BIL) and Inflation Reduction Act (IRA) to support builders and
developers in complying with the 2021 IECC and ASHRAE 90.1-2019
standards proposed in this notice. This funding includes $225 million
in BIL funding for state agencies to partner with key stakeholders,
such as local building code agencies, codes and standards developers,
and associations of builders and design and construction professionals
to update their building codes. In addition, another $1 billion in IRA
funds is available to support states, territories, and jurisdictions
with the authority to adopt energy codes in adopting and implementing
the latest energy codes and zero energy codes.
DOE has already released funding in advance of this notice to
support the training of builders in these codes. As part of the $225
million in BIL funding, DOE announced $90 million as Resilient and
Efficient Codes Implementation (RECI) competitive grant awards in July
2023 to help states and partnering organizations implement updated
building energy codes. This funding is the first installment of a 5-
year program established to support building energy code adoption,
training, and technical assistance at the state and local levels.
Twenty-seven awards were made in 26 states.\62\ In addition, in
September 2023 DOE announced another $400 million in IRA formula funds
to the states to implement energy codes; $240 million will be available
to adopt and implement the latest building energy code, the 2021 IECC
for residential buildings and ANSI/ASHRAE/IES Standard 90.1-2019 for
commercial buildings, or other codes that achieve equivalent or greater
energy savings.\63\ HUD and USDA will work with DOE and its grant
recipients to leverage technical assistance and training for builders,
developers, and others involved in building HUD- and USDA-financed
housing.
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\62\ https://www.energy.gov/articles/biden-harris-administration-announces-90-million-support-resilient-and-efficient-building.
\63\ $160 million will be available to adopt and implement the
zero energy provisions in the 2021 IECC, or other codes with
equivalent or greater energy savings. https://www.energy.gov/articles/biden-harris-administration-announces-400-million-states-improve-building-energy.
---------------------------------------------------------------------------

In addition to the BIL and IRA funds awarded to states to advance
adoption of more current energy codes, including the 2021 IECC and zero
energy codes, HUD and USDA anticipate a significant increase in the
number of new homes certifying to Energy Star New Home or ZERH
standards as builders take advantage of the Section 45L tax credits of
up to $2,500 and $5,000 that are now available to build to these
standards. Building to these standards will automatically comply with
2021 IECC requirements. For multifamily, 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 now
available as well, when builders comply with prevailing wage
requirements.
Some affordable housing builders of rental housing are already
building to higher energy standards as required by state, federal, or
local affordable housing funding streams. A significant driver of
affordable housing is the Low-Income Housing Tax Credit, administered
by the states. Some states set their energy requirements to exceed
prevailing state codes in their Qualified Allocation Plans (QAPs);
housing developers who take advantage of such funding are already well
versed in meeting higher level energy codes than the baseline.
Regarding comments that HUD and USDA should align its
implementation timeline requirements with state code adoption
timetables, states follow a wide range of schedules and procedures when
considering adoption of the new editions of the codes. States adopt
building codes on their own timelines, with some achieving or exceeding
the code levels of energy efficiency and others not adopting any code
at all. The statutory requirement governing this notice does not
provide for HUD and USDA adoption of prevailing state standards but
sets the 2021 IECC and ASHRAE 90.1-2019 as published by the relevant
code bodies as the required standard for the covered programs.
2. Need for Training and Technical Assistance
Several commenters stated the need for training on the 2021 IECC
and ASHRAE 90.1-2019 standards to limit the potential gap between the
efficiency levels required in the standards and the efficiency levels
achieved in the field. One commenter stated that a lack of training can
result in poor implementation of the code and cause unintended building
performance and compliance issues.
One commenter referenced a DOE study that found proper training for
code officials and the construction community can reduce energy costs
by an average of 45 percent due to varying levels of compliance with
the codes. Another commenter suggested that HUD and USDA provide free
code books and workbooks as part of the training and technical
assistance for builders and building designers to alleviate the cost
concerns related to training materials and resources. One commenter
suggested that HUD and USDA should offer a comprehensive, no-cost
training program to ensure equal access to the material necessary to
comply with the new standards. The commenter also suggested that the
Federal government should cover the cost of any technical training or
equipment necessary for nonprofit housing developers to meet the new
standards.
HUD-USDA Response: As with any code update, training is indeed an
important issue, particularly for changes that include fundamental
changes in technology, materials, or practices. In

[[Page 33140]]

updating to the 2021 standard, the primary focal points will be wall
insulation, mechanical systems, and envelope air tightness. Due to the
outdated nature of the 2009 IECC, many of these transitions and
practices are already happening across the country. Recent energy code
field studies, including those conducted by DOE in the 2014 through
2023 timeframe, indicate that higher insulation values, better windows,
more advanced mechanicals, and tighter envelopes are already
commonplace due to natural market forces and advancements in building
products.
Even with this being the case, HUD and USDA will develop training
materials and offer training to builders, developers, and lenders
through guidance materials and webinars to support the implementation
of these new standards, as described in detail in section A.2. above.
3. Enforcement and Compliance
Several commenters emphasized the need to prioritize enforcement of
the standards upon enacting the new requirement to ensure the new
requirements are being met. One commenter suggested allowing builders
to demonstrate compliance through DOE's REScheck code compliance tool.
One commenter suggested that HUD and USDA should ensure ventilation
maintenance meets the higher standard required in tightly sealed
buildings. One commenter suggested that HUD and USDA provide technical
assistance to state and local officials to support enforcement. One
commenter suggested that HUD and USDA should conduct a post-
implementation study to assess compliance and enforcement over the
first one to two years of the new requirements.
HUD-USDA Response: HUD and USDA agree that enforcement of the
standards will be important in ensuring compliance with the standard.
The agencies are anticipated to rely on self-certification that
builders and developers will comply with the code requirements
specified in this notice. For single family FHA-insured properties, FHA
employs self-certification requirements for many of their policies and
program requirements and may pursue enforcement for any false claims or
false statements made. Enforcement can include criminal penalties,
civil penalties, or both.
For FHA single family new construction, in HUD-92541, HUD already
requires the builder to certify that the new construction meets or
exceeds the 2009 IECC; this certification will be updated for the 2021
IECC.\64\ HUD will update the Minimum Property Standards referenced in
HUD-92544 with a conforming amendment to align with the requirements of
this notice; HUD is the final adjudicator of whether a defect exists
and whether the remedy is required.\65\
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\64\ HUD Builder Certification, https://www.hud.gov/sites/dfiles/OCHCO/documents/92541.pdf.
\65\ https://www.hud.gov/sites/dfiles/OCHCO/documents/92544.pdf.
---------------------------------------------------------------------------

Certainly, REScheck is a tool that can be used to demonstrate
compliance; it is a DOE-supported tool for builders, designers, and
contractors to quickly and easily determine whether new homes,
additions, and alterations meet the requirements of the IECC or a
number of state energy codes. REScheck also simplifies compliance
determinations for building officials, plan checkers, and inspectors by
allowing them to quickly determine if a low-rise residence meets the
code.
Note that REScheck is set up for building envelope-related
insulation and window trade-off calculations in residential single
family and low-rise multifamily buildings only; it is not used for the
IECC performance path, which relies on other energy modeling tools,
e.g., HERS or IC3. REScheck works by performing a simple U-factor x
Area (UA) calculation for each building assembly to determine the
overall UA of a building. The UA that would result from a building
conforming to the code requirements is compared to the UA for the
building constructed. If the total heat loss (represented as a UA)
through the envelope of a building does not exceed the total heat loss
from the same building conforming to the code, the software generates a
report that declares the building is compliant with the code.

G. Impact and Duration of COVID-Related Supply Chain Challenges for
Certain Products and Materials, Particularly But Not Exclusively for
Lumber Products

HUD and USDA's preliminary determination acknowledged the
construction industry's experience with COVID-related supply chain
challenges for certain products and materials, particularly but not
exclusively for lumber products, leading to significant price increases
in such products as framing lumber, plywood, and oriented strand board
(OSB). The agencies solicited comments on the duration, persistence and
intensity of these price increases, the extent to which they may impact
the cost of energy related products or materials covered by the IECC or
ASHRAE 90.1 energy codes addressed in this notice, and to what extent
these supply chain issues may impact implementation of the codes
addressed by this notice.
One commenter affirmed the insulation industry's ability to meet
any increase in demand as a result of requiring the 2021 IECC and
ASHRAE 90.1-2019 standards.
Two commenters expressed concern for the construction industry's
ability to meet the additional demand caused by HUD and USDA's
requirement of the 2021 IECC and ASHRAE 90.1-2019 standards. A
commenter stated that additional code requirements will exacerbate the
existing stresses for homebuyers and developers, which include market
scarcity, rising prices, high interest rates, increased construction
costs, labor shortages, and limited subsidies.
One commenter stated their concern with construction costs
continuing to rise which impacts affordability on top of supply
shortages for required materials such as windows, insulation, and other
components. The commenter highlighted the fact that HUD's National
Housing Market Summary for the first quarter of 2023 indicated that
rising construction costs are expected to have an ongoing impact on the
affordability of rental housing. Another commenter suggested that the
agencies create a right of review on a case-by-case basis for builders
unable to source required building materials.
HUD-USDA Response: HUD and USDA recognize that there were
significant cost increases in certain construction materials resulting
from specific COVID-related supply chain shortages, as well as
inflation. The agencies have included a construction cost increase
using the Bureau of Labor Statistics Producer Price Index (PPI) of 37
percent, as cited by the NAHB.^{66 67} This reflects cost
increases for residential construction during the 2020-23 period. While
this additional cost increase adds to the initial first cost of
complying with the 2021 IECC, this does not impact the overall
affordability of the investment, as shown in Tables 13-16 of this final
determination.
---------------------------------------------------------------------------

\66\ BLS, Producer Price Index Commodity Data, One-Screen Data
Search, https://data.bls.gov/PDQWeb/wp. [Under Select a Group,
select ``IP Inputs to industries''; under Select one or more Items,
select ``IP23110013 Inputs to residential construction, goods less
foods and energy.''
\67\ Building Materials Prices Fall for Second Month Straight,
Eye On Housing, https://eyeonhousing.org/2023/06/building-materials-prices-fall-for-second-month-straight/.
---------------------------------------------------------------------------

With regard to material shortages including windows and insulation
and

[[Page 33141]]

their potential impact on builders' ability to comply with the latest
editions of the codes, HUD and USDA recognize that some materials may
be in short supply and may cause construction delays, but have been
unable to determine the scale and scope of such shortages nationwide.
In addition, the 2021 IECC and ASHRAE 90.1-2019 do not require
specialized materials that are not already required for previous
editions. According to one recent report, the hardest insulation
material to procure has been polyiso insulation, a closed-cell, rigid
foam board typically used for roofing--as a result of 2021's winter
storm Uri that disrupted the supply chain of MDI, one of the raw
materials that goes into polyiso insulation material.\68\ That resulted
in a shortage of insulation materials starting in February 2021. In
other parts of the country, COVID-19 and transportation issues strained
supply. However, the report cites industry sources report that lead
times for items like fiberglass insulation and spray foam insulation
have improved in recent months.
---------------------------------------------------------------------------

\68\ Construction Dive, Construction's supply chain outlook:
more shortages, price hikes ahead, November 2022 https://www.constructiondive.com/news/supply-chain-construction-building-materials-price-2023/636442/.
---------------------------------------------------------------------------

HUD and USDA recognize that shortages may arise as a result of
COVID-19 supply chain issues. If shortages arise that prevent builders
from meeting the IECC 2021 and ASHRAE 90.1-2019 requirements, builders
should contact HUD or USDA with information on the product shortage.
HUD and USDA will consider alternate materials based on the agencies'
review of available materials. In addition, HUD and USDA will publish a
list of possible material shortages and provide options for builders to
comply with the codes.

H. Alignment With Green Building Standards and Alternate Compliance
Paths

The preliminary determination noted that HUD and USDA currently
provide incentives or require green building standards for some
programs and their interest in maximizing alignment between the 2021
IECC and ASHRAE 90.1-2019 and these green building standards.
Recognizing that there might be a lag time between the publication of
the current editions of the IECC and ASHRAE 90.1 and their
incorporation in these green building standards, the agencies requested
comments on the current minimum IECC and ASHRAE 90.1 requirements in
these standards, and/or the timetable for adopting the 2021 IECC and
ASHRAE 90.1-2019 as baseline requirements.
One comment was received on the specific question of the baseline
energy code established in third-party green building standards but
several comments were submitted as to how these or other standards
could be used as alternative compliance paths for the 2021 IECC and
ASHRAE 90.1-2019 requirements of this notice. Several commenters who
expressed their support for the preliminary determination provided
suggestions for certification alternatives to meet the 2021 IECC and
ASHRAE 90.1-2019 standards. One commenter emphasized that any
alternative compliance pathways must enforce equivalent building
envelope standards to those required by the 2021 IECC and ASHRAE 90.1-
2019. One commenter stated that third-party certifications are an
essential part of expanding access to HUD and USDA financing in markets
where there may be a lack of certified inspectors or inspectors who are
trained on an amended energy code that does not meet the program
requirements.
1. Alternative Compliance Pathways
One commenter stated that third-party certifications are an
essential part of expanding access to HUD and USDA financing in markets
where there may be a lack of certified inspectors or inspectors who are
trained on an amended energy code that does not meet the program
requirements. Several commenters proposed that HUD and USDA accept
specific green building or energy code standards. One commenter
proposed an alternative compliance pathway of ENERGY STAR v3.1.
One commenter suggested HUD and USDA accept the following as
alternative compliance pathways: ENERGY STAR Certified Homes, DOE Zero
Energy Ready Homes, ANSI/RESNET/ICC standard 301, Enterprise Green
Communities, ENERGY STAR Indoor Air Plus, LEED, Living Building
Challenge, and Passive House. Multiple commenters proposed an
alternative compliance pathway of the National Green Building
Standards.
One commenter suggested HUD and USDA recognize the Home Energy
Rating System (HERS) Index as an alternative compliance pathway. The
commenter suggested adopting a threshold of a HERS Index Score of
either 60, as used by Freddie Mac for their Single Family Green
Mortgage-Backed Securities program, or 57 as the equivalent index to
IECC 2021. Another commenter proposed an alternative compliance pathway
of a HERS Index Score of 57 or lower.
One commenter suggested that HUD and USDA accept third-party energy
and green building certifications as alternative energy compliance
methods. Two commenters suggested that HUD and USDA move towards the
adoption of an all-electric new construction standard to achieve zero
carbon new homes for low- and moderate-income communities. The
commenter suggested the adoption of the optional zero-emissions and
zero-energy appendices of the 2024 IECC and adapt the appendixes for
ASHRAE 90.1-2022.
One commenter suggested that HUD and USDA offer the ASHRAE 90.2-
2018 standard as an alternative compliance pathway to the 2021 IECC
standard as it provides more flexibility to satisfy local conditions
and costs while delivering residential building energy performance that
is approximately 50 percent less consumptive than the 2006 IECC
standard and approximately 20 percent more energy efficient than the
2021 IECC standard.
HUD-USDA Response: HUD and USDA appreciate the range of
recommendations for alternative compliance pathways suggested by the
commenters. Most of these pathways conform to the requirements of
meeting and exceeding the 2021 IECC and ASHRAE 90.1-2019. These are
discussed below:
HERS Ratings. With regard to the proposal to accept the
HERS rating as an acceptable alternative, HUD and USDA recognize the
important role that the HERS Index plays in rating new homes in the
U.S. A recent RESNET report shows that 330,000 homes received a HERS
rating in 2022. The commenter recommending adoption of the HERS Index
pointed to two states, Massachusetts and Texas, that have adopted the
HERS Index as an alternate compliance path. Texas has adopted a sliding
scale for the HERS Index with graduated increases in efficiency from
2022 to 2028, with a HERS Index of 55-59 required after 2028 for
Climate Zones 2,3,4. These scores are above (i.e., less efficient than)
the 2021 IECC ERI scores of 51-54 for these zones. Massachusetts, on
the other hand, set the required HERS rating at 52, the same as the
2021 IECC.
These alternative HERS ratings do not include the mandatory
requirements of the 2021 IECC; accordingly, HUD and USDA are not in a
position to accept a HERS rating as an alternative to the 2021 IECC but
do recognize the growing importance of this rating as a means to
communicate energy performance better to homebuyers and encourage its
use by builders. The HERS rating is also an integral part of the two
federal above-

