Understanding housing market responses to stringent energy codes

Abstract Increased energy efficiency in buildings is essential to reducing carbon emissions and addressing climate change. Massachusetts' Green Communities Act of 2008, aiming for a 50% reduction in carbon emissions by 2030 and net‐zero by 2050, mandates the Stretch Energy Code for eligibility for state funding. This code requires new residential constructions to meet stringent Home Energy Rating System (HERS) Index scores. While these requirements benefit the environment, they may increase construction costs, affecting housing production and affordability. Using the staggered municipal adoption of the Stretch Energy Code to tease out causal relationships, we analyze the effects of the Stretch Energy Code on housing quantity and price across municipalities in Massachusetts. The results indicate that more energy‐efficient single‐family properties command a sales price premium of 4.0%, and the Stretch Energy Code adoption is associated with a decrease in the quantity of new single‐family housing starts. Approximately 45.5% of the price increase is due to higher willingness to pay for energy‐efficient homes, with the remainder attributed to reduced housing supply. Our article is particularly relevant as policymakers seek to balance the objectives and address the tensions between “E” and “S” in their “ESG” policy packages.