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How is rooftop solar capitalized in home prices?

Author

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  • Gillingham, Kenneth T.
  • Watten, Asa

Abstract

Residential solar installations have increased 10-fold over the past decade and are becoming more common in neighborhoods around the United States. This raises the question of how solar affects housing markets. Is the investment fully capitalized in home values? We review the literature on the solar home price premium and present a model to provide a framework for understanding the empirical challenge of quantifying capitalization. We estimate a hedonic model and find that the residual value of a homeowner-owned solar system at the time of a transaction is roughly fully capitalized into home values when we use a discount rate of 15%. Third-party owned systems exhibit a much lower capitalization. We find that solar homes are more likely to have made home improvements leading to substantial bias when home improvements are omitted. We conclude with opportunities for future research.

Suggested Citation

  • Gillingham, Kenneth T. & Watten, Asa, 2024. "How is rooftop solar capitalized in home prices?," Regional Science and Urban Economics, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:regeco:v:107:y:2024:i:c:s0166046224000309
    DOI: 10.1016/j.regsciurbeco.2024.104006
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    More about this item

    Keywords

    Rooftop solar energy; Hedonics; Housing markets;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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