[[Page 33142]]

code standards of EPA's Energy Star for Homes and DOE's Zero Energy
Ready Homes, which can earn the 45L tax credit of $2,500 and $5,000
respectively.
Zero Energy or Zero Energy Ready standards: HUD and USDA
are aware of the voluntary IECC zero emission appendix and the new zero
energy appendix to ASHRAE 90.1-2022. While the statute that governs
this notice does not allow the agencies to require an above-code zero
energy standard or zero energy ready standard without an affordability
or availability determination, the agencies encourage builders to
consider building to the standards outlined in these appendices as
published by the ICC and ASHRAE respectively. Adoption of the
appendices is at the builder or developer's discretion.
Additionally, there are IRA funds that support solar and renewable
energy installations including the Greenhouse Gas Reduction Fund and
solar and renewable energy tax credits, which are refundable and offer
greater incentives for low-income communities. HUD and USDA encourage
builders to explore ways to utilize this financing to build zero energy
homes that will, by lowering energy expenditures, assist homebuyers in
achieving long-term homeowner financial sustainability.
Energy Star for New Construction. Energy Star Version 3.1,
the prevailing version of the standard that is nationally required by
EPA as of January 2023, has been modeled to exceed the 2015-2018 IECC
by approximately 10 percent, which on an overall performance basis is
likely to be equivalent or equal to the 2021 IECC. However, the absence
of specific thermal backstop requirements specified in the 2021 IECC
excludes Version 3.1 from serving as a compliance pathway for the 2021
ICC. Version 3.2, however, takes effect January 2025, and will be
accepted by HUD and USDA as an alternate compliance path. Similarly,
Energy Star for Multifamily New Construction Version 1.2 will be
accepted as an alternate compliance path.
DOE Zero Energy Ready Homes Program. The DOE Zero Energy
Ready Homes Program sets rigorous efficiency and performance criteria,
with certified homes capable of offsetting most or all of the home's
annual energy use through a renewable energy system. Single family
homes must achieve Single Family Version 2 certification to be accepted
as an alternate compliance path. Multifamily homes must achieve
Multifamily Version 2 certification, which will be released on January
1, 2025, to be accepted as an alternate compliance path.
Green Building Standards. As noted in the preliminary
determination, HUD specifies a range of green building certifications
through a range of programs, either as an incentive (the Green Mortgage
Insurance Premium) or as a requirement (CDBG-DR). HUD and USDA will
accept a Green Building Certification as a compliance pathway upon
submission and approval by the agencies of evidence that the 2021 IECC
and ASHRAE 90.1-2019; Energy Star Single Family New Construction
Version 3.2 certification or Version 1.2 for Multifamily New
Construction certification; or DOE Zero Energy Ready Homes Single
Family Version 2 or, once released, Multifamily Version 2 have been
established as minimum requirements.
2. Promoting Unvented Attic Spaces
Several commenters suggested HUD and USDA allow for the use of
unvented attics, which provide builders with additional flexibility by
enabling insulation with lower R-values and eliminating thermal losses
from ductwork in unconditioned attic spaces. Two of these commenters
suggested that HUD and USDA adopt the International Residential
Building Code (IRC), which would replace existing references to the
1994 CABO Code and enable the use of unvented attics.
One commenter suggested that to promote the use of unvented attics,
HUD and USDA adopt an alternative compliance pathway for insulating
attics. The commenter suggested an alternative standard for unvented
attics and enclosed rafter assemblies. This included lowering R values
for ceiling insulation in Climate Zones 1-3 to R-22 and in Climate
Zones 4-8 to R-26, requiring blower door tests results of less than 3.0
ACH50 for all climate zones, and other measures.
HUD-USDA Response: While significant efficiency gains can be
achieved by locating all heating and cooling equipment in a property's
conditioned space and providing for unvented attic space, the specific
proposal recommended by the commenter would lower ceiling/roof
insulation levels below those specified in the 2021 IECC and therefore
cannot be accepted as part of the HUD and USDA determination. The
agencies are not able to adopt amendments to the 2021 IECC and must
establish the standard in full as is required by the statute.
Note that the reference by the commenter to the 1994 CABO is
assumed to reference outdated code citations that have not been updated
in HUD regulations; HUD anticipates removing any references to outdated
codes in its regulations as part of its implementation of this
standard.
3. Alignment With Existing State or Local Codes
One commenter suggested that HUD and USDA take local and state
requirements into consideration when finalizing code requirements at
the national level. Two comments were received on how the HUD and USDA
requirements would align with adoption by states of the 2021 IECC with
amendments. One commenter suggested that HUD and USDA accept the IECC
code version adopted by the state where a project is located instead of
requiring the 2021 IECC. Another commenter stated their concern that
implementation of this proposed rule would leave many jurisdictions out
of HUD and USDA programs, including three states that have adopted the
2021 IECC with amendments and would not be in compliance with this
requirement.
HUD-USDA Response: HUD and USDA recognize that states considering
IECC adoption may do so with either weakening or strengthening
amendments. DOE's State Portal analyzes the impact of any amendments to
the site energy index for the energy code adopted by each state. For
example, Idaho adopted the 2018 IECC with amendments and DOE found
these amendments to reduce the efficiency of the 2018 IECC to more
closely resemble the 2009 IECC.
As of December 2023, 42 states and the District of Columbia have
adopted some version of the IECC. Of these states, 33 have adopted the
IECC with amendments. According to DOE's analysis, 24 of these
amendments weaken the efficiency of the code, five do not substantially
alter the efficiency of the code, and four improve the efficiency of
the code.\69\
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\69\ State Portal, Building Energy Codes Program, https://www.energycodes.gov/state-portal. Based on update from 09/29/2023.
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Of the 22 states that are shown by DOE to have adopted the 2009
IECC or its equivalent due to weakening amendments, two states have
adopted the 2012 IECC with weakening amendments, six states have
adopted the 2015 IECC with weakening amendments, nine states have
adopted the 2018 IECC with weakening amendments, and one state have
adopted the 2021 IECC with amendments that have been determined by DOE
to be equivalent to a weaker code. The governing EISA-amended Cranston
Gonzalez statute does not provide for the flexibility of amending

[[Page 33143]]

either code; the statute requires that all housing specified in the
statute ``meet the requirements of the revised code or standard''. (42
U.S.C. 12709(d)). HUD and USDA recognize that many states adopted the
codes with amendments; however, these amendments often impact the
energy efficiency of the code. To comply with the final determination,
all impacted HUD and USDA housing must meet or exceed the energy
efficiency of the 2021 IECC or ASHRAE 90.1-2019 regardless of any
amendments adopted to the code at the state level.
HUD and USDA acknowledge that the code adoption landscape has
changed and will continue to change ahead of the final determination
going into effect. Since the drafting of the preliminary determination,
two states, Connecticut and New Jersey, have adopted the 2021 IECC as
the state requirement. With this in mind, the estimated 150,000 single
family homes and low-rise multifamily units and 16,550 high-rise
multifamily units affected by this notice represents the approximate
number of impacted homes based on average annual production from 2019
to 2021.
4. Proposed Alternative Prescriptive and Performance Compliance
Pathways
One commenter proposed an alternative prescriptive compliance path
framework. This alternative compliance path involves integrating the
expected 2024 IECC ceiling insulation and wall insulation requirements
into the 2021 IECC, as well as a credit system for prescriptive
measures similar to that proposed for the 2024 IECC. The same commenter
also proposed an alternative performance compliance framework for
energy modeling software developers.
HUD-USDA Response: The commenter is proposing an approach that is
not applicable for including in a federal determination. These
amendments are more relevant to the code development process, which has
been discussed in the 2021 and 2024 energy code update cycle, rather
than the code adoption process.
The EISA statute requires HUD and USDA to adopt the code in full,
meaning that the preliminary determination is not an opportunity to
reevaluate the code package itself. HUD and USDA cannot specify an
alternative code that deviates from the published and consensus-based
model energy code, which has gone through a rigorous affordability and
availability analysis in preparation for its proposed adoption. Both
the proposed prescriptive and performance compliance path frameworks
envision modifications to the 2021 IECC that have been proposed or
adopted for the 2024 IECC, e.g., realignment of ceiling and wall
insulation requirements (Prescriptive Framework proposal 2),
establishing requirements for energy modeling software for envelope
backstops (Performance Framework proposal 3).
Once the 2024 IECC is published, it can serve as a viable
alternative to the 2021 IECC for states who choose to adopt the new
code as has been the case for states that have adopted versions beyond
the 2009 IECC over the past decade. The proposed changes would require
modifying the 2021 IECC in a manner that is inappropriate for this
technical review of the 2021 IECC and ASHRAE 90.1-2019 standards. In
addition, changes resulting from these proposed modifications to the
modeling software would likely result in modifications to the
requirements of the 2021 IECC; modifications to the 2021 IECC are
beyond the scope of the statutory requirements that govern this notice.
HUD has provided DOE with the performance modeling framework proposals
for consideration in future code modeling.

I. Additional Comments

1. Veterans Administration Enhanced Loan Underwriting Methods
One commenter suggested that HUD and USDA add a provision for the
recently enacted Department of Veterans Affairs (VA) enhanced loan
underwriting methods to FHA and USDA mortgages.
HUD-USDA Response: This comment references recently enacted
legislation requiring the VA to incorporate energy expenditures when
underwriting VA loans (Consolidated Appropriations Act of 2023, Section
203. Enhanced Underwriting Methods (Pub. L. 117-238). While the
legislation does not specify methodology for addressing energy
efficiency, it will incorporate household energy expenditures into the
Principal Interest Taxes Insurance (PITI) calculation. This is beyond
the scope of this notice, which does not address underwriting methods.
The agencies will track the VA initiative for lessons learned and
applicability to HUD and USDA programs.
2. Incorrect Montana Data
One commenter suggested that the data utilized in the preliminary
determination to produce the energy cost savings and financial impacts
incorrectly utilized the 2009 IECC for the State of Montana instead of
the 2021 IECC, which Montana adopted with exceptions for cost-
prohibitive requirements based on state-specific variables and climate
requirements in June 2022.
HUD-USDA Response: As noted in the preliminary determination, HUD
and USDA use DOE-PNNL assessments of the effective or equivalent code
adopted by a state after weakening amendments. In Montana's case, the
state adopted the 2021 IECC with amendments that reduce the overall
energy efficiency of the code by 10.4 percent. As such, DOE has
determined that Montana's code functionally resembles the 2009
IECC.\70\
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\70\ State Portal, Building Energy Codes Program, https://www.energycodes.gov/state-portal.
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3. Inclusion of Greenhouse Gas Emissions
One commenter suggested that the RIA and the final determination
should not consider the external social value of reducing emissions of
greenhouse gases because the statute does not require its
consideration. In contrast, another commenter suggested that the
preliminary determination may understate the benefits associated with
updating minimum efficiency requirements by not quantifying the non-
energy benefits from improved efficiency as well as the total emissions
reductions.
HUD-USDA Response. Pursuant to OMB requirements, the RIA includes
estimated reduction of carbon emissions and associated savings in the
social cost of carbon. However, HUD and USDA agree that the social
impact of reducing carbon emissions is not relevant to the consumer
affordability analysis required by the statute. The inclusion of these
costs in the RIA is used to determine the larger benefits of this
regulatory action, but they are not taken into account when considering
the affordability and availability of the impacted housing.
4. Covered Housing vs. Existing Housing Stock
One commenter stated that the statute specifically requires HUD and
USDA to make a determination that the revised codes do not negatively
affect the availability or affordability of new construction,
indicating that the availability of new construction specifically needs
to be the point of analysis instead of the overall availability of the
existing housing stock. This commenter stated that this is particularly
important due to the outsized role new homes play in the current
market, making up 31 percent of the housing stock.
HUD-USDA Response: With regard to considering the ``overall
availability'' of the existing housing stock, it is not clear

[[Page 33144]]

what item in the RIA or preliminary determination the commenter is
referring to; both the RIA and the preliminary determination focused on
the impact that this notice would have on the supply/production of new
USDA-HUD financed housing, not on the availability of housing outside
this stock.
The RIA does acknowledge purchase of an existing home as an
alternative option; however, the availability analysis focuses on
impacts to new construction as per the statute. As part of the
analysis, it takes into account the broader economic impacts of the
proposed standards. This perspective is included to demonstrate the
substitutes available to buyers in the real world; however, existing
homes are not considered as a central part of the availability
analysis. HUD and USDA have modified the RIA.
5. Impact on Increased Sprawl
One commenter suggested that the preliminary determination does not
accurately account for the potential increase in urban sprawl, which
would increase travel-associated greenhouse gas emissions.
HUD-USDA Response: The commenter raises an important point
regarding carbon emissions and the built environment: siting and
location of housing will impact transportation carbon emissions, as
discussed in the National Transportation Decarbonization Blueprint.
Siting housing near transportation options or adjacent to schools,
employment, services, and amenities will significantly lower Vehicle
Miles Traveled (VMTs) and associated carbon emissions. However, this is
outside the scope of this notice.

III. Final Determination--2021 IECC

A. Overview

The IECC is a model energy code developed by the International Code
Council (ICC) through a public hearing process involving national
experts for single family and low-rise residential buildings as well as
commercial buildings.\71\ The code contains minimum energy efficiency
provisions for residential buildings, defined as single family homes
and low-rise multifamily buildings (up to three stories). The code
offers both prescriptive and performance-based approaches. The
efficiency standards associated with the IECC set benchmarks for a
structure's walls, floors, ceilings, lighting, windows, doors, duct
leakage, and air leakage.
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\71\ The IECC covers both residential and commercial buildings.
States that adopt the IECC (or portions thereof) may choose to adopt
the IECC for residential buildings only or may extend the code to
commercial buildings (which include multifamily residential
buildings of four or more stories). Chapter 4 of the IECC Commercial
Code allows compliance with ASHRAE 90.1 as an optional compliance
path.
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Revised editions of the IECC are typically published every three
years. Full editions of its predecessor, the Model Energy Code, were
first published in 1989, and new editions of the IECC were published
every three years beginning in 1998. The residential portion of the
IECC was heavily revised in 2004: the Climate Zones were completely
revised (reduced from 17 Zones to the current eight primary Zones) and
the building envelope requirements were restructured into a different
format.\72\ The post-2004 code became much more concise and simpler to
use, but these changes complicate comparisons of State codes based on
pre-2004 versions of the IECC to the more recent editions.
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\72\ In the early 2000s, researchers at the U.S. Department of
Energy's Pacific Northwest National Laboratory prepared a simplified
map of U.S. climate zones. The map was based on analysis of the
4,775 U.S. weather sites identified by the National Oceanic and
Atmospheric Administration, as well as widely accepted
classifications of world climates that have been applied in a
variety of different disciplines. This PNNL-developed map divided
the United States into eight temperature-oriented climate zones. See
https://www1.eere.energy.gov/buildings/publications/pdfs/building_america/4_3a_ba_innov_buildingscienceclimatemaps_011713.pdf.
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For single family housing, the IECC is one component of the larger
International Residential Code (IRC). Each version of the IRC,
beginning with the 2015 edition, has the corresponding version of the
IECC embedded directly into that code (Chapter 11). A majority of
states have adopted some version of the IRC. For other building types,
including multifamily housing, the equivalent building code is the
International Building Code (IBC), which also refers to other codes
such as the International Plumbing Code, the International Electrical
Code or, in this case, the IECC. Those codes also then embody or refer
to other codes in the industry, such as ASHRAE 90.1. In this hub and
spoke model, there is even more differentiation between states
regarding which versions of which codes are adopted as a suite of codes
at any given point in time. Even with the adoption of the IRC, the all-
in-one code that is focused on single family housing, states and local
areas sometimes make adjustments to the code, removing and in some
cases adding requirements for some building elements.
1. Current HUD-USDA Standard and Subsequent Revisions
In May 2015, HUD and USDA published a Final Determination that
established the 2009 IECC as the minimum standard for both new single
family housing built with HUD and USDA assistance and new HUD-assisted
or FHA-insured low-rise multifamily housing.\73\ HUD and USDA estimated
that 3,200 multifamily units and 15,000 single family units per year
could potentially be impacted in the 16 states that had not yet adopted
either of these codes. The average incremental cost of the higher
standard was estimated to be $1,019 per unit, with average annual
savings of $215, for a 5-year payback and a 1.3-year net positive cash
flow. HUD and USDA determined that adoption of the 2009 IECC would not
negatively impact the affordability and availability of the covered
housing. The 2009 IECC represented a significant increase in energy
efficiency of 7.9 percent and a 10.8 percent cost savings over the
previous (2006) code.
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\73\ 80 FR 25901 (May 6, 2015).
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Since HUD and USDA's adoption of the 2009 IECC, there have been
four revisions to the IECC.\74\ No action was taken by the prior
Administration to comply with the statutory requirements to consider or
adopt these updated codes.
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\74\ IECC 2012, 2015, 2018, and 2021.
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The figure below shows the average national energy cost savings
estimated with each version of the IECC. The greatest incremental
savings come from the 2012 IECC (23.9 percent), followed by the 2009
IECC (10.8 percent over the 2006 IECC), followed by the 2021 IECC (8.7
percent). PNNL provided HUD with cost and benefit estimates for
adopting the 2021 IECC from a baseline of the 2009 IECC and has made
publicly available estimates for adopting the 2021 IECC from a 2018
IECC baseline. For states that have adopted standards equivalent to the
2012 or 2015 IECC, HUD and USDA use the estimates for the adoption from
the 2018 to the 2021 IECC, as the 2012 and 2015 IECC both are closer to
the 2018 IECC than the 2009 IECC.

