Gail Neil is dreading the winter.
The Lakeview landlord has just spent $30,000 on a new boiler for the 12-unit building that her family has owned since the 1940s, but she suspects its modern efficiency still won’t offset the heating costs that await her.
“I’m frightened,” she said. “Everybody keeps saying how high heating costs are going to be, but I can’t imagine them being higher than they’ve been.”
Increasing rents to cover the heat, which last year cost about $2,300 a month, isn’t an option. “I have a lot of senior citizens, one of whom has lived in the building since before my family bought it, and a disabled person as tenants. They’re deciding between paying for food and paying for prescriptions,” Neil said.
“How could I raise their rent?”
As a property owner, Neil may qualify as an advanced student of the ugly specter of soaring heating costs. For though spiking energy prices have made themselves painfully familiar to anyone who has bought gasoline in the last few months, most home buyers have yet to put “energy efficiency” at the top of their shopping lists, according to Chicago-area real estate agents and home builders.
This month, the Federal Energy Information Administration announced that this winter’s heating bills are likely to jump by about 48 percent for Americans who use natural gas, with much of the increase brought on by the damage to natural gas production wrought by Hurricanes Katrina and Rita. FEIA said this will translate to an overall bill for the season of about $1,100 for the average home that’s heated by natural gas, an increase of about $350 from $750 last year.
The federal agency predicts worse for the Midwest, where it expects such costs to go up by 61 percent, to an average of about $1,400. The American Gas Association, however, predicted that the overall seasonal bill in the Midwest would average about $1,600.
In September, Peoples Energy Corp. put out a less-dire estimate of 39 percent higher bills.
“I don’t think people are taking it seriously,” said Mark Zipperer, owner of Re/Max Edge in Lakeview. Zipperer said the question of heating bills comes up rarely among clients who are house-hunting.
“I don’t see it affecting the housing market yet. People think it’s just a blip,” he said. “The consensus is that once they fix the refineries, prices will go back to normal.”
If they don’t, though, some say the consequences could be significant for the housing market, which has largely driven the economy for several years. This time, housing may feel a blow more than in previous price spikes, given Americans’ fondness for increasingly larger homes that need to be heated and for putting them in areas that require increasingly longer commutes and more fill-ups at the gas pump.
“It’s a double whammy of gas prices and heating costs,” agrees David Johnston, a Boulder, Colo., consultant on green building and energy conservation who says that home values in exurban areas might be the first to be hurt by rising costs.
“When you see a $200- or $300-a-month heating bill turn into $500 or $600, that raises eyebrows. People are going to start looking at how far they commute,” Johnston said.
“In far-flung suburbs of Chicago where it’s pretty tough to grab a train, people are going to start looking at what their priorities are.”
But Michael Carliner, an economist with the National Association of Home Builders in Washington, says that in previous energy crises, consumers didn’t alter their housing preferences.
“The ’70s and ’80s gave us a pretty good idea of what people say [about energy conservation] and what they actually do. They are different things,” Carliner said.
“They don’t tend to buy smaller houses or houses with lower ceilings or houses that are closer to work, to any significant extent,” Carliner said. “They tend to be more conscious of how efficient the equipment is in the house, and how well-insulated it is. There will be increased attention to things like that.”
Carliner says that until the heating season hits its stride, it’s too early to make predictions. “In terms of consumers, it’s hard to tell yet what’s happening, except maybe that people don’t drive around as much to go window-shopping for homes.”
A couple of weeks ago, Lake Forest broker Brad Andersen said he was surprised when a buyer asked him to research the heating costs of a $599,000 house in Lake Bluff.
“I must admit, I don’t remember the last time I was asked this, so it may be that it’s in the forefront of people’s concerns and something that will become more important in the next few months, when the heating season is in full swing,” said Andersen, managing broker of Griffith Grant & Lackie Realtors.
But some sellers are getting nervous, according to Nancy Fanning-Basso, a Century 21 McMullen agent on the Northwest Side who attributed a recent flurry of price reductions there and in Park Ridge — especially on large, pricey homes — to heating concerns.
“Typically, we see 2 or 3 percent reductions, but some are coming down 5 to 11 percent. That’s unusual. These aren’t overpriced castles that have been on the market for two years. They’re usually [on] 90 days or less.
