Fracking vs. Real Estate: Are home value declines near wells another multi-billion dollar subsidy for oil and gas industry?
From an Article By Joel Dyer, Boulder (Colorado) Weekly, December 12, 2013
New research indicates that many of the 15.3 million Americans living within a mile of a hydraulically fractured well that’s been drilled since 2000 may have lost or be in the process of losing a good portion of their wealth as a result of this drilling activity.
So just how big of a loss are we talking about cumulatively? If the research is correct, it’s billions upon billions of dollars. As a matter of perspective, recent research indicates that drilling wells within just one mid-size community such as Longmont could, in a worst-case scenario, trigger a drop in home values of more than 15 percent. And a 15 percent drop in Longmont real estate values, a town with a population of only 88,000, would equal somewhere around a $1.2 billion loss.
The losses of those living near wells is due to the diminishing values of their homes and property as a result of the fact that an increasing number of buyers have become hesitant to purchase real estate near fracked wells and their accompanying industrial production platforms. It also doesn’t help that fracking/oil and gas shale development is also threatening the primary and secondary mortgage markets. No buyer, no sale. No mortgage, no sale. It’s that simple.
The fracking/real estate conundrum will not be easily solved. It is not so simple as identifying the fact that most people won’t buy a home if it’s sited near oil and gas activity that they believe could be harmful to their health or negatively impact future property values. That part of the equation is just common sense and is indirectly linked to the ongoing scientific health debate over fracking.
Because perception is reality in the real estate market, informed buyers and qualified real estate agents are beginning to steer clear of houses and properties near oil and gas shale plays unless they are at a substantial discount to similar properties that are not threatened by such drilling activity. And if buyers and agents are aware of fracking’s impact on real estate values, you can bet that banks are also well aware of their potential exposure when lending money in those same areas.
If housing prices in an area fall because of the fear of fracking, then lenders stop lending in areas where fracking may occur, and when that happens, prices in those areas fall still further. Like many ups and downs within the investment community, it is a chain reaction triggered entirely by perception, but the results are all too real.
Small towns near shale plays all across the country, including Colorado towns like Rifle and Trinidad have already experienced the boom and bust cycles attributable to shale gas.
The housing additions that were new and promising a few years ago are today bank-owned eyesores. The new restaurants, hotels and businesses that came have mostly gone. Today even the businesses that existed before the wells came are struggling to hold on now that the oil patch has shifted to the next unsuspecting, ill-prepared community.
It seems hardly an honest position for the oil and gas industry to point to such boomtowns as examples of oil and gas shale development’s positive influence on real estate values. Industry folks know that, for the most part, the benefit to real estate values only occurs during a drilling boom phase of development due to severe housing shortages for workers in less populated corners of rural America.
In most areas where a larger population exists before the rigs move in — areas such as Colorado’s Front Range or similarly populated parts of Pennsylvania, New York and Texas — researchers have found that fracking has a substantial and negative influence over real estate prices.
In these more populated, more developed areas there is no upward pressure on housing prices when the drilling comes because there is ample housing and other businesses to handle any short-term influx of the drillingrelated workforce.
So the real, long-term impact on housing values for most Americans living near oil and gas shale development is to the downside due to the perception, right or wrong, that drilling and fracking may contaminate the air and water, create a visual/noise nuisance and threaten public health, at least that is what the research is finding.
A recent study titled “A Review of Hydro-Fracking and its Potential Impacts on Real Estate” which was conducted by the University of Denver’s Ron Throupe, a professor in the Daniels College of Business, along with his DU colleague Xue Mao and Robert A. Simons of Cleveland State University, found that the term “fracking” is having an influence on public opinion, and that when it comes to real estate, that influence is likely causing people to not buy or at best pay less for homes near such oil and gas activity.