[[Page 33145]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.103

Each successor edition since the 2009 IECC has increased energy
efficiency and offered cost savings to consumers in varying degrees:
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\75\ Sources: DOE, 2012: https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-22068.pdf; 2015: https://www.energycodes.gov/sites/default/files/2021-07/2015_IECC_FinalDeterminationAnalysis.pdf; 2018: https://www.energycodes.gov/sites/default/files/2021-07/EERE-2018-BT-DET-0014-0008.pdf, 2021: https://www.regulations.gov/document/EERE-2021-BT-DET-0010-0006.
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(1) The 2012 IECC was published in May 2011, representing a
significant increase of 23.9 percent in energy cost savings over the
2009 IECC.^{76 77} Key changes in the 2012 edition included:
increased stringency for opaque thermal envelope components;
clarification that sun rooms enclosing conditioned spaces must meet the
thermal envelope provisions; requirements for a blower door test to
determine the air leakage rate and limits for the number of prescribed
air changes per hour (ACH) per climate zone; insulation to at least R-3
for hot water piping; and an increase in the minimum number of high-
efficacy electrical lighting sources from 50 percent to 75 percent of
permanent fixtures or lamps in permanent fixtures.^{78 79} This
translated into an estimated $500 or 32.1 percent annual cost savings
per unit over the 2006 IECC.\80\
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\76\ U.S. Department of Energy, ``Updating State Residential
Building Energy Efficiency Codes: notice of Final Determination.''
77 FR 29322 (May 17, 2012). http://www.gpo.gov/fdsys/pkg/FR-2012-05-17/pdf/2012-12000.pdf.
\77\ Pacific Northwest National Laboratory, Cost-Effectiveness
Analysis of the 2009 and 2012 IECC Residential Provisions--Technical
Support Document, U.S. Department of Energy, PNNL-22068, April 2013.
https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-22068.pdf.
\78\ Pacific Northwest National Laboratory, Guide to the Changes
between the 2009 and 2012 International Energy Conservation Code,
U.S. Department of Energy, PNNL-21435, May 2012. http://www.pnnl.gov/main/publications/external/technical_reports/PNNL-21435.pdf.
\79\ Pacific Northwest National Laboratory, Energy savings for a
Typical New Residential Dwelling Unit Based on the 2009 and 2012
IECC as Compared to the 2006 IECC, Letter Report, PNNL-88603, April
2013, Table 1.
\80\ Pacific Northwest National Laboratory, Cost-Effectiveness
Analysis of the 2009 and 2012 IECC Residential Provisions--Technical
Support Document, U.S. Department of Energy, PNNL-22068, Tables 8.1
and 8.4, April 2013.
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(2) The 2015 IECC was substantially the same as the 2012 edition,
with a modest increase in energy efficiency of just 0.87 percent over
the 2012 IECC.\81\ Revisions in this edition included: revised
provisions for existing buildings; removal of exemption for historic
buildings; revised requirements for building envelope and duct leakage
testing and hot water distribution efficiency. The most notable
innovation was the introduction of a new Energy Rating Index (ERI)
performance path that utilizes the Home Energy Rating System (HERS)
Index.
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\81\ U.S. Department of Energy, Determination Regarding Energy
Efficiency Improvements in the 2015 International Energy
Conservation Code, 80 FR 33250 (June 11, 2015), https://www.federalregister.gov/documents/2015/06/11/2015-14297/determination-regarding-energy-efficiency-improvements-in-the-2015-international-energy-conservation.
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(3) The 2018 IECC also saw limited changes to the prior edition. In
its efficiency determination for the 2018 IECC, DOE found site energy
savings over the prior code of just 1.68 percent; 1.91 percent source
energy savings; and 1.97 percent annual energy cost savings.\82\ Of the
47 changes in this edition, most were expected to have a neutral impact
on energy efficiency, with two changes making up most of the energy
savings associated with the updated code: (1) lower fenestration U-
factors in Climate Zones 3 through 8, and (2) an increase in high-
efficacy lighting from 75 percent to 90 percent of permanently
installed fixtures in all climate zones.
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\82\ DOE, ``Final Determination Regarding energy efficiency
Improvements in the 2018 International Energy Conservation Code,''
84 FR 67435 (Dec. 10, 2019), https://www.federalregister.gov/documents/2019/12/10/2019-26550/final-determination-regarding-energy-efficiency-improvements-in-the-2018-international-energy;
also PNNL for DOE, Energy Savings Analysis: 2018 IECC for
Residential Buildings, November 2019, https://www.energycodes.gov/sites/default/files/2021-07/EERE-2018-BT-DET-0014-0008.pdf.
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2. 2021 IECC--Overview
As required by statute, this notice addresses the most recent
edition of the IECC, the 2021 IECC.\83\ In its efficiency determination
for this standard, DOE determined that this edition would result in
significant savings relative to the 2018 IECC: 9.4 percent savings in
annual site energy use intensity (EUI); 8.8 percent in annual source
EUI; 8.7 percent in annual energy cost savings; and 8.7 percent
reduction in carbon emissions.\84\ The 2021 standard will yield a
national weighted energy cost savings of 34.4 percent over the current
USDA-HUD baseline 2009 standard.
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\83\ International Code Council, 2021 International Energy
Conservation Code, January 29, 2021. https://codes.iccsafe.org/content/IECC2021P1.
\84\ 86 FR 40529 (July 28, 2021), Analysis Regarding Energy
Efficiency Improvements in the 2021 International Energy
Conservation Code (IECC) https://www.federalregister.gov/documents/2021/07/28/2021-15969/analysis-regarding-energy-efficiency-improvements-in-the-2021-international-energy-conservation-code;
also PNNL, Preliminary Energy Savings Analysis: 2021 IECC for
Residential Buildings, April 2021, https://www.energycodes.gov/sites/default/files/2021-07/2021_IECC_PreliminaryDetermination_TSD.pdf.
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In their qualitative assessment of the code, PNNL identified a
total of 114 approved code changes or addenda in this edition of the
code over the prior edition, of which 35 will have a direct impact on
energy use in residential buildings. Of these, 29 are expected to
reduce energy use, while six are expected to increase energy use.\85\
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\85\ 79 additional changes were determined to be administrative
or impact non-energy portions of the code.
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The following are the primary technical changes in the 2021 IECC
over the previous edition:
Building Envelope. Building envelope revisions include
increased insulation requirements; more efficient U factors and Solar
Heat Gain Coefficients (SHGCs) for windows and fenestration; maximum
air leakage rate of 5 Air Changes per Hour (ACH) at 50 pascals for all
compliance paths, with 3 ACH for Climate Zones 3-8 following the
prescriptive path. Testing alternatives are provided for smaller homes
and attached single family and multifamily buildings.\86\
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\86\ AMCA International, International Energy Conservation Code:
2021 Changes, Getting Involved in the 2024 Process, May 5, 2021,
https://www.amca.org/assets/resources/public/assets/uploads/FINAL-_ICC_Webinar-_presentation_May_5__2021.pdf.

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[[Page 33146]]

Heating, Ventilation and Air Condition (HVAC). Mechanical
ventilation in Climate Zones 7 and 8 provided by a Heat Recovery
Ventilator (HRV) or Energy Recovery Ventilator (ERV) is required for
the prescriptive compliance path.\87\
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\87\ Northeast Energy Efficiency Partnerships, Key Changes in
the 2021 IECC for the Northeast and Mid-Atlantic, https://neep.org/sites/default/files/media-files/2021_iecc_one-pager_.pdf.
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Additional Efficiency Options. Additional efficiency
options in the 2021 IECC include an enhanced envelope performance
option--a 5 percent improvement in proposed home UA value (R408.2.1); a
more efficient HVAC equipment option (highlighted above); a reduced
energy use in service water heating option 0.82 EF for fossil fuel, 2.0
EF for electric fuels or 0.4 solar fraction water heater (R405.2.3); a
more efficient duct thermal distribution system option--100 percent of
ducts in conditioned space or ductless systems (R405.2.4); and an
improved air sealing and efficient ventilation option--air leakage at
3.0 ACH50 with ERV or HRV with 75 percent Sensible Recovery Efficiency
(SRE) (R405.2.5).
Lighting Changes. The efficacy value of high-efficacy
lamps increases to 70 lumens/watt (100 percent of lighting), a 10
percent increase over the 2018 standard.
Renewables. The 2021 IECC revises the definition for ``on-
site renewables'' for consistency with other national standards; adds a
definition for biogas and biomass; and requires that Renewable Energy
Certificates (RECS) be retired with the homeowner when using the ERI
compliance approach.\88\
---------------------------------------------------------------------------

\88\ New Buildings Institute, 2021 IECC National Model Energy
Code (Base Codes). https://newbuildings.org/code_policy/2021-iecc-base-codes/.
---------------------------------------------------------------------------

Zero Energy Appendix. In addition to these technical
changes, the 2021 IECC includes, for the first time, a Zero Energy
Appendix that requires compliance with an ERI score without renewables
and then achieving an ERI score of ``0'' with renewables. This provides
jurisdictions with an opportunity to adopt a base or stretch code that
achieves zero energy in homes and low-rise multifamily buildings.\89\
---------------------------------------------------------------------------

\89\ Ibid.
---------------------------------------------------------------------------

Building Electrification. While the 2021 IECC did not
include building electrification provisions in the final version of the
code, provisions are available for adoption by states as amendments to
the 2021 IECC: RE147-19, Electrification-Ready; RE126-19, Energy
Efficient Water Heating; RE107-19, Eliminate Continuous Burning Pilot
Light.
Compliance Pathways. There are three compliance pathways
in the 2021 IECC: Prescriptive, Performance, and Energy Rating Index or
ERI, which reverted to IECC 2015 levels. The prescriptive paths can
follow the R-value minimum table, the U-Factor equivalent table, or the
UA equivalent alternative. All compliance pathways now have required
Additional Efficiency Options (AEOs) to achieve five percent greater
energy efficiency than base levels. The 2021 IECC lowers the
performance path ERI scores compared to the 2018 IECC.
3. Current State Adoption of the 2021 IECC
There is typically a lag time between the publication of a new
edition of the IECC and state adoption of the code: Table 11 and Figure
1 show that, as of December 2023, while all but eight states have
adopted a version of the IECC, only five states (California,
Washington, Vermont, New Jersey, and Connecticut) have adopted the 2021
IECC or its equivalent.\90\
---------------------------------------------------------------------------

\90\ California's Title 24 2019 Building Energy Efficiency
standard, Washington's 2018 State Energy Code, and Vermont's
amendments to the 2018 IECC were determined to meet or exceed the
2021 IECC.
---------------------------------------------------------------------------

Overall, 41 states plus the District of Columbia have adopted a
version of the code that is equivalent to or higher than the current
HUD and USDA standard of the 2009 IECC. Of these, only 18 states plus
the District of Columbia have adopted a code above the 2009 IECC (the
2018 IECC, the 2015 IECC, or equivalent to the 2021 IECC),\91\ while 23
states have set their codes at the 2009 IECC or its equivalent. The
remaining 9 states have either adopted standards that pre-date the 2009
IECC (1 state) or have no state-wide codes (8 states).
---------------------------------------------------------------------------

\91\ PNNL, State Level Residential Codes Energy Use Index, FY
2023Q2, Excel File at https://www.energycodes.gov/state-portal.
---------------------------------------------------------------------------

Based on historical experience and the continued consideration or
adoption of the 2021 IECC by states, it is anticipated that over time
additional states are likely to adopt the 2021 IECC, either as
published by the ICC or with amendments.

[[Page 33147]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.104

This tabulation is drawn from DOE's tracking of state adoptions of
the IECC, available at DOE's state portal at https://www.energycodes.gov/state-portal. For the purpose of this notice, HUD
and USDA rely on the December 2023 update of the status map maintained
by DOE at this site. Figure 1 displays the state IECC adoption status
shown in Table 11.

[[Page 33148]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.105

Note that states often adopt amendments to the code as published by
the ICC. In some cases, these amendments will sufficiently alter the
IECC code as published, such that the energy performance of buildings
meeting the amended code provisions may be equivalent to that of a
prior code.
The DOE code adoption map and the adopted codes listed in Table 11
reflect DOE/PNNL's analysis of state adopted codes (including
amendments) and associated assessment of their IECC code equivalent.
Accordingly, 18 states have adopted the 2012, 2015, 2018, or 2021 IECC
with amendments and were determined by PNNL to be equivalent to the
2009 IECC. These are therefore shown in Table 11 and Figure 1 as at the
2009 IECC level.\92\ Additionally, DOE provides an analysis of the
energy use index of each state-adopted code on their state portal.\93\
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\92\ The 23 states deemed equivalent to the 2009 IECC are: AL,
GA, ID, IL, IN, IA, KY, MI, MN, MT, NV, NM, NC, ND, OH, OK, RI, SC,
TN, UT, VA, WV, WI. See Table for a listing of these code
equivalents at https://www.energycodes.gov/state-portal and
``Reidential State Level Results'' Excel file at ``Available Data''
for detailed DOE/PNNL analysis.
\93\ DOE, State Portal, https://www.energycodes.gov/state-portal.
---------------------------------------------------------------------------

Ohio, for example, adopted the 2018 IECC with amendments to
basement and crawl space wall R-values, air leakage rates and the
allowance to utilize framing cavities as return ducts.\94\ DOE/PNNL
determined that the Ohio code as adopted with amendments is equivalent
to the 2009 IECC.\95\ New Mexico adopted the New Mexico Energy
Conservation Code, based on the 2018 IECC, with state-specific
amendments which were determined by DOE/PNNL to yield a performance
standard equivalent to the 2009 IECC. On the other hand, if the new
code is less than one percent more efficient than the prior code then
DOE counts the newer code as equivalent to the previous code.
California has adopted its own standard, Title 24, which DOE has
determined meets or exceeds the 2021 IECC.
---------------------------------------------------------------------------

\94\ ACEEE, State Scorecard Ranking, https://database.aceee.org/state/ohio.
\95\ See ``Residential State Level Results'' at https://www.energycodes.gov/state-portal.
---------------------------------------------------------------------------

In certain cases, home rule cities or counties within a State may
adopt a different code from the rest of the State. For example, Austin,
Texas has adopted the 2021 IECC energy code, thereby exceeding the
minimum Texas statewide code of the 2015 IECC.\96\ In instances where a
local entity has a more stringent standard, the affordability impacts
within a State will differ.\97\
---------------------------------------------------------------------------

\96\ City of Austin, Building Technical Codes. https://www.austintexas.gov/department/building-technical-codes.
\97\ HUD and USDA do not maintain a list of local communities
that may have adopted a different code than their state code. See
ACEEE, State and Local Policy Database for codes adopted by
individual cities. https://database.aceee.org/city/energy-code-stringency.
---------------------------------------------------------------------------

4. Estimated Impacts
Table 12 provides an estimate of the average number of units that
may be impacted annually by adoption of the 2021 IECC. HUD and USDA
used prior-year production for these programs in order to estimate
future annual production for these programs.\98\ Based on average
annual production for the three year 2019-21 period, the agencies
estimate that a total of approximately 161,700 units of HUD- and USDA-
financed or insured housing may be impacted by the 2021 IECC, of which
150,227 are in the 45 states plus DC and U.S. territories that have not
yet adopted this standard.
---------------------------------------------------------------------------

\98\ Three-year averages were used (2019-21) for all programs,
except for public housing which used four-year 2016-2020 averages
since limited data were available for the three-year period. Prior-
year production data provided by program offices using internal
tracking or reporting systems.

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[[Page 33149]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.106

[[Page 33150]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.107

Table 12 includes both single family and low-rise multifamily
housing. Of the total, in the 45 states and the U.S. territories that
have not yet adopted the 2021 IECC, approximately 106,650 units are
estimated to be FHA-insured new single family homes; approximately
13,100 units are USDA Section 502 direct loans, and 1,800 units are
Section 502 guaranteed loans. The remaining single family units are
financed through the HOME program (5,000 units), HUD's Public and
Indian Housing (PIH) programs (approximately 600 units through the
Choice Neighborhoods and Capital Fund Financing Programs), and 500
units through the Housing Trust Fund program. Also included in Table 12
are some 20,200 FHA-insured multifamily housing units financed with FHA
multifamily insurance that are estimated to be low-rise multifamily and
therefore covered under the 2021 IECC.\100\ When adjusted to exclude
units in states that have already adopted codes equivalent to the 2021
IECC (California, Connecticut, New Jersey, Vermont, Washington), the
total potential number of estimated units potentially impacted
decreases to around 150,000 units.
---------------------------------------------------------------------------

\99\ Estimated count of impacted units does not include the
Project-Based Voucher program. There is insufficient data on the
annual use of this program for new construction. Additionally, it is
likely that, in most cases, Project-Based Vouchers are used for new
construction projects that also rely on one or more of the other
programs included in this table.
\100\ In order to derive the number of low-rise multifamily
units, the following assumptions were made: for FHA units, 50
percent of all multifamily units are assumed to be low-rise; for
public housing units, all units coded as ``multifamily/walkup
apartments'' are assumed to be low-rise; and for HOME units, all
units in multifamily developments with less than 100 units are
assumed to be low-rise, as well as 50 percent of all units in
developments with more than 100 units.
---------------------------------------------------------------------------

Note that the volume of estimated production is not evenly
distributed across the states but reflects historic demand for FHA and
USDA financing for one or more of the agencies' programs: two states,
Texas (24 percent) and Florida (14 percent), account for almost 40
percent of potentially impacted units based on prior-year production.
As noted above, Austin, Texas, has already adopted the 2021 IECC, as
have 86 other Texas home-rule jurisdictions albeit often with
amendments. Given Texas and Florida have passed more current iterations
of the IECC since 2009, and one or more areas of Texas is IECC 2021
compliant, it is possible builders will be more adaptable to
constructing in accordance with the 2021 IECC. Along with Georgia (6
percent), North Carolina (6 percent) and California (5 percent), five
states account for more than half of all potentially impacted units (56
percent). Note that historical production is used as a guide to future
production; actual state by state unit counts in the future may vary
from these estimates, based on actual supply and demand.

