Wednesday, January 15, 2014

To Sell Or Not To Sell: The Impacts of Pollution on Home Transactions

Numerous nonmarket valuation studies have examined the impacts of environmental commodities on house prices, but little attention has been given to how shifts in these commodities affect the occurrence of home transactions, and the resulting welfare implications. Using a novel theoretical framework and an empirical analysis of homes impacted by petroleum releases from underground storage tanks, this paper demonstrates that changes in environmental quality can significantly impact a household’s decision to sell their home, and that this change in behavior has important implications towards theoretical welfare measures and empirical estimates. A discrete time duration model is estimated using a panel of single-family homes from 2000 to 2007. The dependent variable is the annual occurrence of a sale at each individual home. I find that contamination and cleanup activities in close proximity significantly impact the probability that a home is sold. Most striking is that this probability is reduced by about 50% during ongoing cleanup. This finding is most pronounced among lower quality homes and where an exposure pathway is present.
Source US EPA - Removal of leaking Underground Storage Tank and contaminated soil
Depro and Palmquist (2012) ... estimate a discrete-time binary choice model, and examine how characteristics of the home, the household, macroeconomic trends, and of particular interest, changes in local ozone levels, impact the probability that a household decides to sell their home and successfully does so in a given year. They find that the probability of a household moving and choosing a new housing bundle is 2.1% higher when ozone concentrations increase by 1 part-per-billion (ppb), relative to the levels at the time the home was first purchased. They conclude that households do exhibit ozone averting actions in deciding when to re-optimize and choose a new home. Depro and Palmquist also find that households are more likely to move when ozone levels improve, an effect that is slightly less (a 1 ppb decrease in ozone implies a 0.5% increase in the odds of moving).
Before a leak is discovered the probability that a home within 500 meters of a LUST is sold in a given year is 4.81%. According to model 2.A the discovery of a leak increases the annual probability of a sale 0.46 percentage points, from 4.81% to 5.27%. During cleanup, however, it seems the annual probability of a sale decreases to 4.27% (=4.81-0.54). After closure of the leak investigation and completion of cleanup, the annual probability of a sale seems to increase again to 5.29% (=4.81+0.48), which is above the transaction rate prior to the discovery of the leak. Although the effects of the leak and cleanup are seemingly small, the percent changes in the annual probability of a sale range from negative 11% to positive 10.0%....
Model 2.B, which includes interaction terms allowing the coefficients on nearby USTs and LUSTs, and the impact of leak and cleanup activities, to vary across public water and private well homes.19 In the public water column, the positive and statistically significant coefficients on leak discovered and post-closure suggest that the opening and closure of a leak investigation lead to an increase in transactions relative to before the leak was discovered. Most striking, however, is that for homes on private wells cleanup activities reduce the probability of a sale by 1.90 percentage points. The probability that a home with a private well is sold in a given year is 3.59%, on average, implying that cleanup leads to a 53% reduction in the probability that a home is sold.
In an earlier hedonic study of these data, Guignet (2013) found that transaction prices were 11% lower among homes where the private well was tested. These were the homes where households were most at risk to exposure, and where they were formally notified of a nearby release and of actual or suspected contamination in their private well.
The full report is available free of charge at http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2014-01
By Dennis Guignet
U.S. Environmental Protection Agency (EPA) National Center for Environmental Economics (NCEE) Working Papers Number: 2014-01; Document Date: January 2, 2014
Keywords: housing market; property transactions; discrete time duration model ; hedonic analysis; leaking underground storage tanks; groundwater contamination

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