“I have one seller who has come down $50,000 in his asking price,” a 9 percent reduction, she said. “He owns two properties, and he said [he wants to sell because] he doesn’t want to heat it.”
But builders and real estate agents say that clients, in general, are more focused on closet space and countertops than on BTUs.
Even at Bigelow Homes in Aurora, which has staked its reputation on energy efficiency — the builder currently guarantees that its buyers’ annual heating bills won’t exceed $400, total — it’s seldom the first thing on the minds of potential buyers, according to Mike Venetis, vice president of sales and marketing.
“About 65 percent of our buyers are coming from rental situations,” Venetis said. “For them, they most likely have had their heating included in their monthly rent. If you tell someone their gas bill is going to go up 71 percent, it doesn’t really hit home. They’re just not asking about it — at least not yet.”
But more renters may be about to get an energy education, according to Judith Roettig, executive vice president of the Chicagoland Apartment Association, a trade group for landlords in Schiller Park.
“There’s definitely some anxiety out there” among her group’s members, she said. Some larger landlords who managed to lock in prices by buying energy in bulk are now seeing those margins erode because of added energy fees from the City of Chicago, Roettig said.
“That somewhat eliminated some of the benefit of bulk purchasing. Then there are going to be added costs from the change in minimum heat requirements by the city,” she said.
“You’re going to see more and more buildings converting, long-term, to individual heating systems, where the tenant becomes responsible for his individual bill,” Roettig said. “Plus, we’re also hearing [landlords] talk more about allocating a portion of the heat [costs] back to the resident, allocated by square footage.”
Such a surcharge might not just be for renters. It’s an option that’s on the mind of Larry Goldstein, who is vice president of the condo board for a 144-unit townhouse complex in Buffalo Grove.
When he bought the townhouse three years ago, the complex’s natural gas bill was about $50,000, and last year it went to $70,000. Nicor has informed the association that it should expect to spend $125,000 this year, he said.
Under ordinary circumstances, the $300,000 held in reserve by the association would cover the need, but the 25-year-old complex also is facing the cost of replacing its swimming pool, its streets and roofing.
“I think what we’re going to have to do is have an 8 percent [assessment] increase and also put in a fuel surcharge, which to the average family would be about $312 a year,” he said.
“A lot of people who live there are new immigrants to the United States and people who are on low incomes or fixed incomes,” said Goldstein, whose daughter, a nursery school teacher, lives in the townhouse he owns. “This hurts.”
Other costs may show up indirectly. Many home-building components, for example, are petroleum-based, and affected by higher oil costs and the limitations on production and shipping brought on by the Gulf storms.
Such building staples as vinyl siding, vinyl flooring, PVC pipe and roofing shingles all are expected to take a hit.
“We’re getting rumors [of those supply-price increases], but nothing substantial,” said Neville Alperstein of Kimball Hill Homes, based in Rolling Meadows.
“We know that [the cost of transportation] is going to be a factor. It hasn’t reached down through the supply chain yet. It’s coming, but nobody can tell you how much or when. But it’s coming soon.”
Economists for mortgage financier Freddie Mac predicted this month that construction-material costs (including non-petroleum-based items) are facing upward price pressure and that increases of 5 to 10 percent for components could translate to a 2 to 3 percent increase in the cost of a home.
Further, high energy costs are feeding inflation worries that are expected to motivate the Federal Reserve Board to continue to raise short-term interest rates. Those rates have a coattails effect on longer-term mortgage rates — widely regarded as the principal driver of the long-running housing boom.
The Mortgage Bankers Association in Washington doesn’t expect drastic changes in mortgage rates, however. Its current forecast is for 30-year rates, which have been rising incrementally for weeks, to average 6.6 percent in 2006 — still low, by historical standards.
“Our view would be that [higher energy costs] would have less to do with purchase activity than with people making mortgage payments on time,” said the trade group’s chief economist, Doug Duncan.
“The last time we had a price spike in home heating fuels, we saw an increase in mortgage-payment delinquencies.
“Given a choice between making mortgage payments and keeping your house warm, people go with the warm house.”
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PART 1
FRIDAY IN YOUR PLACE
You can’t control the price of natural gas, but you can cut down on your use of fuel.
PART 2
SATURDAY IN NEW HOMES
New home buyers tend to focus on “price per square foot” of a house at the expense of energy-efficient options.
For the complete series, visit bancodeprofissionais.com/energy
mumberger@tribune.com