[[Page 33151]]

B. 2021 IECC Affordability Analysis

In this notice, HUD and USDA address two aspects of housing
affordability in assessing the impact that the revised code will have
on housing affordability. As described further below, the primary
affordability test is a life-cycle cost savings (LCC) test, i.e., the
extent to which the additional, or incremental, investments required to
comply with the revised code are cost effective inasmuch as the
additional measures pay for themselves with energy cost savings over a
typical 30-year mortgage period. A second test is whether the
incremental cost of complying with the code as a share of total
construction costs--regardless of the energy savings associated with
the investment--is affordable to the borrower or renter of the home.
Note that there may be other benefits associated with energy
efficient building codes in addition to energy cost savings. These
include increased resilience against extreme temperature events, the
potential for lowering mortgage defaults, and lowering the
disproportionate energy burden for low-moderate income households. In
addition, studies show that added energy efficiency may also yield
improved health outcomes.\101\
---------------------------------------------------------------------------

\101\ See, for example, DOE, Jonathan Wilson et al, Home Rx: The
Health Benefits of Home Performance, December 2016; HUD, BRIGHT
Study Finds Improved Health at Boston Housing Authority's Old Colony
Homes, https://www.huduser.gov/portal/casestudies/study-05042017.html.
---------------------------------------------------------------------------

A 2023 study from PNNL found that energy efficiency measures
improve the habitability of single family buildings during extreme cold
and extreme heat events by up to 120 percent and 140 percent,
respectively.\102\ With the frequency and intensity of extreme weather
events, particularly heatwaves, expected to increase, the improved
resilience of energy efficient buildings will save lives. In 2020, 34
million U.S. households, or 27 percent of all households, reported
difficulty paying their energy bills or kept their homes at an unsafe
temperature because of energy cost concerns, according to the Energy
Information Administration.\103\ In some cases, homes perform so poorly
that the energy bills impact spending choices about allocating
financial resources for other necessities, like food, clothing,
transportation, and medical care.\104\ Excessive energy bills can
create a snowball effect, leading to mortgage defaults, missed
opportunities to participate in job training and educational
opportunities, and family separations, ultimately increasing wealth
inequality. Poor-performing homes can even cause physical harm and
death in extreme heat and cold events during power outages.\105\
---------------------------------------------------------------------------

\102\ Franconi, E, E Hotchkiss, T Hong, M Reiner et al. 2023.
Enhancing Resilience in Buildings through Energy Efficiency.
Richland, WA: Pacific Northwest National Laboratory. PNNL-32737, Rev
1.
\103\ Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=51979.
\104\ https://fahe.org/wp-content/uploads/Summary-of-Issues-Facing-Rural-Housing-V1.2.pdf.
\105\ National Institutes of Health, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10249403/ PMC10249403/.
---------------------------------------------------------------------------

Another benefit may be the potential for lower mortgage defaults
associated with improved energy efficiency. A study by the University
of North Carolina (UNC) Center for Community Capital and the Institute
for Market Transformation (IMT) shows a correlation between greater
energy efficiency and lower mortgage default risk for new homes. The
UNC study surveyed 71,000 Energy Star-rated homes and found that
mortgage default risks are 32 percent lower for these more energy
efficient homes than homes without Energy Star ratings.\106\
---------------------------------------------------------------------------

\106\ UNC Center for Community Capital, Institute for Market
Transformation, ``Home Energy Efficiency and Mortgage Risks,'' March
2013, Available at: http://www.imt.org/uploads/resources/files/IMT_UNC_HomeEEMortgageRisksfinal.pdf.
---------------------------------------------------------------------------

1. Cost Benefit Analysis and Results
The baseline analysis used for this Determination is the PNNL study
prepared for DOE, National Cost Effectiveness of the Residential
Provisions of the 2021 IECC, published in June 2021. This analysis
estimates annual energy and cost savings as well as life-cycle cost
(LCC) savings that assume initial costs are mortgaged over 30
years.\107\ The study provides an assessment of both the initial costs
as well as the long-term estimated savings and cost-benefits associated
with complying with the 2021 IECC.
---------------------------------------------------------------------------

\107\ PNNL, Salcido et al, National Cost Effectiveness of the
Residential Provisions of the 2021 IECC, June 2021. https://www.energycodes.gov/sites/default/files/2021-07/2021IECC_CostEffectiveness_Final_Residential.pdf.
---------------------------------------------------------------------------

HUD and USDA have adopted a modified version of the DOE
methodology. These modifications include adding a supply chain cost
increase factor and energy price increase factor to adjusted for
inflation from 2020 to 2023 as well as cost and savings adjustment
factors that reflect the smaller FHA home relative to the prototypes
used in the PNNL model. Additionally, one difference in this approach
is that it does not take into account replacement costs or residual
value, which are factored in for the PNNL model. The RIA explains the
reasoning for this difference on page 25. The modifications to the DOE
methodology have been included to respond to public comments that the
HUD-USDA analysis take into account current market and economic
conditions as well as the specific features of HUD-USDA financing and
characteristics of the FHA-USDA borrower.
The LCC method used by DOE And adapted by HUD and USDA for this
final determination is a ``robust cost-benefit metric that sums the
costs and benefits of a code change over a specified time frame. LCC is
a well-known approach to assessing cost-effectiveness'' \108\ and
reflects extensive prior public comment and input. In September 2011,
DOE solicited input on their proposed cost-benefit methodology \109\
and this input was incorporated into the final methodology posted on
DOE's website in April 2012 and further updated in August
2015.^{110 111}
---------------------------------------------------------------------------

\108\ Department of Energy, National Energy and Cost Savings for
new Single- and Multifamily Homes: A Comparison of the 2006, 2009
and 2012 Editions of the IECC. April 2012, p. A-1, https://www.energycodes.gov/sites/default/files/2020-06/NationalResidentialCostEffectiveness_2009_2012.pdf.
\109\ 76 FR 56413 (Sep. 13, 2011).
\110\ Pacific Northwest National Laboratory for the Department
of Energy (Z. Taylor, R. Lucas, N. Fernandez) Methodology for
Evaluating Cost-Effectiveness of Residential Energy Code Changes.
April 2012. Available at: http://www.energy.sc.gov/files/view/Taylor%202012.pdf.
\111\ Pacific Northwest National Laboratory for the Department
of Energy (V. Mendon, R. Lucas, S. Goel), Cost-Effectiveness
Analysis of the 2009 and 2012 IECC Residential Provisions--Technical
Support Document. April 2013, Available at https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-22068.pdf.
---------------------------------------------------------------------------

For this analysis, DOE calculates energy use for new homes using
EnergyPlusT energy modeling software, Version 9.4.\112\ Two buildings
are simulated: (1) a two-story single family home, with 2,376 square
feet of conditioned floor area, excluding the conditioned basement (if
any), and a window area equal to 15 percent of the conditioned floor
area; and (2) a low-rise apartment building (a three-story multifamily
prototype with six 1,200 square-foot dwelling units per floor) with a
window area of approximately 23 percent of the exterior wall area. DOE
combines the results into a composite average dwelling unit based on
Census building permit data for each state and for eight Climate Zones.
Single family home construction is more common than low-rise
multifamily construction;

[[Page 33152]]

the results are weighted accordingly to reflect this for each Climate
Zone as well as each state.
---------------------------------------------------------------------------

\112\ Pacific Northwest National Laboratory for the Department
of Energy (Z. Taylor, V. Mendon, N. Fernandez), Methodology for
Evaluating Cost-Effectiveness of Residential Energy Code Changes,
August 2015, https://www.energycodes.gov/sites/default/files/2021-07/residential_methodology_2015.pdf.
---------------------------------------------------------------------------

Four heating systems are considered for modeling the energy savings
in these building prototypes: natural gas furnaces, oil furnaces,
electric heat pumps, and electric resistance furnaces. The market share
of heating system types is obtained from the U.S. Department of Energy
Residential Energy Consumption Survey (2015). Domestic water heating
systems are assumed to use the same fuel as the space heating system.
2. Limitations of Cost Savings Models
HUD and USDA are aware of studies that discuss limitations
associated with cost-savings models such as those developed by PNNL for
DOE. For example, Allcott and Greenstone suggest that ``it is difficult
to take at face value the quantitative conclusions of the engineering
analyses'' associated with these models, as they suffer from several
empirical problems. The authors cite two problems in particular. First,
engineering costs typically incorporate upfront capital costs only and
omit opportunity costs or other unobserved factors. For example, one
study found that nearly half of the investments that engineering
assessments showed in energy audits for medium-size businesses that
would have short payback periods were not adopted due to unaccounted
physical costs, risks, or opportunity costs. Second, engineering
estimates of energy savings can overstate true field returns, sometimes
by a large amount, and some engineering simulation models have still
not been fully calibrated to approximate actual returns.\113\ HUD and
USDA nevertheless believe that the PNNL-DOE model used to estimate the
savings shown in this notice represents the current state-of-the art
for such modeling, is the product of significant public comment and
input, is now the standard for all of DOE's energy code simulations and
models, and presents a reliable and validated methodology for
estimating energy code costs and benefits.
---------------------------------------------------------------------------

\113\ Hunt Allcott and Michael Greenstone, ``Is there an energy
efficiency gap?'' Journal of Economic Perspectives, Volume 26,
Number 1,Winter 2012, pp. 3-28.
---------------------------------------------------------------------------

3. Estimated Costs and Savings
For all 50 states and the District of Columbia, DOE estimates that
for a weighted average of both single family and low-rise multifamily
housing, the 2021 IECC saves 9.38 percent of energy costs for heating,
cooling, water heating, and lighting over the 2018 IECC.\114\ For the
purposes of this notice, DOE provided HUD and USDA with a special
tabulation that disaggregates this analysis into each building type
(single family and low-rise multifamily). The disaggregated data are
shown in Tables 13 (single family) and 14 (low-rise multifamily) for
the following data points: LCC savings, incremental cost, annual
mortgage increase, down-payment and other up-front costs, net first
year annual cash flow, years to positive cash flow, and simple payback
for the 2021 IECC in relation to the current HUD and USDA baseline of
the 2009 IECC. Tables 13 and 14 provide both national average costs and
benefits, as well as for each climate zone.
---------------------------------------------------------------------------

\114\ PNNL, Salcido et al., 2021.
---------------------------------------------------------------------------

The United States has eight Climate Zones, further subdivided to
represent moist, dry, or marine climates, that are listed here: 1A Very
hot humid; 2A Hot Humid; 2B Hot Dry; 3A Warm Humid; 3B Warm Dry; 3C
Warm Marine; 4A Mixed Humid; 4B Mixed Dry; 4C Mixed Marine; 5A Cool
Humid; 5B Cool Dry; 6A Cold Humid; 6B Cold Dry; 7 Very Cold; and 8
Subarctic/Arctic. Zone 1 includes Hawaii, Guam, Puerto Rico, and the
Virgin Islands. Almost all of Alaska is in Zone 7.\115\
---------------------------------------------------------------------------

\115\ DOE, IECC climate zone map, https://basc.pnnl.gov/images/iecc-climate-zone-map.
---------------------------------------------------------------------------

Tables 13 and 14 show the economics of adopting the 2021 IECC
nationally and in each Climate Zone, relative to the 2009 IECC
baseline. Table 15 shows costs and savings against the 2018 IECC
baseline. Data points provided include, incremental or first costs,
annual energy savings, increased debt service on a thirty-year
mortgage, estimated down payment and closing costs, net annual cash
flow in the first year, and simple payback on the initial
investment.\116\
---------------------------------------------------------------------------

\116\ The 2009 standard is used as the primary baseline for this
analysis since, as shown in Table 11, 23 states still require a
standard equivalent to the 2009 baseline, which is also the most
recent baseline established by HUD and USDA, while eleven states and
the District of Columbia have adopted the 2018 standard. However,
Tables 19 and 20 below shows baseline data for individual states per
data provided by DOE/PNNL based on the state adoption status in
2021, which has seven states and the District of Columbia at the
2018 IECC.
---------------------------------------------------------------------------

4. Analysis of Adopted State Energy Codes for Residential Buildings
The Department of Energy assesses the energy code adopted by each
state, considering the impact of any included amendments to the
original IECC code. This analysis can be found in the ``residential
state-level results'' available for download at https://www.energycodes.gov/state-portal. The analysis shows the energy index,
which is the modeled energy use based on the adopted energy code, for
the adopted code of each state as well as multiple versions of the
IECC. A comparison of the energy index for the IECC code and any state-
adopted version with amendments demonstrates the impact of amendments
to the code on energy efficiency.
5. Incremental or Added Costs
Tables 13 shows the average per-unit incremental cost of adopting
the 2021 IECC over the current HUD and USDA 2009 IECC baseline for
single family homes, both nationally and for each Climate Zone: a
national average of an estimated $7,229 per unit for single family
housing,\117\ ranging from a low of $3,662 in Climate Zone 1, to a high
of $8,845 in Climate Zone 8. Cost data sources used to derive these
costs include: Building Component Cost Community (BC3) data repository;
construction cost data collected by Faithful+Gould under contract with
PNNL; RS Means Residential Cost Data; National Residential Efficiency
Measures Database; and price data from nationally recognized home
supply stores.\118\
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\117\ Source: Data provided by DOE to HUD and USDA showing
disaggregated LCC Savings, Incremental Cost, and Annual Energy
Savings for single family and low-rise multifamily homes.
\118\ See for example, PNNL, Alaska Cost Effectiveness Analysis,
https://www.energycodes.gov/sites/default/files/2021-06/AlaskaResidentialCostEffectiveness_2018.pdf.

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[[Page 33153]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.108

6. Annual Cost Savings
Table 13 summarizes the first-year annual energy cost savings per
single family dwelling unit for the 2021 IECC compared to the 2009
IECC, aggregated over 16 single family residential prototype buildings
modeled by DOE/PNNL.\119\ Modeled energy savings are converted to cost
savings using the most recent residential fuel prices from DOE's Energy
Information Administration (EIA).\120\ Cost savings stated are time
zero dollars not adjusted for inflation or fuel price escalation. The
per-unit annual energy cost savings for single family homes is
estimated to be $963 per unit, ranging from $608/unit in Climate Zones
1 and 2, to a high of $2,467 in Climate Zone 8.
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\119\ For residential buildings, PNNL uses two base prototypes
to simulate (1) a single family detached house and (2) a multifamily
low-rise apartment building. These prototypes are modified to
accommodate four different heating system types and four foundation
types typically found in residential new construction. The result is
an expended set of 32 models (16 for each building type) which is
then simulated across 18 climate locations for each edition of the
IECC. This results in a set of 3,552 energy models in EnergyPlus
Version 9.5).
\120\ U.S. Energy Information Administration, Washington, D.C.
Natural Gas Prices, https://www.eia.gov/dnav/ng/ng_pri_sum_a_EPG0_PRS_DMcf_m.htm. Electric Power Monthly, https://www.eia.gov/electricity/monthly/epm_table_grapher.php?t=epmt_5_06_b.
Petroleum and Other Liquids. https://www.eia.gov/dnav/pet/PET_PRI_WFR_A_EPD2F_PRS_DPGAL_W.htm..
---------------------------------------------------------------------------

7. Simple Payback
Simple payback is a commonly used measure of cost effectiveness,
defined as the number of years required for the sum of the annual
returns on an investment to equal the original investment. The simple
payback for adoption of the 2021 IECC code is an estimated 7.7 years
for single family homes, ranging from 3.7 years in Climate Zone 8 to
9.2 years in Climate Zone 2.
8. Total Life Cycle Cost Savings
LCC analysis computes overall cost savings per dwelling unit
resulting from implementing efficiency improvements. LCC savings are
based on the net change in overall cash flows (energy savings minus
additional costs) resulting from implementing the new code. LCC savings
are a sum over an analysis period of 30 years: future cash flows vary
from year to year and are discounted to present values using a discount
rate that accounts for the changing value of money over time. LCC is
the primary metric used by DOE to determine the cost effectiveness of
the code or specific code changes. The economic analysis assumes that
initial costs are mortgaged, and that homeowners do not take advantage
of the mortgage interest deduction since most FHA/USDA borrowers are
likely to take the standard, non-itemized tax deduction.\121\
---------------------------------------------------------------------------

\121\ PNNL, Salcido et al., 2021.
---------------------------------------------------------------------------

Net life cycle cost savings shown in Table 13 average $15,071 per
housing unit for adoption of the latest 2021 IECC. LCC savings vary
considerably by Climate Zone, from as low as $8,313 in Climate Zone 2
to a high of $52,078 in Climate Zone 8.
9. Consumer Cash Flows
Converting first costs and annual savings to Consumer Cash Flows is
an important component of the affordability analysis. Consumer Cash
Flow results are derived from the year-by-year calculations that
underlie LCC savings and provide an assessment of how annual cost
outlays are compensated by annual energy savings and the time required
for cumulative energy savings to exceed cumulative costs, including
both increased mortgage payments and down payment and other up-front
costs.
The financial and economic parameters used by HUD in calculating
LCC savings and annual cash flow are based on DOE's cost-effectiveness
methodology. Based on public comments, HUD has revised the original DOE
analysis to incorporate new economic parameters that better reflect
current market and economic conditions. Figure 2 shows the original and
revised parameters. These revised parameters account for significant
changes in construction, labor, and energy costs as well as several
adjustments to financing terms to better reflect HUD and USDA
borrowers.

