That dream home seem priced too low? The reasons could be environmental.

Beia Spiller
Published February 12, 2014 in ClimateEconomicsScience

Here’s the scene: You’re in the market for a home, and you’ve found one that has all the bedrooms, bathrooms, and features you desire. But the price looks a little low…why? A host of environmental factors could be at play, from those you can see to those you can’t. 

You may be familiar with how positive environmental factors like proximity to a lake or park can increase home value. One study in 2001, for example, found that homes on the coast in Orange County, CA cost $24,000 more than similar homes located only one mile away from the coast.

However, the converse is also true, and many people don’t want to pay for a house that has some sort of environmental problem nearby, either because they are worried about the risk to their health or water supply, or are put off by an aesthetic issue like an ugly smoke stack, drilling noises, construction lights, or bad smells.

These might seem like mere preferences, but the impact of such disamenities can be capitalized into the property’s value, resulting in lower prices for homes with local undesirable land uses or worsened environmental quality nearby. Hedonic estimation is a method of calculating the dollar value of each constituent part of an item being measured, for example, a home. Using this method, my colleagues and I recently wrote a paper investigating the housing market impacts of shale gas development in order to identify how proximity to shale gas wells is capitalized into the value of nearby homes.

Homes near shale gas developments

With shale gas wells, you can clearly see something is happening, and we found that house prices near shale gas developments fall for homes that rely on groundwater sources for their water supply, because of fears that the fracking process may pollute local aquifers. Whether or not fracking is in fact contaminating the water supply (arguments both for and against this claim have been hotly contested) is irrelevant when it comes to the impact on property values: if a potential home buyer believes there is a risk to his future water supply, regardless of the evidence to support this belief, he will only be willing to purchase that home for a reduced price.

In fact, our results of property value losses are consistent with the cost of installing a whole house water filter, lending some evidence that home buyers are hedging against the potential future need to filter their groundwater.  Shale gas wells are a very visible example of a potentially negative environmental factor; others are harder to see but no less impactful.

Cancer risks – Being near a Superfund site

Superfund sites have a cancer risk associated with them given the presence of toxic chemicals on site, and an EPA review found that homes near a Superfund site can cost up to 26% less than homes nowhere near the site. People are willing to pay to avoid cancer risk, or put another way, people are willing to pay less for a home whose location increases the risk of cancer.

Homeowners may not actually know the potential hazards of living near a particular site, since each site may have different chemicals or risks, but the presence of a site is an indicator that some risk does exist, so they respond accordingly.

Even if there is no demonstrated cancer producing source, property values can fall on perception alone. This happened in NV, where children began to contract leukemia at a much higher rate than the normal population. Nobody knew what the source of leukemia was, but housing prices still fell by 15% during the time of high risk.

Air quality problems – Being near a coal-fired power plant

Another study shows that being near a power plant can lower values by 7% or more for homes located within two miles distance. The negative aspects of living near a power plant are not just aesthetic, as they also produce air pollution, contributing to asthma and other respiratory diseases.

People are willing to pay to avoid these respiratory issues, so the purchase price of properties exposed to air pollution, whether or not they are near power plants, ends up being lower. Another hedonic study looked at air pollution more broadly and found that people are willing to pay $150-200 to avoid 1 μg/m3 reduction in PM10 concentrations (where allowable PM10 concentrations in the US are 50 μg/m3).

Water contamination problems – A home needs clean water

Contaminated water near a home site can cause health problems including gastrointestinal illness, reproductive problems, and neurological disorders, according to the CDC.  This is especially true for people with their own private water wells (like you’ll find in over 15 million households in the United States), because that water is not regulated or cleaned by the state.

Once again, potential homeowners incorporate this risk by negatively capitalizing it into home values, as was the case for homes located near large scale hog farms in NC. These farms not only produce bad odors (an aesthetic issue which can lower property values) but also can cause ground and surface water contamination through the movement of nutrients or antibiotics emitted by the farm. Due to these risks, a study showed that homes near these farms cost 9% less than homes located farther away.

It’s not black and white – Some may gain from these impacts

Although lower housing values are bad for the seller, they may be quite good for the buyer, allowing people to purchase homes when they otherwise could not. For example, we see a shift in demographics from the placement of power plants in the 1990s; families with lower income and lower education levels moved in, and the amount of homeowners renting their properties increased.

While no one should be forced to live in an unsafe environment, for some buyers environmental risk is secondary to a lower price that allows them to enter the housing market at all. That said, environmental justice implies that income level and socio-economic status should not be what drives exposure to environmental risk.

To return to the issue of proximity to shale gas development, it’s worth noting that gas companies need to pay royalties and bonuses to homeowners for drilling under their land. These royalties may be capitalized into the home value, so that the buyer will receive a stream of payments over time. On average, we find that homes without groundwater contamination risk (i.e., those with piped water) have net positive increases of $9,000 from being very near a shale gas well.

Unfortunately, sometimes the mineral rights are severed from the property rights, allowing the seller to keep the royalty payments, leaving the new buyer with no future payment stream.

The role of regulation and enforcement

Although it occurs all too frequently, no one should be forced into making a tradeoff between having a home, or a job, and a clean environment. Whether we are talking about power plants, natural gas development, commercial animal feed lots, or any other industrial activity, people living nearby have a right to expect that such operations are doing everything possible to minimize risks to health and the environment, and that strong regulations and vigilant enforcement will be in place to make sure that they do. 

Economic theory assumes everyone has perfect information. In an ideal world, a buyer would know all the pertinent environmental details about their new home’s surroundings. Since this information is often hard to come by (e.g., you might not know about a nearby Superfund site until the cleanup is in progress), a safe bet for all, buyers and sellers alike, is supporting a healthy and sustainable environment no matter where you chose to call home.