cost versus rewards

[J.P.M.]

From a recent Forbes article discussing home prices in our area (San Diego) -
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For the average installation, the authors found that solar panels added a $20,194 premium to the sales price of the house based on repeat sales data (houses were in the mid-$500,000 range). Solar is really expensive to install—the average total system cost is $35,967, but the effective price to homeowners with subsidies including the federal tax credit is $20,892. Thus, homeowners appear to recover approximately 97% of their investment costs – in addition to the savings associated with reduced energy bills.

By contrast, a luxury kitchen remodel brings a 60% payback, according to Hanley Wood’s 2010-2011 Cost v. Value report. A new steel front door brings a 102% payback. For the Hanley Wood report, click here. Of course it depends on your personality as to whether you get more enjoyment out of ushering guests through a steel door, showing off new granite countertops, or leading a tour of the mechanical guts of a photovoltaic system.
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Thank you for the info.

That may well be. If so, I'm glad. I could use a little good news just now. I'll dig out the article. I'd like to trust authors, just as I'd like to trust vendors, but I also like to verify the claims of both for the same reasons. Until then, I'm not sure how I'd handle salvage/resale value. Maybe less conservatively than treating any appreciation like found money as is my current tendency.

There's a lot of middle ground between too conservative and too optimistic. I've found most decent solar decisions fall somewhere in the middle. Being conservative for unknown situations or untrusted data is the way I've generally gone, but I'd like to think I can be objective enough to not cut my nose off, leave $$'s on the table, look stupid and thus perhaps lose some credibility in the face of new, verifiable information. BUT, I try to remember, that not everyone who tells me good news is necessarily telling me the truth, or the whole truth. Same with naysayers and bomb throwers with respect to bad news.

I will suggest that assuming a future value for anything is a bit like buying a pig in a poke. Maybe it'll have lipstick.

[pleppik]

Residential solar as it's currently marketed and sold, in the U.S. anyway, is not usually the most cost effective choice of ways to reduce a residential electric bill, pretty much independent and regardless of people's ignorance of the subject.

I'm assuming that the PV system is owned, in which case for purposes of the resale value of the house it is a sunk cost. If there's an ongoing financial obligation (such as a lease) tied to the PV system then that changes things considerably.

Once the system is bought and paid for, it doesn't matter whether it was the best way to save money or not. You're stuck with it.

[J.P.M.]

I'm assuming that the PV system is owned, in which case for purposes of the resale value of the house it is a sunk cost. If there's an ongoing financial obligation (such as a lease) tied to the PV system then that changes things considerably.

Once the system is bought and paid for, it doesn't matter whether it was the best way to save money or not. You're stuck with it.

Which is precisely and exactly why I suggest folks do their homework first and look before they leap. The homework part is getting aware of some economic savvy. The looking is the investigation part, determining loads, sizing, quotes, etc. The leaping part is the decision. Until that time (the end of the decision making process), and action ( go/no go/ wait), the acquisition cost is an avoidable future cost whose value is part of the decision process.

Once the decision is made to acquire and $$'s & resources committed, it becomes a sunk cost. It has no bearing on future decisions. At that point you are indeed stuck with it, good or bad. W/out getting into how emotions influence decision making, that's most of the extent of sunk costs.

For purposes of resale, the sunk cost matters not. As you state, your stuck with it. The salvage value is what matters - that is, how does the system affect the resale price of the house, and something that affects the after decision future.

[prhamilton]

I put a solar system on my roof 2 years ago and then sold my house last year. When we got an offer I countered back with with 15K more and had the agent explain the solar system and show them all the cost savings and the price paid for the work.

In my mind I recouped the cost but I know they could've rejected the counter or accepted because they liked the backyard and never bothered to figure out the solar.

[prhamilton]

And you people that say the difference between a bond is you get your money back drive me crazy. The internal rate of return takes a series of cash flows. If you are setting up your cash flows correctly it will show the bond principle coming back to you at the end of the term and interest rate will account for that. Its an apples to apples comparison, it accounts for the fact that you get your money back in 20 years with the bond.

Try it for yourself use the IRR function in excel:
Bond cash flow = -100, 5, 5, 5, 5,..., 100 = 5% rate of return
Solar cash flow = -100, 10, 10, ..., 0 = 8% rate of return

[J.P.M.]

From a recent Forbes article discussing home prices in our area (San Diego) -
=================
For the average installation, the authors found that solar panels added a $20,194 premium to the sales price of the house based on repeat sales data (houses were in the mid-$500,000 range). Solar is really expensive to install—the average total system cost is $35,967, but the effective price to homeowners with subsidies including the federal tax credit is $20,892. Thus, homeowners appear to recover approximately 97% of their investment costs – in addition to the savings associated with reduced energy bills.

By contrast, a luxury kitchen remodel brings a 60% payback, according to Hanley Wood’s 2010-2011 Cost v. Value report. A new steel front door brings a 102% payback. For the Hanley Wood report, click here. Of course it depends on your personality as to whether you get more enjoyment out of ushering guests through a steel door, showing off new granite countertops, or leading a tour of the mechanical guts of a photovoltaic system.
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I downloaded the paper. I'm on my second read. While I'm not an economist, IMO, the article referencing the paper did a poor job of describing the paper's theses.

Briefly:

1.) The paper did not state home prices have increased due to solar in terms of a percentage as the article seemed to allude. Among other things, the paper described a set of parameters and suggested conditions, including preferences among certain classes of potential buyers (Prius drivers vs. pickup truck drivers for example, and others), and how solar may affect perceived worth as a some percentage of price with respect to "similar" homes without solar. Those $$ figures quoted are for specific areas in S.D. and certain specific buying groups. This translates to a "roughly" 3% premium in some areas (those with more prius owners, per the abstract).

2.) The paper was not deceptive - perhaps only boring, of limited use, and easily misused by people looking at meeting a deadline and filling magazine pages w/tripe maybe. IMO, the magazine article appeared written by someone unfamiliar with the subject, new to their job and maybe sent by their boss on a training exercise.

2.) The study was published at the end of 2010. A lot has happened in 4+ yrs. I'm not sure it has the same validity it had in 2010. Furthermore, the study covers home sales from 1997 through 2009, thus further decreasing the validity and appropriateness of comparisons to today's market and buying public, making comparisons and conclusions about present prices and marketing conditions less valid still.

3.) The study made no mention of how the variation in price as f(time) may affect perceived worth. In 4 1/2 yrs. for example, solar prices have dropped, giving a $50K system purchased 5 yrs. ago maybe a $30K replacement cost for new and perhaps (even if only perceived) better equipment if purchased today.

4.) IMO, the paper takes 20 pages of text and 8 or so pages of table/charts to make what seems to be a somewhat academic statement of a commonly heard mantra: A house is only worth what someone's willing to pay. It just does it in a more sophisticated way than a brief magazine article from 4+yrs. ago can accurately describe.

5.) I'm on my second reading. I'd recommend download/read for those interested in the subject.

[billvon]

IMO, the paper takes 20 pages of text and 8 or so pages of table/charts to make what seems to be a somewhat academic statement of a commonly heard mantra: A house is only worth what someone's willing to pay.

Absolutely. "What someone is willing to pay" is a very heavily studied subject since it does, effectively, set real estate prices. (And as the paper points out, this is not always directly related to the monetary value of the improvement.)

.. . . and how solar may affect perceived worth as a some percentage of price with respect to "similar" homes without solar. Those $$ figures quoted are for specific areas in S.D. and certain specific buying groups.

Agreed, although as mentioned above, "perceived" worth is equal to actual real-estate market worth, when the person doing the perceiving is the potential home buyer.