[[Page 33154]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.109

Annual cash flow is defined as the net difference between annual
energy savings and annual cash outlays (mortgage payments, etc.),
including all tax effects but excluding up-front costs (mortgage down
payment, loan fees, etc.). Only first year net cash flow is reported:
subsequent years' cash flow will differ due to the effects of inflation
and fuel price escalation, changing income tax effects as the mortgage
interest payments decline, etc. Assuming a 5 percent, 30-year fixed
mortgage, and a 5 percent down payment, increased annual debt service
is shown in Table 13 to be an average of $439/unit, or $36.58/month,
with annual energy savings more than twice that amount: $963, or
$80.25/month. This translates into a net annual positive cash flow in
Year One of $377 or $31.42/month. Years to Positive Cash Flow, i.e.,
the number of years needed to recoup the cost of the initial down
payment and first-year debt service with annual savings, is just
eighteen months on average.
---------------------------------------------------------------------------

\122\ PNNL, Salcido et al., 2021.
---------------------------------------------------------------------------

10. Low-Rise Multifamily Buildings
Table 14 shows costs and savings for low-rise multifamily housing
similar to those shown in Table 13 for single family homes. The costs
and savings shown are aggregated over 16 low-rise multifamily
residential prototype buildings modeled by DOE/PNNL.\123\ The
incremental costs for this housing type, as well as associated savings,
are generally lower than for single family homes, as a result of both
differences in unit size and building type. Incremental costs average
$3,002/unit nationally, more than half of the $7,229 per unit cost for
single family housing only. Net LCC savings of $6,345 for low-rise
multifamily housing are also projected to be lower than for single
family housing only ($15,071/unit).
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\123\ See Footnote 47 for methodology for prototype buildings.
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First year increased debt service for low-rise multifamily housing
is estimated to be $182/unit, while savings are nearly three times that
amount: $403/year, for a net annual cash flow of $160/year. While costs
and savings differ, Years to Positive Cash Flow are similar to that of
single family homes (1.4 years), and the national Simple Payback
average of 7.6 years is also comparable. Simple paybacks range from a
low of 5.1 years in Climate Zone 8 to a high of 8.2 years in Climate
Zones 2 and 3. Net LCC savings vary considerably from $5,218 in Climate
Zone 2 to a high of $18,185 in Climate Zone 8. Higher incremental or
added costs typically translate into higher annual savings, with net
annual positive cash flows for year one ranging from $123 to $565.

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Table 15 shows the energy savings and incremental costs of
construction for the average housing unit (average of single family and
multifamily). First costs average $2,620 per unit, well below the
average first cost of $7,229 against the 2009 baseline. As would be
expected, annual savings are similarly lower, and the resulting
national average payback is higher than the 2009 IECC--at 10.7 years
vs. 7.7 years against the 2009 IECC. Simple paybacks vary considerably
across Climate Zones, from 4.8 years in Climate Zone 1 to 16.8 years in
Climate Zone 5.
[GRAPHIC] [TIFF OMITTED] TN26AP24.111

11. Additional analysis--6 Percent Mortgage Interest Rate and 3.5
Percent Down Payment
---------------------------------------------------------------------------

\124\ HUD does not have PNNL estimates of energy savings
disaggregated by single family and multifamily for the 2021 IECC
relative to the 2018 standard. HUD computed a weighted average of
the incremental cost of construction. The weights used by PNNL in
their analysis are 66 percent for single family units and 34 percent
for low-rise multifamily units.
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Table 16 provides cash flow analysis for single family housing
using a 3.5 percent downpayment consistent with minimum FHA
requirements, and a 6.5 percent nominal mortgage interest rate
predicted to be in place at the end of 2024 (compared to 5% average
downpayment and 5.3 percent mortgage interest rates used in Tables 13-
15, above). The cash flows are similar to the prior analysis, with
positive cash flows ranging from less than a year to 2.8 years and
simple paybacks below 10 years.

[[Page 33156]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.112

12. Cash Flows for Single Family and Low-Rise Multifamily
HUD and USDA rely on a 30-year term for the loan based on guidance
from DOE. Tables 13 and 14 show net life-cycle costs of $15,071 (single
family) and $6,345 (low-rise multifamily) for the 2021 IECC over the
2009 IECC. In both cases, positive cashflows occur by the end of the
second year. Table 17 and 18 present the cumulative, present value cash
flow for each building type at the one-, two-, five-, 10-, 20-, and 30-
year marks as well as with no loan. The tables show cash flows for the
national average as well as each climate zone.
LCC savings for periods of less than 30 years also show positive
cash flows. At the 10-year mark, the national savings are estimated to
be $2,515 over the 2009 IECC and $1,076 over the 2018 IECC.
[GRAPHIC] [TIFF OMITTED] TN26AP24.113

[[Page 33157]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.114

12. Appraisals of Energy Efficiency Improvements
In this section of the determination, we address the question of
home appraisals, and the extent to which they fully value energy
efficiency improvements. As noted in the response to public comments
received on this topic, the residential appraisal system in the U.S. is
not generally set up to fully assign a contributory value to increased
energy efficiency of a home, particularly in the absence of sales
comparisons, in part because of imperfect information--the level of
energy efficiency is not typically disclosed at the time of home
purchase, unless the home has a HERS rating, or it has an energy
efficient certification such as Energy Star or Zero Energy Ready Homes.
In addition to information availability necessary to identify and
develop the contributory value of energy efficient measures in a
residential appraisal, the valuation requires a market recognizable
response, appraiser technical expertise and training, and underwriter
recognition of the approaches, methods and techniques applied in
support of the conclusions.
As discussed in the comments section of this notice, however, there
are several mitigating factors, as well as emerging trends that
indicate that tools are available to the appraiser that when properly
applied allow for adjustments to as-is valuations. In addition, studies
of sales prices in Washington, DC and other markets show that energy
efficient homes command higher sales prices.\125\ A review of sales
prices of FHA homes for the past four years relative to appraised
values show that a significant share--32 percent--are valued at more
than $5,000 or more above the sales price, thereby allowing a
significant margin for borrowers to accommodate the estimated increase
in value associated with the 2021 IECC. There is also increasing use of
the MLS that have ``green'' fields including energy certifications,
HERS ratings, and in some cases utility costs associated with a home
(existing homes), which provide both lenders and appraisers with the
necessary information needed to incorporate in the home valuation. In
addition, while still underutilized, tools such as the Green Addendum
that is available to appraisers and can be filled out by HERS raters
(or even the homeowner) are available to identify the energy features
of a home. See Section A.5 in the Comments section of this notice for a
discussion of these issues. HUD and USDA plan to implement a robust
training and technical assistance program for both appraisers and
lenders to maximize the use of accurate and reliable valuation methods
and will work with the rosters of FHA- and USDA-approved appraisers to
provide such training.
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\125\ Adomatis, Sandra, ``What is Green Worth? Unveiling High
Performance Home Premiums in Washington DC,'' September 2015,
https://doee.dc.gov/sites/default/files/dc/sites/ddoe/service_content/attachments/2015_HighPerformance%20Home%20Valuation%20Report_FINAL.pdf.
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14. State-Level Results ^{126 127}
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\126\ State-level results are based on PNNL analyses on the
cost-effectiveness of the 2021 IECC for residential buildings in
each state. As such, Tables 19 and 20 present the cost-effectiveness
of the 2021 IECC for each state based on their adopted energy code
in July 2021. States that have revised their energy code
requirements since July 2021 should look to other states in the same
climate zone with the same energy code requirements for estimated
costs and savings.
\127\ State results use state-specific property tax rates
provided in the PNNL analyses on the cost-effectiveness of the 2021
IECC for residential buildings in each state instead of the national
property tax rate of 1.5 percent.
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Table 19 provides a state-by-state breakout of estimated costs and
savings, for single family homes only. This table provides a more
granular breakout of estimated costs and savings than the national and
Climate Zone averages shown in Table 13 above, using the HUD and USDA
2009 IECC baseline for those states that have not yet adopted this
standard or its equivalent as well as a 2018 IECC baseline for the 7
states plus the District of Columbia that have adopted the 2018 IECC or
its equivalent.^{128 129} All states have positive LCC savings
and meet the necessary affordability requirements.
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\128\ Cost benefit data are not available for three states
(California, Washington, and Oregon). According to DOE, these codes
deviate significantly from the model codes and
as a result DOE has historically not analyzed those states.
\129\ The 2018 data shown in Tables 19 and 20 are aggregated
single family and low-rise multifamily data adjusted for the
weighted averages used by PNNL for the 2009 IECC.
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DOE did not provide HUD and USDA with a cost effectiveness analysis
for the U.S. territories--American Samoa, Guam, North Mariana Islands,
Puerto Rico, and U.S. Virgin Islands. In situations without a state-or
territory-specific cost effectiveness analysis, the cost effectiveness
analysis for the climate zone is used to determine affordability. As
shown in Table 13, climate zone 1, the climate zone for each of the
U.S. territories, has LCC savings of $10,774, which meets the
affordability requirements. The climate zone also has an incremental
cost of $3,662, annual energy savings of $608, and a simple payback
period of 6.2 years.

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[[Page 33159]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.116

Incremental costs for adoption of the 2021 IECC in those states
currently at the 2009 IECC or its equivalent range from a low of $3,046
(Hawaii) to a high of $11,523 (Alaska), with most states typically in
the $6,000 range. Annual energy savings exceed added debt service in
all states with energy savings ranging from a low of $564 (Florida) to
a high of $2,849 (Alaska).
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\130\ Current code is set at the 2009 IECC, the current HUD
requirement, for states at or below the 2009 IECC based on the
standard adopted by each state as of July 2021, which was when PNNL
conducted their state analysis for the 2021 IECC. States that have
since adopted the 2021 IECC show no impact as they current require
the proposed standard. As shown in Table 11, some states have
adopted a state code that is below the current HUD/USDA standard
(2009 IECC) or have not yet adopted any state code.
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Both incremental costs and savings for the 2021 IECC in the 11
states plus the District of Columbia that have adopted the 2018 IECC
are typically lower than for those at the 2009 IECC baseline. New York,
for example, shows an added cost of $3,837/unit for adoption of the
2021 IECC relative to its current 2018 baseline, $495 in annual
estimated savings, yielding LCC savings of $7,782.
15. Total Costs and Benefits
Table 20 provide estimated up-front costs, annual energy cost
savings, and life cycle cost savings for the 2021 IECC for all 50
states and the District of Columbia, weighted by the estimated share of
single family and low-rise multifamily units potentially impacted by
the adoption of the 2021 IECC. As previously shown in Table 12, an
estimated 140,000 single family and low-rise multifamily units would be
impacted annually by this code if adopted today. By multiplying the
incremental cost/unit per state by the number of units estimated likely
to be impacted, the total cost of implementing the 2021 IECC is
estimated at $605.4 million, total savings are estimated at $2.1
billion, and net life-cycle cost savings of $1.3 billion.\131\
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\131\ Net LCC savings of $1.3 billion are based on life-cycle
costs of $770 million and life-cycle savings of $2.1 billion over
the 30-year period.

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[GRAPHIC] [TIFF OMITTED] TN26AP24.117

[[Page 33161]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.118

This LCC figure covers a single year's cohort of HUD and USDA
financed housing. Annual effects will increase as more cohorts are
added to the stock of new HUD- and USDA-assisted, insured, or
guaranteed energy-efficient housing. In the second year, with two
cohorts in place, there could be a stream of almost $150 million
(future value) of energy savings. The number of units affected every
year will decline as states update their standards to the 2021 IECC, or
industry adopts the prescribed above-code standards. Thus, we expect
the aggregate annual incremental effects to taper off. The maximum
annual effect of all cohorts is not likely to exceed somewhere between
three or four times the annual effect of a single-year cohort. While a
new code edition is typically published every three years, since HUD
and USDA must consider the affordability and availability impacts of
each edition when it is published, in this notice, LCC savings cover
one year's cohort. See ``Aggregate Incremental Impacts of IECC Update''
in the Regulatory Impact Analysis (p.44) for further discussion.
The Regulatory Impact Analysis at www.regulations.gov provides an
estimated first cost of $553 million, annual energy savings of $73
million, and net LCC savings that range from $972 million (7 percent
real discount factor) to $1.48 billion (3 percent real discount
factor). (See RIA Figures 20 and 21).

C. Final Affordability Determination--2021 IECC

Based on the analysis provided above, HUD and USDA have determined
that adoption of the 2021 IECC will not negatively impact the
affordability of homes covered by the statute. This conclusion
recognizes the profile of FHA borrowers, who according to FHA's 2021
Annual Report are typically first-time home buyers (84 percent) who are
more likely than repeat buyers to be especially price sensitive.
While the national average incremental cost shown in Table 13 of
adopting this standard is $7,229, this represents a modest 2.2 percent
increase in the median cost of $330,000 for a new FHA-insured home in
2023. In all cases this translates into an increase in the downpayment
and other first costs, on average, of $445, which represents
approximately 0.13 percent of the median FHA-insured new energy
efficient home mortgage.\132\
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\132\ Average USDA Section 502 Direct Loan 2018-20 of $191,100,
and of Section 502 Guaranteed Loan of $210,700. Incremental cost of
$7,229 equals 3.0 percent and 2.8 percent respectively of these
loans; down payment and other upfront costs are 0.28 percent and
0.26 percent. For average FHA new home mortgage of $363,000 (2023),
added first cost equals 2.0 percent, average down payment and other
upfront costs equals 0.15 percent.
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Unlike other added costs associated with the home purchase
transaction, these incremental costs yield significant cost savings to
the borrower. As shown in Tables 13-15, cash flows are extremely
favorable for all types of housing covered by the IECC (single family
and low-rise multifamily), for the 2021 IECC against both the 2009 IECC
and the 2018 IECC baselines, in all Climate Zones, and for both life
cycle cost savings as well as first year savings to the consumer. In
all cases, annual energy savings in Year One exceed increases in debt
service. Using the national average for the 2021 IECC over the 2009
IECC as a base case, as shown in Table 13, debt service increases
average just $36/month ($439/year) for net positive cash flows of $31/
month ($377/year) after debt service. Consumers are expected to see
energy savings of $963 annually, and a net positive cash flow of $377
in the first year. On a life cycle basis, consumers are projected to
save $25,100 in energy bills over the life of a typical 30-year
mortgage, and a net life cycle savings (after costs) of $15,071. Years
to positive