The study surveyed homeowners in Texas, Alabama and Florida. The homeowners were asked if they would buy a home under certain conditions, which included that “an energy company had bought the rights to inject a pressurized mixture of water, sand and chemicals into a lower groundwater aquifer to recover natural gas under the property they were considering buying.”
In Texas, where residents have had a long relationship with the oil and gas industry, only about a quarter of those surveyed said they would be willing to purchase the house. Of those who said they would still purchase the home, the best offers were around 6 percent below what should have been the home’s market value.
While just over a third of those surveyed in Alabama and Florida said they would be willing to buy such a home under the set conditions, those still willing to purchase the property discounted the property more heavily than the Texans, claiming that they would only buy if they could pay 15 percent below what should have been market value.
The DU research also found that other factors near drilling operations, such as whether or not a home was on well water or city supplied water, also influenced potential purchasers’ willingness to buy and pricing.
Throupe and his colleagues are currently working on another research project examining the oil and gas industry’s impact on Colorado real estate specifically by actually mapping oil and gas wells and then analyzing the real estate nearby. That study will be completed in a few months.
In 2004, another study titled, “The impact of oil and natural gas facilities on rural residential property values: a spatial hedonic analysis” was conducted by Peter C. Boxall and Melville L. McMillan of the University of Alberta and Wing H. Chan of Ontario’s Wilfrid Laurier University. For simplicity this research will be referred to as the Boxall study.
The peer-reviewed Boxall study is believed to be the first actual study of the impact of oil and gas industry activity on real estate values. Because it examined a region on the edge of a significant population center, its findings may well be applicable to Colorado’s Front Range.
The Boxell study looked at the impact of gas wells and other associated industry development such as pipelines and production facilities on the values of real estate located just on the edge of Calgary, a million-plus-population city in Alberta, Canada. So the study looked at a populated area more similar to Colorado’s Front Range or the Barnett Shale’s proximity to Fort Worth, Texas, as opposed to a small isolated town like Williston, N.D.
The Canadian researchers examined how the fear of health risks from gas wells and the perceived lost amenity attributes caused by wells affected real estate values.
It’s also important to note that this study revealed that the oil and gas industry had paid for three prior consulting papers examining the industry’s impact on real estate values, and that those papers had all claimed that no negative impact existed.
However, the peer-reviewed Boxell study researchers found that all three industry-funded papers had serious shortcomings in the processes used to arrive at their conclusions and that the findings were, in fact, in error.
The Boxell study concluded, “The results of this analysis strongly suggest that the presence of oil and gas facilities can have significant negative impacts on the values of neighboring rural residential properties.” The report found that properties located within four kilometers (2.48 miles) of gas wells lost between 4 percent and 8 percent of their value.
Perhaps most importantly, the Boxell study researchers also recommended that the findings of this study and others that would be done subsequently should be used in the U.S. and Canada as a way to help determine proper compensation to homeowners whose property values have been negatively impacted by oil and gas activity.
In many ways that suggestion could be a short-term answer for those communities and counties that are trying to prevent invasive oil and gas shale development while more research on fracking’s impact on public health and the environment is conducted.
If oil and gas companies were legally made to pay proper compensation for surface damages, which logically should include real estate value damages to homeowners, it is likely that much of the proposed drilling near populated areas such as Colorado Front Range communities like Longmont, Lafayette, Fort Collins and Broomfield would be deemed uneconomical, as damages could easily reach into the tens of millions of dollars or more for any well located in close proximity to concentrated housing.
At this point, the only reason that oil and gas companies can drill close to or even within communities is because outdated state laws regarding surface damages which exclude real estate value losses to nearby homeowners are, in fact, acting as a multi-billion dollar subsidy for the world’s most profitable industry.
And this is only the impact that the oil and gas industry is having on real estate values. Next week BW will be examining how oil and gas development is threatening to implode the primary and secondary mortgage markets of the United States. It’s a problem that has thus far stumped some of the best legal minds in the country. But a solution must be found quickly before the next chain reaction starts unwinding more financial markets.