For builders of energy-efficient homes, 2024 came in as a banner year.

Well over 410,000 homes have been rated for their energy efficiency using the Residential Energy Services Network’s (RESNET) HERS Index. In 2024, there are likely to be 20% more HERS-rated homes than in the prior record year of 2023. Consumer demand, energy-efficient new-home tax credits, investors, and utility and industry incentives have all contributed to these record numbers.

With President-elect Donald Trump set to take office on Jan. 20, 2025, and the Republicans controlling the House and Senate, what does the future hold for high-performance homes and the policies that impact how builders build?

Fears that the first Trump administration would cut significant programs from the Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE) never materialized. Even though Trump did withdraw the United States from the Paris Climate Accords, greenhouse gas emissions in the U.S. continued to decrease.

Talk has stirred up over the Department of Government Efficiency, but what about energy efficiency?

New Tax Legislation a Key Issue

The Tax Cuts and Jobs Act (TCJA) of 2017, passed under the first Trump administration, expires at the end of 2025. Congress must act to extend or reform this legislation. Any reform to the TCJA will likely include reductions in corporate and individual taxes, but a builder tax credit for water-efficient new homes might also be included.

Since the Republicans control the House and Senate by tiny margins, the effort will be to address the TCJA tax credits through a budget reconciliation process.  Reconciliation requires only a simple majority in the House and Senate and off-setting budget cuts. This is where the new Department of Government Efficiency could play a role. To accommodate the extension of the expensive tax cuts, major budget offsets will be required. One target is likely the clean energy investments enacted in the Inflation Reduction Act (IRA), passed under the Biden administration. Cutting or eliminating the clean energy tax credits and rebates contained in the IRA are likely on the table.

The IRA included a revision and extension of the energy-efficient new homes tax credit (45L), increasing it from $2,000 to $2,500 for Energy Star certification or $5,000 for Zero Energy Ready Home (ZERH) certification. Requiring home certification was important to ensure homeowners realize the expected energy savings from a government-backed program that requires third-party verification and quality assurance oversight. 

The popular builder tax credit has existed for nearly two decades and has bipartisan support. However, it should be expected that it will be considered for either elimination or reduction. 

There are reasons for optimism about the retention of the 45L tax credit. Recently, 18 Republican congressional representatives signed a letter to House Speaker Mike Johnson urging the retention of the clean energy tax provisions of the IRA, stating that the credits were creating good jobs in their districts. Even if 45L is retained, there will be pressure to either reduce the amount of the credit or reduce its life (currently through 2032).

RESNET will be working with its network to educate Congress on the value of the 45L tax credit in reducing the cost of homeownership and creating jobs and economic growth.

Despite what Congress does, changes are coming to the tax credit on Jan. 1, 2025, as detailed in this TBD February 2024 article. Most notably, Energy Star New Homes version 3.2 will now be required to claim the tax credit. Many builders have criticized the new version as too expensive to meet and no longer worth the $2,500 tax credit. Some have indicated they will not pursue the Energy Star tax credit in 2025, while others have pushed forward with ZERH to claim the $5,000 credit.

Water efficiency has gained momentum in the residential new construction market in recent years, with voluntary programs like EPA’s WaterSense Labeled Homes. A new builder tax credit of $2,000 for achieving the WaterSense Labeled Home certification has been suggested. This tax credit proposal has garnered support from RESNET, the Alliance for Water Efficiency, home builders, and plumbing product manufacturers. Such a tax credit could provide a much-needed boost for water efficient new construction practices. A recent policy white paper explains the rationale and potential water savings if the tax credit is implemented. 

Building Energy Codes — Does Uncle Sam Control?

Building energy codes is an important part of reducing energy costs for households and making homes more affordable. The national model energy code for residential construction is the International Energy Conservation Code (IECC). The nonprofit International Code Council develops this code through a typical standards development, consensus-based process. The DOE participates in the process as a technical resource but does not control its development or adoption.

The IECC is adopted at the state or local level, just as other building, plumbing, mechanical, electrical, and fire codes are adopted. This puts building energy codes outside federal government purview — primarily, but the White House still can exert control over efficiency requirements for federally-backed mortgages.

In April 2024, the Department of Housing and Urban Development (HUD) with the U.S. Department of Agriculture (USDA) announced that new construction homes financed by either organization must meet the 2021 IECC. This means that even in the 43 states that have not adopted an energy code equivalent to the 2021 IECC, builders will need to demonstrate that their homes comply with this code if a prospective homebuyer uses a HUD- or USDA-backed mortgage. The 2021 IECC is the same code that serves as the basis for the insulation requirements in Energy Star v3.2.

Whether this controversial rule through HUD and USDA will be part of the Trump agenda in 2025 has yet to be seen.

To learn more about the recent changes to the IECC, see this article.

The Tailwind for High-Performance Homes Remains Strong

Despite concerns of the Trump administration reducing requirements for energy efficiency, it’s important to keep in mind that much of what drives energy efficient new homes is outside of federal control. In the past decade, the number of HERS rated homes has increased by over 175% with builders voluntarily choosing to rate the energy efficiency of their homes. A variety of public and private incentives have helped spur this increase, including:

• Fannie Mae and Freddie Mac Green Mortgage-Backed Securities
• Environmental and sustainability reporting
• Investor demand for builders to demonstrate their environmental impact
• Local utility program incentives
• 45L energy efficient new home tax credits
• Flexibility in achieving energy code compliance
• Consumer demand for more efficient, sustainable, and healthy homes

Consumer demand is becoming an increasingly more important driver of high-performance homes as younger generations take over the homebuying market. In fact, according to the National Association of Realtors’ “Home Buyers and Sellers Generational Trends Report,” one-third of all buyers considered heating and cooling costs as a very important environmentally friendly feature, the highest of any environmentally friendly feature.

Another recent survey by ERM/Shelton revealed more about Americans’ feelings on the environmental impact of companies they purchase from:

• 61% of people in America hold companies strongly-to-very strongly responsible for making changes that would positively impact the environment.
• 65% of people in America say a company’s environmental reputation has a moderate-to-very-strong impact on their purchasing decisions.
• 35% of people in America say that in order for a company to be considered a “good company,” it needs to make a concerted effort to reduce its environmental impact.
• 58% of people in America say knowing a company is a leader in greenhouse gas reductions makes them feel better about that company.
• Only 9% say that would make them feel worse about the company.

President-elect Trump made reducing costs for Americans a cornerstone of his campaign. Supporting policies that reduce energy and water costs in America’s housing is an excellent way for his administration to keep that promise and insulate millions of households from future energy and water cost spikes.