[[Page 33162]]

cash flow range average 1.5 years and range from less than six months
to 2.5 years depending on Climate Zone. The simple payback--the years
required to recoup the full cost of the code update--averages 7.7 years
and is less than 10 years in all Climate Zones, ranging from a low of
3.7 years to a high of 9.2 years.
While there is likely to be variability in actual cash flows
depending on energy use associated with family size and behavior, the
data shows that on average the adoption of these measures are likely to
improve overall affordability in light of these positive cash flows.
While the cash flows and lifetime cost savings are positive, an
additional affordability consideration is whether increased down
payment costs due to the added or incremental cost will negatively
impact home buyers with regard to qualifying for a mortgage, or to meet
mortgage down payment requirements. This is especially important for
first-time home buyers who typically have lower cash availability for
down payments. As shown in Table 13, HUD estimates increased average
down payment and other up-front costs of $550, ranging from $279 to
$673 for FHA-insured mortgages (varying by Climate Zone).\133\ This is
based on an assumed average 5 percent down payment.
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\133\ Average price in 2023 for all FHA-insured purchases,
including existing homes, was $363,000.
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HUD and USDA do not view these additional downpayment requirements
as a barrier to qualifying for financing: a borrower purchasing a
median FHA new energy code-compliant home of $337,200 will need an
additional downpayment of $360 (5 percent down) plus an additional $190
for variable closing costs, including $126 (1.75 percent) for the
Upfront Mortgage Insurance Premium (MIP) for a total of $550. A cash-
constrained borrower may be able to finance the Upfront MIP in the
mortgage and in doing so would still be well above the minimum FHA down
payment requirement of 3.5 percent. Amortizing this amount will add a
nominal additional monthly mortgage payment, yet result in an average
of $80 per month or $963 a year in energy savings from this investment.
The borrower who is already contributing the minimum 3.5 percent
downpayment required by FHA will need an average of an additional $252
down payment (3.5 percent of $7,229 added average cost) over the
$11,550 downpayment required for a non-energy code compliant home. In
the event that the borrower is not able to contribute this additional
cash above the minimum 3.5 percent downpayment, we note the large
number of down payment assistance programs that may be available to
borrowers to close this gap.\134\ For one program, the USDA Section 502
Direct Loan Program which serves low-income borrowers with 50-80
percent incomes, there is a zero down payment requirement; for these
borrowers the incremental down payment will by default present no
affordability challenges. Longer amortization schedules (up to 38 years
for up to 60 percent AMI borrowers) can also be used to lower monthly
payments for Direct Loan borrowers if needed.
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\134\ See, for example, https://nwhomepartners.org/get-ready-help-for-homebuyers/down-payment-help/, or https://www.energy.gov/scep/slsc/low-income-community-energy-solutions.
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Note that energy costs and savings are generally not factored into
current underwriting practices for single family mortgages, i.e., while
positive cash flows related to improved energy efficiency will be
realized, they are not specifically included in the Principal Interest,
Taxes, and Insurance (PITI) debt-to-income ratios typically used by
lenders to qualify borrowers. Multifamily underwriting, on the other
hand, does take into account energy savings: FHA offers the Green
Mortgage Insurance Premium to multifamily borrowers who build to a
green building standard, which may include the most recent energy code
as a mandatory element, or may offer additional points if the building
meets or exceeds the latest IECC or ASHRAE 90.1 standard.
Equity Impacts
The Regulatory Impact Analysis (RIA) that accompanies this notice
includes an extensive equity analysis, which discusses the
disproportionate energy burden experience by low-income borrowers--and
conversely the increased benefits likely to be realized by low-income
borrowers from increased efficiency. See the Equity Impacts section of
the RIA (p.98) at www.regulations.gov.
Lower-income households face disproportionately higher energy
burdens; they spend a higher share of their gross household income on
energy costs.\135\ Two-thirds of low-income households earning up to
200 percent of the federal poverty level face high energy burdens,
spending more than 6 percent of their income on energy bills. Black,
Hispanic, Native American, and older adult households, as well as
families residing in manufactured housing and low-income households
with a person with a disability, experience disproportionately high
energy burdens.\136\
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\135\ https://www.energy.gov/scep/slsc/low-income-community-energy-solutions.
\136\ Drehobl, A.L. Ross, and R. Ayala. 2020. How High Are
Household Energy Burdens? Washington, DC: American Council for an
Energy-Efficient Economy.
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Since increasing energy efficient codes will lower the energy
burden for buyers of energy efficient homes, more efficient codes will
at the same time be most beneficial to lower-income households. These
codes typically require added first costs, but HUD and USDA single
family insured or guaranteed programs include mitigating factors which
may make this investment more affordable to eligible borrowers, e.g.,
lower down payment requirements (3.5 percent for FHA-backed mortgages
compared to 20 percent required for conventional financing without
mortgage insurance), as well as more flexible underwriting requirements
such as lower allowable credit scores. USDA's Direct Loan program
serves an underserved market, very low or extremely low-income
borrowers in rural areas, through no-or low-down payment requirements,
as well as significant interest rate subsidies. FHA's low-rise
multifamily housing serves a renter population that is not directly
responsible for any additional first costs.
The overall conclusion provided in the RIA concerning the equity
impacts of a minimum energy standard is that lower-income households
will benefit more from the existence of energy-efficient housing but
may be challenged in their ability to address first costs. Empirical
work has shown that residential energy is a necessary good, but that
reducing its cost through energy efficiency requires an additional
investment that lower-income households may not have the disposable
income to accommodate. If, however, the notice encourages the supply of
energy efficiency in the affordable housing stock, then low-income
households will gain. Precise impacts are likely to vary by housing
market and climate zone.

[[Page 33163]]

IV. Final Determination--ASHRAE 90.1-2019

Overview

EISA requires HUD to consider the adoption of revisions to ASHRAE
90.1 for HUD-assisted multifamily programs.\137\ Published and revised
every three years in coordination with the publication schedule of the
IECC, the standard provides minimum requirements for the energy-
efficient design of commercial buildings, including residential
buildings with more than three stories.\138\
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\137\ USDA multifamily programs are not covered by the Act.
\138\ Standard 90.1 is published in October of the year two
years before the year listed for the IECC, to allow the latest
version of standard 90.1 to be submitted to the IECC for inclusion
in the commercial chapter of the IECC.
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ASHRAE 90.1 includes several compliance pathways. The first is the
prescriptive path, which establishes energy-related criteria for
individual building components, including minimum insulation levels,
maximum lighting power, and controls for lighting and heating,
ventilation, air conditioning, and refrigeration systems. Some
requirements are considered mandatory, even when one of the optional
paths is utilized. ASHRAE 90.1 also includes two optional whole-
building performance paths. The first is the Energy Cost Budget method,
which allows the designer to trade off compliance among various code
requirements, using established energy modeling protocols. A building
is deemed in compliance when the annual energy cost of the proposed
design is no greater than the annual energy cost of the reference
building design (baseline). ASHRAE 90.1 also includes a second
performance approach, the Performance Rating Method in Appendix G.
Appendix G has been used to rate the performance of buildings that
exceed the requirements of Standard 90.1 for above-code programs, such
as LEED, Green Globes, ASHRAE Standard 189.1, the International Green
Construction Code, the National Green Building Standard, and other
above-code programs.
1. Current HUD and USDA Standard and Subsequent Revisions
In their May 2015 Final Determination, HUD and USDA established the
2007 edition of ASHRAE 90.1 (ASHRAE 90.1-2007) as the minimum standard
for HUD-assisted multifamily properties. ASHRAE has revised the code
four times since the publication of the 2007 edition. ASHRAE 90.1-2010
was published in October 2010. There were 56 changes to the 2007
edition code with a positive impact on energy efficiency, including
revised requirements for the building envelope, HVAC systems,
commissioning, lighting, and power.\139\ DOE determined that the ASHRAE
90.1-2010 code would yield national energy cost savings of 7.72 percent
in mid-rise apartment buildings and 6.99 percent in high-rise apartment
buildings over the previous 2007 code.\140\
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\139\ A ``positive change'' is defined as a change to the code
that results in increased energy efficiency. Other changes might
include items that are either savings-neutral, or, in rare cases,
may lower energy efficiency.
\140\ Pacific Northwest National Laboratory for the Department
of Energy, Cost-effectiveness of ASHRAE Standard 90.1-2010 Compared
to ASHRAE Standard 90.1-2007, May 2013, Tables C.2, http://www.pnnl.gov/main/publications/external/technical_reports/PNNL-22043.pdf.
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The next edition, ASHRAE 90.1-2013, published in October 2013,
included 52 changes over the 2010 edition, most of which were
determined by DOE to be relatively minor. Only six were applicable to
residential buildings, including improved lighting controls and
decreased lighting power densities, increased building envelope
requirements for ``opaque assemblies and fenestration,'' and increased
efficiency requirements for smaller air conditioners and heat
pumps.\141\ These amendments resulted in an average energy savings of
5.4 percent in mid-rise apartment buildings and 6.9 percent in high-
rise multifamily buildings (site energy) over ASHRAE 90.1-2010.\142\
Cost savings were estimated by DOE to be 5.0 percent for mid-rise
apartments and 8.7 percent for high-rise apartments.
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\141\ PNNL, National Cost-effectiveness of ANSI/ASHRAE/IES
Standard 90.1-2013, January 2015, https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-23824.pdf.
\142\ U.S. Department of Energy, Determination Regarding Energy
Efficiency Improvements in ANSI/ASHRAE/IES Standard 90.1-2013:
Energy Standard for Buildings, Except Low-Rise Residential Building,
Table IV.5, 79 FR 57900 (Sep. 26, 2014), https://www.federalregister.gov/documents/2014/09/26/2014-22882/determination-regarding-energy-efficiency-improvements-in-ansiashraeies-standard-901-2013-energy. For more detailed analysis,
see PNNL, ANSI/ASHRAE/IES Standard 90.1-2013 Determination of Energy
Savings: Quantitative Analysis, August 2014. Available at https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-23479.pdf.
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The following edition, ASHRAE 90.1-2016, yielded an additional 3.6
percent site energy savings for mid-rise apartment buildings, and 4.0
percent for high-rise apartment buildings.\143\ Energy cost savings
were estimated by DOE to be 3.9 percent and 5.1 percent respectively
over the 2013 edition for these two building types.
---------------------------------------------------------------------------

\143\ PNNL/DOE Preliminary Energy Savings Analysis, ANSI/ASHRAE/
IES Standard 90.1-2016, June 2017, https://www.energy.gov/sites/default/files/2017/07/f35/Preliminary_90.1-2016_Energy_Savings_Analysis.pdf.
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DOE's quantitative analysis concluded that ASHRAE 90.1-2019 for
mid-rise and high-rise multifamily buildings (representing 11.65
percent of all commercial buildings) would yield an additional site
energy savings of 2.65 percent over the 2016 edition, and energy cost
savings (Energy Cost Index (ECI)) of 2.5 percent.^{144 145 146}
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\144\ Op cit., PNNL, Energy Savings Analysis, July 2021.
\145\ PNNL, Impacts of Model Building Energy Codes--Interim
Update, July 21, 2021, https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-31437.pdf. For all commercial
buildings, DOE estimates national site energy savings of 4.7 percent
and energy cost savings of approximately 4.3 percent.
\146\ 86 FR 40543 (July 28, 2021), Final Determination Regarding
Energy Efficiency Improvements in ANSI/ASHRAE/IES Standard 90.1-
2019, https://www.federalregister.gov/documents/2021/07/28/2021-15971/final-determination-regarding-energy-efficiency-improvements-in-ansiashraeies-standard-901-2019.
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Tables 21 and 22 show the changes in incremental costs for each
code cycle since the 2007 edition. Table 21 shows that per square foot
costs increased for the first two cycles (2010 and 2013) in a prototype
mid-rise apartment building modeled by PNNL in five representative
climate zones. In 2013, for example, the incremental cost of complying
with ASHRAE 90.1-2019 ranged from just $0.17/sf to $0.69/sf, or 0.14 to
0.59 percent of total building costs. In contrast, the last two code
cycles (both 2016 and 2019) have seen incremental cost savings rather
than cost increases as a result of complying with these codes. In all
cases, the incremental cost, whether a cost increase or a cost savings,
is a small fraction of the total per building first cost ($111/sf in
2010 to $218/sf in 2019).

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Table 22 shows building-level incremental cost or cost savings for
each code cycle since 2007. In Climate Zone 2A (Tampa) for example, the
incremental cost for the prototype mid-rise building was estimated to
be $20,858 and $5,711 for the 2010 and 2013 editions respectively,
followed by a combined savings of $30,167 in the following 2016 and
2019 codes.
[GRAPHIC] [TIFF OMITTED] TN26AP24.120

2. ASHRAE 90.1-2019 Overview
This notice addresses ASHRAE 90.1-2019, which was the most recently
published edition of ASHRAE 90.1 at the time of drafting the
preliminary determination. In its qualitative analysis of the code, DOE
identified a total of 88 changes, or addenda, to ASHRAE 90.1-
2016.^{147 148} Twenty-nine changes were determined to have a
positive impact on energy efficiency (i.e., yield energy savings).
These include: increased requirement for building vestibules, removal
of data processing centers from exceptions to HVAC requirements,
removal of hotel room exceptions to HVAC requirements, modification of
demand-controlled ventilation requirements, modification of fan power
limitations, modification of retail lighting requirements, modification
of cooling tower testing requirements, modification of commercial
boiler requirements, modification of part load fan requirements,
modification of opaque envelope requirements, and modification of
fenestration envelope requirements.
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\147\ Pacific Northwest National Laboratory for the U.S.
Department of Energy, Energy Savings Analysis: ANSI/ASHRAE/IES
Standard 90.1-2019, July 21, 2021, https://www.energycodes.gov/sites/default/files/2021-07/Standard_90.1-2019_Final_Determination_TSD.pdf.
\148\ 148DOE determined that 59 of the 88 addenda will have a
neutral impact on overall building efficiency; these included
editorial changes, changes to reference standards, changes to
alternative compliance paths, and other changes to the text of the
standard that may improve the usability of the standard, but do not
generally improve or degrade the energy efficiency of the building.
Changes with impacts which do not become effective within three
years from the publication of Standard 90.1-2019 (i.e., until a
cutoff date of December 31, 2022), are also considered as having no
impact within the context of this analysis.

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[[Page 33165]]

On March 6, 2024, DOE published an affirmative efficiency
determination for ASHRAE 90.1-2022, which has additional energy
savings.\149\ The 2022 edition includes 89 addenda in total, of which
39 are expected to decrease energy use. With the publication of DOE's
affirmative efficiency determination as required under the Energy
Conservation and Policy Act, each state is now required to review the
provisions of their commercial building code regarding energy
efficiency, and, as necessary, update their codes to meet or exceed
Standard 90.1-2022. This determination considered only ASHRAE 90.1-2019
because that was the most recent determination available to HUD and
USDA at the time of developing the preliminary determination.\150\
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\149\ Energy Efficiency and Renewable Energy Office, 2024-03-06
Determination Regarding Energy Efficiency Improvements in ANSI/
ASHRAE/IES Standard 90.1-2022; Notification of determination.
https://www.regulations.gov/document/EERE-2023-BT-DET-0017-0001.
\150\ See ANSI/ASHRAE/IES Standard 90.1-2022 Changes for list of
amendments. www.ashrae.org/technical-resources/bookstore/ansi-ashrae-ies-standard-90-1-2022-changes.
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3. Current State Adoption of ASHRAE 90.1-2019
Table 23 shows the current adoption status of ASHRAE 90.1 for mid-
rise or high-rise multifamily buildings. As of December 2023, ten
states and the District of Columbia have adopted ASHRAE 90.1-2019. A
total of 33 states and the District of Columbia have adopted an ASHRAE
90.1 standard that is above the current HUD and USDA standard (one of
the 2010, 2013, 2016, or 2019 editions), while 17 states have adopted
codes that are currently equivalent to or below the current HUD and
USDA standard or have no statewide codes.\151\ Additionally, DOE
provides an analysis of the energy use index of each state-adopted code
on their state portal.\152\
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\151\ DOE, Status of State Energy Code Adoption--Commercial,
https://www.energycodes.gov/status/commercial. Note that the codes
shown in Table 23 and Figure 3 represent DOE/PNNL's Determination of
the standard that the state-adopted code is equivalent to,
reflecting amendments that may have been adopted by each state.
\152\ DOE, State Portal, https://www.energycodes.gov/state-portal.

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[[Page 33166]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.121

[[Page 33167]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.122

4. Analysis of Adopted State Energy Codes for Commercial Buildings
As with residential buildings, the Department of Energy assesses
the energy code adopted by each state for commercial buildings. This
analysis can be found in the ``commercial state-level results''
available for download at https://www.energycodes.gov/state-portal. The
analysis presents the energy index for each state-adopted code,
including any amendments, as well as each version of ASHRAE 90.1. A
comparison of the energy index for the amended codes to that of their
code efficiency category demonstrates the impact of each amendment on
energy efficiency.
5. Impacted Multifamily Housing
Table 24 provides the estimated number of new mid-rise or high-rise
multifamily units that are estimated to be impacted annually by the
proposed Determination on ASHRAE 90.1-2019. Using a three-year average
(2019 to 2021) annual production for each program, HUD preliminarily
estimates that a total of approximately 15,000 new mid-or high-rise
multifamily units (four or more stories) will be impacted annually in
the 40 states that had not yet adopted ASHRAE 90.1-2019. This includes
approximately 11,900 FHA-insured multifamily units, 300 public housing
units, and 2,000 HOME- and 300 HTF-financed units. No USDA-guaranteed
multifamily units are impacted since these are not covered under this
notice.

[[Page 33168]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.123

[[Page 33169]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.124

B. ASHRAE 90.1-2019 Affordability Analysis

1. Cost Benefit Analysis
In its Final Determination of improved energy efficiency for
commercial buildings, including multifamily buildings, DOE completes
both a ``qualitative'' analysis and a ``quantitative'' analysis to
assess increased efficiency of ASHRAE Standard 90.1.\153\ In addition
to a quantitative and qualitative analysis of the new code, PNNL
publishes a cost benefit analysis of each of the codes, which considers
the added, or incremental cost for the new standard. In addition, PNNL
has published its methodology for evaluating the cost-effectiveness of
commercial energy code changes, including multifamily buildings, and
that methodology is used by HUD and USDA for this determination.\154\
For more detail on the methodology developed by DOE for their cost-
benefit analysis, see PNNL's 2015 cost-effectiveness report.\155\
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\153\ 86 FR 40543 (July 28, 2021), Final Determination Regarding
Energy Efficiency Improvements in ANSI/ASHRAE/IES Standard 90.1-
2019, https://www.govinfo.gov/content/pkg/FR-2021-07-28/pdf/2021-15971.pdf.
\154\ PNNL, Methodology for Evaluating Cost-Effectiveness of
Commercial Energy Code Changes, January 2015, https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-23923.pdf.
\155\ Ibid.
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Evaluating cost-effectiveness requires three primary steps: (1)
evaluating the energy and energy cost savings of code changes, (2)
evaluating the incremental and replacement costs related to the
changes, and (3) determining the cost-effectiveness of energy code
changes based on those costs and savings over time. The DOE methodology
estimates the energy impact by simulating the effects of the code
change(s) on typical new buildings, assuming both old and new code
provisions are implemented fully and correctly. The methodology does
not estimate rates of code adoption or compliance. Cost-effectiveness
is defined primarily in terms of LCC evaluation, although the DOE
methodology includes several metrics intended to assist states
considering adoption of new codes.
2. Building Prototypes
The basis for DOE's ASHRAE 90.1 cost-benefit analysis are16
prototype building models representing different commercial sector
building types. Of the 16 prototypes modeled by DOE, two are
multifamily buildings-a 4-floor mid-rise apartment building and a 10-
floor high-rise apartment building. Table 25 provides detailed
characteristics of the mid-rise prototype.

[[Page 33170]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.125

3. ASHRAE 90.1-2019 Incremental Costs
---------------------------------------------------------------------------

\156\ PNNL, Impacts of Standard 90.1-2007 for Commercial
Buildings at State Level, https://www.pnnl.gov/main/publications/exter00nal/technical_reports/PNNL-18544.pdf.
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Table 26 provides annual cost savings, added construction costs,
and net LCC savings for the mid-rise multifamily prototype
building.\157\ Cost estimates typically use current national average
prices. Labor costs are based on estimated hours and current crew labor
rates from RS Means. In some cases, cost estimates completed for a
prior code cycle are still applicable and are adjusted for inflation
rather than creating a new cost estimate or obtaining current unit
prices throughout the cost estimate. Where cost estimates are updated,
inflation factors specific to the equipment are used. These inflation
factors are developed for each specific equipment or insulation type by
comparing RS Means from the time of the estimate with the current RS
Means.
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\157\ Special tabulation provided by DOE/PNNL to HUD of costs
and savings for mid-rise multifamily buildings only, 9/2/21.

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[[Page 33171]]

Added construction costs average $574/building, or just $18/unit.
This low average per-unit increase in cost is because in two of the
climate zones analyzed, construction costs are expected to be lower for
ASHRAE 90.1-2019 relative to the USDA-HUD 2007 baseline: construction
costs for ASHRAE 90.1-2019 are projected to decrease by $257/unit in
Climate Zone 2A, and by $142/unit in Climate Zone 4A. Conversely, the
highest increase is projected to be $285/unit in Climate Zone 3B,
followed by $274 per unit in Climate Zone 3A. Added or incremental
construction cost can be negative for some building types for some of
the following reasons:
Fewer light fixtures are required when the allowed
lighting power is reduced. Also, changes from fluorescent to LED
technology result in reduced lighting costs in many cases and longer
lamp lives, requiring fewer lamp replacements.
Smaller heating, ventilating, and air-conditioning (HVAC)
equipment sizes can result from the lowering of heating and cooling
loads due to other efficiency measures, such as better building
envelopes. For example, Standard 90.1-2019 has more stringent
fenestration U-factors for some climate zones. This results in smaller
equipment and distribution systems, resulting in a negative first
cost.\158\
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\158\ See, for example, PNNL: https://www.energycodes.gov/sites/default/files/2021-07/Cost-effectiveness_of_ASHRAE_Standard_90-1-2019-NorthCarolina.pdf.
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Annual energy cost savings average $7,153 per building, or $224 per
unit, yielding LCC savings of an estimated $188,337 per building or
$5,886 per unit. Simple paybacks are immediate in two of the five
climate zones analyzed, and 0.4 to 1.5 years in the remaining climate
zones, resulting in an extremely fast average payback of just 0.1
years.
[GRAPHIC] [TIFF OMITTED] TN26AP24.129

4. State-Level Results
Table 27 provides multifamily added costs and savings for ASHRAE
90.1-19 over the 2007 edition for individual states.\159\ Most states
(38 states plus the District of Columbia) show lower per-unit added
costs for adoption of ASHRAE 90.1-2019 compared to the 2007 standard.
Incremental cost savings per unit range from a low of $44 in Illinois
to a high of $347 in Delaware. Only 13 states show increased
incremental costs: Alabama, Georgia, Mississippi, North Carolina,
Nevada, Oklahoma, South Carolina, South Dakota, Tennessee, and
Wisconsin. For these 10 states, increased costs average $169/unit,
ranging from $22/unit in Nevada to $297/unit in South Dakota. The
average incremental cost for all states is just -3/unit.
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\159\ Ibid., DOE/PNNL Special Tabulation provided to HUD 9/2/21.
Note that many states have already adopted more recent versions of
the code than ASHRAE 90.1-2007. As a result, actual costs and
savings can both be expected to be lower for those states.

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[[Page 33172]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.130

All states show energy cost savings, both those with incremental
cost increases and those that show lower incremental costs. Annual
energy cost savings average $208/unit, ranging from $152/unit (North
Carolina) to $328/unit

[[Page 33173]]

(Alabama). For the prototype 32-unit mid-rise building, this translates
into an average annual cost savings of $6,670/building, ranging from
$4,859 annual cost savings in North Carolina to $10,493 in Alabama.
The annual energy cost savings relative to lower incremental costs
in many states yield ``negative'' simple paybacks in these states;
where that is the case, Table 27 shows these paybacks as ``immediate.''
Average simple payback for all states is immediate. The states showing
lower incremental costs show immediate paybacks: For example, Ohio
shows a decrease in first costs of $192 per unit, but annual energy
cost savings of $218, in which case the payback on this investment is
immediate.
Table 27 also shows life cycle cost savings for this investment.
Average Life Cycle Cost savings for privately owned buildings are
$5,822/unit, with LCC savings estimated to be highest in Hawaii
($10,357 per building) and lowest in Idaho ($4,698 per building).
5. Total Life Cycle Cost Savings
Table 28 shows total estimated LCC Savings for ASHRAE 90.1-2019
relative to ASHRAE 90.1-2007. For the total estimated units that could
be impacted by the adoption of this code, incremental costs will be an
estimated $1.49 million lower than the cost of construction to the 2007
baseline. Annual energy cost savings are estimated to be $3.1 million,
and national LCC savings $83.4 million for privately owned buildings.
Costs and savings for states that have already adopted the 2019
standard are excluded from these totals, on the assumption that housing
will already be built to this standard, and no additional costs will be
incurred or savings realized. Additionally, states that have adopted a
more recent version than ASHRAE 90.1-2007 are expected to see reduced
costs as well as reduced savings compared to the analysis that relies
on ASHRAE 90.1-2007 as a baseline.

[[Page 33174]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.131

[[Page 33175]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.132

The Regulatory Impact Analysis at www.regulations.gov provides a
more granular analysis of the estimated cost benefits associated with
building to the ASHRAE 90.1-2019 standard, taking into account each
state's current baseline code. Using current state baselines, Table 29
(also RIA Figure 30) estimates a total incremental cost savings of $9.2
million, and a LCC savings of $44.1 million (at a 3 percent discount
rate).
[GRAPHIC] [TIFF OMITTED] TN26AP24.133

C. Final Affordability Determination--ASHRAE 90.1-2019

In light of the significant estimated savings, both annual and LCC
savings, and the nominal cost increase shown in Tables 27 and 28, HUD
and USDA have determined that the adoption of ASHRAE 90.1-2019 will not
negatively impact the affordability of the multifamily housing covered
by this notice. As shown in Table 27, the national average incremental
cost for adoption of this edition is -3/unit, while the annual energy
cost savings per unit averages $208/unit. In all but 10 states, the
incremental costs of building to this standard have in fact decreased,
not increased, relative to the current HUD and USDA ASHRAE 90.1-2007
standard: in none of these states is the added construction cost more
than $297/unit, and in that state (South Dakota), annual energy cost
savings are estimated to be $198/year, yielding a rapid Simple Payback
of just 1.6 years. Average (unweighted) payback for all states is
immediate, with 10 states having payback period of up to 1.6 years.
Estimated first costs are also a nominal fraction of total construction
costs: the weighted national average of 0.017 $/sf (less than two
cents) in added costs represents just 0.16 percent of the estimated
total building cost of $218/sf. Finally in every state analyzed, the
net LCC savings are positive, with a weighted national average of
$5,822 for privately owned buildings.

V. Impact on Availability of Housing

EISA requires that HUD and USDA assess both the affordability and
availability of housing covered by the Act. This section of this notice
addresses the impact that the EISA requirements would have on the
``availability'' of housing covered by the Act. ``Affordability'' is
assumed to be a measure of whether a home built to the updated energy
code is affordable to potential homebuyers or renters, while
``availability'' of housing is a measure associated with whether
builders will make such housing available to consumers at the higher
code level; i.e., whether the higher cost per unit as a result of
complying with the revised code will impact whether that unit is

[[Page 33176]]

likely to be built or not. A key aspect of determining the impact on
availability is the proportion of affected units in relation to total
units funded by HUD and USDA or total for sale units. These issues are
discussed below.

A. 2009 IECC--Single Family

In its 2015 Final Determination adopting the 2009 IECC, HUD
concluded ``[t]hough both higher construction costs and hedonic
increases in demand for more energy-efficient housing are expected to
contribute to an increase in housing prices or contract rents, HUD and
USDA do not project such higher prices to decrease the quantity of
affordable housing exchanged in the market.'' \160\
---------------------------------------------------------------------------

\160\ 80 FR 25901 at 25918 (May 6, 2015).
---------------------------------------------------------------------------

The current proposed update of IECC requirements constitutes a more
expansive impact. The per unit cost is greater than for the previous
rule. Revised estimate of the upfront cost of building to 2021 IECC is
approximately $7,229, ranging from a low upfront incremental cost of
$3,662 in Climate Zone 1 to a high of $8,845 in Climate Zone 8.
Likewise, the geographic scope of the impact of the proposed rule is
also more extensive than in 2015. In 2015, construction only in those
16 states that had not yet adopted the 2009 IECC or its equivalent was
directly affected. Conversely, only five jurisdictions have adopted a
standard that meets or exceeds the 2021 IECC requirements. Under this
notice, more than 100,000 newly built units would have to comply with
the 2021 IECC standard, compared to an estimate of 11,500 annually for
the 2015 notice that required IECC 2009 as a minimum standard. This
merits a more detailed discussion of the potential impacts on the
availability of housing to program participants as well as the housing
market overall. As set forth in this section of this notice, HUD and
USDA find that there would be no noticeable impact on the supply of
housing covered by this notice; there are many ways for both homebuyers
and builders to address the costs of the notice if buying or building
to the 2021 IECC is not advantageous; but, under very specific
conditions, availability could be constrained.
The focus of this availability analysis is on the purchase of newly
built homes by FHA-insured borrowers. While other covered programs are
important, FHA-insured single family purchases represent the
overwhelming majority of units that would be affected by final adoption
of the proposed standards. Homebuyers and builders of single family
homes will be more sensitive to the IECC requirement than renters and
builders affected by the ASHRAE 90.1 update because the estimated
incremental cost for single family homes is greater than the
incremental cost of updating ASHRAE 90.1.
1. Builder Impacts
Builders are required to build to the 2021 IECC standard only if
they wish to sell the new home to a borrower who has a mortgage insured
by FHA or guaranteed by USDA. If builders predict that the construction
costs outweigh the expected private benefits of building to the 2021
IECC standard, then the supply of newly built homes for FHA-financed
borrowers could contract. However, one of several incentives for
builders to build to the 2021 IECC standard is to preserve FHA-insured
borrowers as potential customers.
FHA-insured borrowers can be a large portion of potential buyers of
new construction in some markets. As shown below, in 2020, FHA-insured
loans financed just one percent of the purchases of newly built homes
in the Northeast, 8.3 percent in the Midwest, 11.0 percent in the West,
and a significantly higher market share of 24.5 percent of purchases in
the South.
The regions where construction activity is high (e.g., South and
West) are also areas where a higher share of buyers of new construction
are FHA-insured. In such markets, builders would be more inclined to
build to the energy code required by this notice. Having more potential
customers increases competition for a home and would reduce the
opportunity costs of time on market.
[GRAPHIC] [TIFF OMITTED] TN26AP24.134

The cost to a developer of adopting the standard includes the added
building costs, loss of potential customers unwilling to pay the
additional price, and any other distortions in design introduced by the
regulation. The builder can reasonably be expected to build an
affordable home to the 2021 IECC standard if: FHA-insured borrowers are
a significant part of the market for newly built homes; there is a
sufficient market return from energy efficiency; and the builder is
able to pass on some of the cost to the buyer. Under these conditions,
which will vary by climate zone and the state of the housing market,
availability is not likely expected to be adversely affected.
Conversely, builders may be discouraged from building to the higher
standard if FHA-insured borrowers are a limited share of the market for
new homes, e.g., in the Northeast, where only 1 percent of all new
homes are

[[Page 33177]]

FHA-financed. However, the impact would be limited because the number
of homes likely impacted would be close to zero and, more importantly,
there are already states in the Northeast considering adoption of the
2021 or 2024 IECC standards.
A second possibility is that the builder continues to build
affordable homes but not to the 2021 IECC. This would be the case when
and where there are significant profits from building new homes for
low-income homebuyers, even if not FHA-insured, FHA-insured borrowers
are not a major part of the market, perhaps because conventional loans
are relatively more affordable, the unlikely case that lower-income
homebuyers do not place a significant premium on energy efficiency, or
the builder is unable to pass on costs to the buyer. Under this
scenario, the total supply of affordable housing would not necessarily
be adversely affected, but new construction for FHA borrowers could
decline. A third possibility is that the profit margin from building
affordable housing is so slim that any change to the market could lead
to different development decisions. One alternative may be for builders
to build housing for higher-income buyers. This strategy could place
the home out of reach of some FHA-insured borrowers and thus reduce the
availability of some affordable housing. However, in both of these
cases, the impact is expected to be limited: estimates of the impact on
availability in the price elasticity model shown below indicate the
impacts are likely to be limited to an extremely small share of housing
supply (0.2 percent of all homes available to FHA-insured home buyers).
For further and more detailed discussion of different availability
scenarios, see the Regulatory Impact Analysis, Section 10.2 New
Construction, Housing Supply, and Availability of Housing.
2. Single Family Market Impacts
The change in market quantity depends not only on the decisions of
builders and the real estate industry more broadly but also on the
willingness of buyers to absorb a price change. The percentage
reduction of quantity is greater as demand and supply are more
responsive to price changes and as the incremental cost constitutes a
larger portion of the sales price.
The impact on availability, as measured by the quantity of housing,
would be given by:
[GRAPHIC] [TIFF OMITTED] TN26AP24.135

The percentage change in the quantity of housing, [Delta]Q/Q,
depends on the price elasticity of demand ED (the percentage change in
quantity demanded from a percentage change in price), the price
elasticity of supply ES, and the incremental cost [Delta]C, as a
fraction of the pre-regulation sales price P. The percentage reduction
of quantity is greater as demand and supply are more responsive to
price changes (more price elastic), and the incremental cost
constitutes a larger portion of the sales price before the introduction
of the cost.\161\
---------------------------------------------------------------------------

\161\ The pass-through rate is the proportion of the cost paid
by buyers, which is higher as demand is less price elastic and
supply is more price elastic.
---------------------------------------------------------------------------

Estimates from studies of the price elasticities of demand and
supply vary due to differences in methods, data, and geographies and
time periods examined. Generally, the estimate of the price elasticity
of demand for housing is below -1, as low as -0.2 for low-income
households, but has been estimated to be above -1. Generally, lower
income households have a lower measured price elasticity of demand for
housing. The positive association between income and the absolute value
of price elasticity stems from shelter being a necessary good.\162\
---------------------------------------------------------------------------

\162\ Mayo (1981) shows this to be the case when a household
must consume a minimum amount of housing (a Stone-Geary utility
function).
---------------------------------------------------------------------------

The price elasticity of supply and demand has been estimated at a
wide variety of levels for different housing markets, primarily due to
differences in the ease of building additional units, depending on the
metropolitan area, neighborhood and even type of housing.\163\ The
incremental cost of adopting the 2021 IECC is expected to be
approximately 2 percent of the pre-regulation sales price (a $7,229
incremental cost and $363,000 sales price). Our most cautious estimate
is that the approximately 2 percent increase in construction cost would
reduce the production of homes for FHA-insured borrowers by 1.5
percent, which represents a 0.2 percent reduction of all homes
available to FHA-insured homebuyers.
---------------------------------------------------------------------------

\163\ Gyourko and Saiz (2006) attribute the local variation in
construction activity to more than the cost of materials but also to
local wages, local topography, and the local regulatory environment.
---------------------------------------------------------------------------

This estimate is considered a ``worst-case'' scenario because it
does not account for any of the positive effects of energy-efficiency.
Any adverse impacts on availability would be diminished when there is a
perceptible demand for energy-efficient homes.
It is important to note that there would be no adverse effects on
the broader availability of housing options for FHA-insured homebuyers
if they are able to find close substitutes in other submarkets. Close
substitutes may include, for example, relatively new existing housing
or code-complaint new homes in adjacent or nearby communities with
similar features or amenities. Finding a close substitute may be more
difficult in rural areas where there is less available housing stock.
USDA guaranteed and direct loans are limited to eligible areas as
defined by USDA and exclude central cities. Thus, there could be a
greater relative burden on Section 502 guaranteed loans: about half of
USDA's guaranteed and direct home loans are to borrowers in rural areas
as defined by the 2010 Census as compared to about one-fifth of FHA-
insured mortgages (AHS, 2019).
However, adoption of the new code is not expected to have spillover
impacts on other housing submarkets given the relatively small size of
the directly affected FHA and USDA submarkets. The purchase of new
homes by FHA-insured borrowers represents only 2.3 percent of all
residential sales in 2020. As a portion of all home purchases (all
homebuyers, new and existing homes), FHA-financed purchases of new
construction range from slightly more than 0 percent in the Northeast
to slightly less than 3.6 percent in the South.
Energy efficiency has also been shown to impart an economic value
to buildings. The willingness to pay for this benefit will vary among
homebuyers. If there is a sufficient proportion who expect to realize
those gains, then there will be a demand for housing built to the 2021
IECC that could partially counteract any adverse impacts on
availability. See the discussions in the Regulatory Impact Analysis at
www.regulations.gov in the ``Capitalization of Energy Efficiency
Standard'' section (p.86).

[[Page 33178]]

Empirical studies cited in the RIA suggest there is a statistically
significant and positive influence of energy efficiency on real estate
values of energy efficient housing.\164\ One study examining the
residential market in California found that a green label adds about
2.1 percent to the value of a home. This premium is slightly above the
costs of bringing a home in compliance with the green labels (Energy
Star, LEED, and EnergyPoint).
---------------------------------------------------------------------------

\164\ Laquatra, J., Housing Market Capitalization of Energy
Efficiency Revisited, 2002.
---------------------------------------------------------------------------

Another study examined the premium placed on the Energy Star
certification on homes in Gainesville, Florida and found that there is
a premium for these homes but that the premium diminishes when the home
is resold; this finding could suggest that energy efficiency is a
motivator for buying newly built homes.\165\ Another two studies
examined the effects of a label, which would be a voluntary option for
the builder, rather than a code, which is obligatory.\166\ In another
study, researchers found that energy performance certificates do not
play a role in determining market value but that energy efficiency
itself is capitalized into housing sales prices (about 2 percent for
every 10 percent reduction of energy consumption).\167\
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\165\ Bruegge, C., Deryugina, T. and Myers, E., 2019. The
distributional effects of building energy codes. Journal of the
Association of Environmental and Resource Economists, 6(S1), pp.
S95-S127.
\166\ Bruegge et al., 2016; Kahn, Matthew E., and Nils Kok.
``The capitalization of green labels in the California housing
market.'' Regional Science and Urban Economics 47 (2014): 25-34.
\167\ Aydin, Erdal, Dirk Brounen, and Nils Kok. ``The
capitalization of energy efficiency: Evidence from the housing
market.'' Journal of Urban Economics 117 (2020): 103243.
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A survey by the National Association of Home Builders found that
the median borrower was willing to pay an extra $5,000 upfront to save
$1,000/year in utility bills.\168\ This tradeoff would be equivalent to
the resident receiving 10 years of benefits at a 20 percent discount
rate or 30 years of benefits at 25 percent discount rate. A recent
survey of the National Association of Realtors found that sixty five
percent of realtors believed that energy efficiency was valuable in
promoting residential units. (However, the majority of realtors (57
percent) were ``not sure'' as to the impact of energy efficiency on
sales price.) \169\
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\168\ Ford, Carmel. ``How Much Are Buyers Willing to Pay for
Energy Efficiency?'' Eye on Housing: National Association of Home
Builders Discusses Economics and Housing Policy. April 12, 2019.
https://eyeonhousing.org/2019/04/how-much-are-buyers-willing-to-pay-for-energy-efficiency/.
\169\ National Association of Realtors, REALTORS and
Sustainability Report--Residential, 2021, https://www.nar.realtor/sites/default/files/documents/2021-realtors-and-sustainability-report-04-20-2021.pdf.
---------------------------------------------------------------------------

A study of commercial buildings showed that a studio with an Energy
Star certification will rent for about 3 percent more per square foot
and sell for as much as 16 percent more. The authors were able to
disentangle the value of the label itself from the value of energy
savings stemming from increased energy efficiency. Energy savings were
important: a 10 percent decrease in energy consumption led to an
increase in value of about one percent over and above the rent and
value premium for a labeled building.\170\
---------------------------------------------------------------------------

\170\ Eichholz, P., N. Kok and J. Quigley, ``Doing Well by Doing
Good? Green Office Buildings,'' American Economic Review 100:5
(2010): 2492-2509.
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All of this empirical research shows that there are profit
incentives to providing energy efficiency. Such a price gain would
diminish any adverse effects on the supply of housing, although it is
also evidence that bidding for energy efficiency could reduce
affordability.
3. Evidence From Prior (2009 IECC) Code Adoption
Examining FHA new construction loans by the level of a state's
energy-efficiency standards can provide a rough indicator of the
potential impact of the IECC on availability. Having required a minimum
standard equal to the 2009 IECC (in 2015), the purchase of a new FHA-
insured or USDA-guaranteed home could depend on the strictness of the
state-wide code relative to the 2009 IECC. However, as shown in Table
19, in states where the state-wide standard is lower than that required
by HUD and USDA, the proportion of FHA loans for new construction
appears similar to states that have adopted stricter codes. For the
group where the state-wide code is at least as stringent as the 2009
IECC, the proportion of FHA-insured new construction loans is 16.9
percent, which is slightly higher than the 15.1 percent for the states
where energy codes are below IECC 2009. Despite the cyclical nature of
new construction, there is no compelling evidence that the availability
of newly built owner-occupied housing will be adversely affected.

[[Page 33179]]

[GRAPHIC] [TIFF OMITTED] TN26AP24.136

There is some regional variation. In the South, the proportion of
new construction is much higher in states above the IECC 2009 (32.7
percent) than in states below (16.6 percent). In the West, the
proportion of FHA new construction is lower in states with energy codes
above the IECC 2009 (12.3 percent) than in states below (19.1 percent).
A clear pattern is not identifiable in either the Northeast or Midwest.
Diverse climate zones and housing markets could explain why different
regions appear to respond differently to the energy standard.
4. Variability in Building Practices in Relation to Energy Codes
Note that there is wide variability in enforcement of, or
compliance with, building codes in general. Some states do not adopt
statewide building codes, others adopt for only certain building types
that may exclude single family housing, some states adopt codes with
amendments, while others that have adopted building codes may not
enforce them, either in their entirety or only for certain building
types.\171\
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\171\ Lawrence Berkeley National Laboratory, The Cost of
Enforcing Building Codes, Phase I, April 2013. Table 1 shows varying
compliance rates: https://www.researchgate.net/publication/282136731_The_Cost_of_Enforcing_Building_Energy_Codes_Phase_1.
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Conversely, a growing number of builders are incorporating above-
code energy efficiency or green building standards that meet or exceed
the 2021 IECC as standard building practice. Nearly 2.5 million Energy
Star certified single family, multifamily, and manufactured new homes
and apartments have been built to date, including more than 140,000 in
2022, representing nearly 10 percent of all U.S. homes built. Homes and
apartments that earn Energy Star certification are at least 10 percent
more efficient than those built to code. Since 2023, in most states,
Version 3.1 of the Energy Star program is the minimum Energy Star
standard for single family homes, which is designed to deliver at least
10 percent savings relative to all code versions up to the 2018 IECC.
Energy Star Version 3.2 will be implemented in states that adopt the
2021 IECC; Version 3.2 is designed to

[[Page 33180]]

deliver at least 10 percent energy savings relative to the 2021 IECC.
There are also a smaller number built to the DOE's Zero Energy
Ready Home (ZERH) standards. In addition, certain green building
standards set Energy Star as a minimum requirement. With the energy
efficient new homes tax credit (45L) of up to $2,500 now available for
Energy Star Certified Homes and up to $5,000 for DOE Zero Energy Ready
Homes for single family homes and, with prevailing wage requirements,
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, the market share for these above-code standards is likely to
increase.\172\
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\172\ For multifamily homes, the amounts of the 45L tax credit
change to up to $500 per unit for Energy Star Multifamily New
Construction and up to $1,000 per unit for DOE Zero Energy Ready
Homes if prevailing wage requirements are not met.
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There is widespread regional variation in adoption of these
standards because they are not typically mandated by municipalities for
single family home construction. There are regional variations in
above-code standards among builders as well. For example, for Energy
Star New Homes, adoption rates in most states are below five percent,
with very little in the northeast, while in the southwest the share of
Energy Star new homes is much higher, e.g., adoption in Arizona is
around 40 percent.\173\
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\173\ https://www.energystar.gov/newhomes/energy_star_certified_new_homes_market_share.
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In the multifamily sector, builders frequently build to above code
standards such as LEED, Enterprise Green Communities, ICC 700 National
Green Building Standard, PHIUS, the Living Building Challenge, or
regional programs like Earthcraft. Most of these programs embed Energy
Star New Construction within their standards while also addressing
other areas of health and disaster resilience requirements. Some
municipalities may require one of these above-code standards for new
construction of multifamily housing. In the affordable housing sector,
each state may also drive the choice of compliance with above-code
standards through their Low-Income Housing Tax Credit Qualified
Allocation Plans (QAPs). State QAPs may call out these above-code
standards specifically or may allocate points to other matching funding
streams that incentivize or require specific above-code standards.

B. ASHRAE 90.1-2019--Rental Housing

USDA and HUD have determined that in light of the extremely small
incremental first costs, or, in many cases, negative first costs,
adoption of ASHRAE 90.1-2019 will not negatively impact the
availability of multifamily units financed or insured through these
programs. Simple paybacks times are extremely low for the small number
of states that will see an increase in first costs, in most cases less
than one year. The estimate of the direct cost of construction of
moving to this code is not greater than zero. Even if there were a
slight increase in construction costs, the estimates of energy savings
are sizeable enough such that the benefits would offset the costs for
property managers. There could be some builders of multi-family
properties who are doubtful of the return and so view the ASHRAE 90.1-
2019 requirement as a net burden. For the hesitant developer, there
remain other incentives to comply: FHA multifamily loans allow a higher
LTV than is common and Low-Income Housing Tax Credits that are
frequently used by developers in conjunction with HUD financing often
carry a requirement or incentive for energy efficiency. In addition,
FHA's lower multifamily Green Mortgage Insurance Premium provides a
strong incentive for developers to adopt an above-code standard.

VI. Implementation

Under Section 109(d) of Cranston-Gonzalez (42 U.S.C. 12709), the
2021 IECC and ASHRAE 90.1-2019 standards automatically apply to all
covered programs upon the effective date of the specified affordability
and availability determinations by HUD and USDA. Accordingly, once a
Final Determination has been made by HUD and USDA under section 109(d)
(42 U.S.C. 12709(d)) and published, additional notice and comment
rulemaking will not be required for the covered programs.
Based on DOE findings on improvements in energy efficiency and
energy savings and a subsequent HUD and USDA Final Determination with
respect to both housing affordability and availability, HUD and USDA
programs specified under EISA will implement procedures to ensure that
recipients of HUD and USDA funding, assistance, or insurance comply
with the 2021 IECC and ASHRAE 90.1-2019 code requirements, commencing
no later than 30 days after the date of publication of a notice of
Final Determination. HUD and USDA will take such administrative actions
as are necessary to ensure timely implementation of and compliance with
the energy codes, to include Mortgagee Letters, notices, notices of
Funding Opportunity (NOFOs), Builder's Certification Form HUD-92541,
and amendments to relevant handbooks.
In addition, conforming rulemaking will be required to update FHA's
single family minimum property standards at 24 CFR 200.926d, Public
Housing Capital Fund energy standards at 24 CFR part 905, and HOME
property standards at 24 CFR 92.251, although as noted above, this
would not entail further notice and comment rulemaking. Similarly, USDA
will update minimum energy requirements at 7 CFR part 1924 to conform
with the requirements of this notice.
To enable these administrative and conforming rulemaking procedures
to be implemented and to provide the industry with adequate time to
prepare for these requirements and incorporate them in project plans
and specifications, proposals, or applications, adoption of the new
construction standards described in this notice will be required as
described in Table 32.
In response to public comment and to better enable builders to
adapt to these code requirements, the compliance deadlines are extended
beyond the dates in the preliminary determination, as shown in Table
32. As discussed in this notice, rural persistent poverty areas, where
capacity to adopt above-code standards may be challenging, have a
longer compliance timeline. Due to differing administrative procedures
associated with each program, compliance dates vary. The compliance
dates differ for example, for competitive grant programs that have
notices of funds availability or programs, such as FHA-insured
multifamily, that provide for pre-applications before firm commitments,
compared to application for building permits for single family
construction. The compliance dates are as follows:
(1) For FHA-insured multifamily programs, the standards set forth
by this notice are applicable to those properties for which mortgage
insurance pre-applications are received by HUD 12 months after the
effective date of this determination;
(2) For FHA-insured and USDA-guaranteed single family loan
programs, the standards set forth by this notice are applicable to new
construction where building permits applications will be or have been
submitted on or after18 months after the effective date of this
determination;
(3) For the HOME and Housing Trust Fund (HTF) programs, the
standards set forth by this notice are applicable to residential new
construction projects for which HOME or HTF funds are committed by HOME
Participating Jurisdictions or HTF grantees on or after

[[Page 33181]]

180 days after the effective date of this notice;
(4) For Public Housing Capital Fund, the standards set forth by
this notice are applicable to HUD approvals of development proposals
for new Capital Fund or mixed financed projects on or after12 months
after the effective date of this determination;
(5) For new construction occurring in higher needs rural areas
across all covered programs, the standards set forth by this notice are
applicable on or after 24 months after the effective date of this
determination. For the purposes of this notice, these are defined as
persistent poverty rural areas, as defined by USDA Economic Research
Service. This will include persistent poverty counties coterminous with
or persistent poverty census tracts located in rural counties as
defined by USDA. USDA will publish a map of rural areas covered by this
extension no later than 30 days after the effective date of this
notice.
[GRAPHIC] [TIFF OMITTED] TN26AP24.137

Compliance Paths
HUD and USDA interpret EISA/Cranston-Gonzalez to mean that any
energy code that is determined by a DOE or EPA analysis to have an
energy efficiency standard that is equal to or more efficient than what
is required under the 2021 IECC or ASHRAE 90.1-2019, is deemed to meet
the requirements of the 2021 IECC or ASHRAE 90.1-2019, respectively:
(1) EPA's Energy Star Version 3.2 certification for single family
and low-rise multifamily buildings, Energy Star Version 1.2 for
multifamily new construction, and DOE's Zero Energy Ready Homes Single
Family Version 2 certification or Multifamily Version 2, once it is
released on January 1, 2025, certification for multifamily buildings
will be accepted as evidence of compliance with the standards addressed
in this notice:
(2) Certain energy and green building certifications, provided that
they require and provide evidence of energy efficiency levels that meet
or exceed the 2021 IECC or ASHRAE 90.1-2019 or include certification
through EPA's Energy Star Version 3.2 certification for single family
and low-rise multifamily buildings, Energy Star Version 1.2 for
multifamily new construction, and DOE's Zero Energy Ready Homes Single
Family Version 2 certification or Multifamily Version 2 once released,
certification for multifamily buildings. These may include standards
referenced in one or more HUD or USDA programs,

[[Page 33182]]

such as the ICC-700 National Green Building Standard, Enterprise Green
Communities, Energy Star Certified New Homes, Energy Star Indoor Air
Plus, Leadership in Energy and Environmental Design (LEED), Living
Building Challenge, or Passive House, as well as one or more regional
or local standards such as Earthcraft, Earth Advantage, or Greenpoint
Rated New Home.\174\ HUD and USDA will publish a list, to be updated
annually, of those standards that comply with the minimum energy
efficiency requirements of this notice. HUD and USDA will also accept
certifications of compliance of state or local codes or standards for
which credible third-party documentation exists that these meet or
exceed the 2021 IECC and ASHRAE 90.1-2019.
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\174\ Energy Star Certified New Homes Version 3.2 and DOE's Zero
Energy Ready Homes set the 2021 IECC as the baseline standard.
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(3) 2024 IECC (pending publication). The 2024 IECC has
preliminarily been estimated by DOE to be at least 6.66 percent more
efficient than the 2021 IECC. Adoption of the prescriptive or
performance paths of the 2024 IECC will be an allowable compliance
pathway, upon publication of a final efficiency determination by DOE
that this edition is more energy efficient than the prior code.

VII. Environmental Impact

A Finding of No Significant Impact with respect to the environment
was made in connection with the preliminary determination, in
accordance with HUD regulations at 24 CFR part 50 and USDA Rural
Development regulations at 7 CFR part 1970, which implement section
102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C.
4332(2)(C)), and remains applicable to this final determination. That
finding is posted at www.regulations.gov and is also available for
public inspection between the hours of 8 a.m. and 5 p.m. weekdays in
the Regulations Division, Office of General Counsel, Department of
Housing and Urban Development, 451 7th Street SW, Room 10276,
Washington, DC 20410-0500. Due to security measures at the HUD
Headquarters building, please schedule an appointment to review the
finding by calling the Regulations Division at 202-402-3055 (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.

Damon Smith,
General Counsel, U.S. Department of Housing and Urban Development.

Xochitl Torres Small,
Deputy Secretary, U.S. Department of Agriculture.
[FR Doc. 2024-08793 Filed 4-25-24; 8:45 am]
BILLING CODE 4210-67-P