Real Estate Value Impacts From Fracking: Industry Response And Proper Analytical Techniques
Clarion Associates, Inc
DePaul University – Driehaus College of Business
December 1, 2014
Real Estate Issues 39(3), 2014, 6-20
In this article, we discuss how fracking can affect housing prices in both positive and negative ways. We then critique several recent papers that use hedonic regression to analyze the effect of fracking on house prices and conclude that fracking has an unambiguously negative affect on housing prices. We identify serious methodological problems and data shortcomings in these studies; and discuss how to correct these problems and shortcomings. We conclude that much more research into the effects of fracking on real estate prices and values is needed before this issue is resolved.
Real Estate Value Impacts From Fracking: Industry Response And Proper Analytical Techniques – Introduction
Fracking has emerged as an environmental and real estate issue in the past 10 years because of the enhancements in drilling technology that enable oil and gas to be economically captured from shale deposits in many parts of the country. Figure 1 below shows the various shale formations across the country in which fracking is either actively underway or potentially possible in the future.
In some fracking exploration and development areas, especially above the Marcellus Shale formation in New York and Pennsylvania, there are serious concerns that future groundwater contamination and methane leaks will invariably lead to adverse impacts on home prices and values and affect mortgage lending.
In this article, we discuss the following six points to consider before concluding that fracking will inevitability lead to adverse impacts on home prices, values and mortgage lending:
- First, economic factors that can enhance prices and values in fracking areas must be carefully weighed against environmental concerns that could create potential negative impacts;
- Second, the oil and gas industry and federal, state and local governments are developing programs, policies and regulations to decrease the risks of environmental contamination to respond to groundwater and well water contamination concerns, and to mitigate potential adverse impacts of fracking on home prices and values;
- Third, the real estate appraisal profession has developed well-established methods for determining the impact of those risks and the effectiveness of industry and government responses on prices and values;
- Fourth, the few fracking impact studies published to date have weaknesses and limitations, and are only an opening round in what will be a long process of understanding the effects of fracking on the single-family real estate market;
- Fifth, past studies related to oil field groundwater contamination and methane leaks show that real estate impacts, when they do occur, typically are temporary and can be eliminated by careful environmental and policy responses;
- Sixth and finally, mortgage lenders and real estate appraisers will be able to deal effectively with the additional risks for the security of mortgage loans extended to borrowers in communities and regions where fracking is taking place.
Real Estate Impacts From Fracking: Tallying The Pluses Against The Minuses
There are both pluses and potential minuses for communities and regions experiencing fracking exploration and development. Fracking creates jobs, and more workers mean increased demand for goods and services resulting in an enhancement to retail and commercial real estate values. While that can put pressure on local rents, making it more difficult to find affordable housing in fracking boom areas, it also enhances the value of existing rental properties, and even single-family homes. The net result is an economic benefit to the local economy and increased state and local tax revenues. For example, North Dakota, as a result of oil drilling in the Bakken formation, has the lowest unemployment rate in the country. Between 2007 and 2012, it also had the most counties showing increases in median household income. Shale development impact fees levied by some state and local governments have generated significant investment in local infrastructure, which in turn creates jobs and enhances local property values. For example, the Pennsylvania Public Utility Commission estimates that the Commonwealth of Pennsylvania collected $225.75 million in drilling impact fees in 2013, an increase of 11.4 percent over the 2012 impact collections1 and much of that revenue is redistributed to local governments.
The value of the land on which the fracking operations occurs also typically increases because of well site rents and royalty revenues. Rents—sometimes called “signing bonuses”—for drilling sites have been increasing rapidly. In Ohio, Pennsylvania and New York, signing bonuses that were at $2.00 to $5.00 per acre pre-2000 had increased to $30 per acre by 2005, more than $2,000 per acre in 2008, and typically ranged between $5,000 and $10,000 per acre in 2012.2 The Oil and Gas Monitor reports that “historically, in the eastern United States, oil and gas royalties were in the range of 12 to 14 percent” but that at least one production company has paid rates as high as 20 percent in fracking boom areas.3 Both Pennsylvania and New York have state laws guaranteeing a landowner royalty payments equal to at least 12.5 percent of the “value of production.”
The Governmental And Oil And Gas Industry Response To Fracking Concerns
State and local governments across the country have been reviewing and revising regulations related to oil and gas explorations in response to some of the unique issues raised by horizontal drilling and fracking. A statewide fracking moratorium in New York has been in place for six years while the state’s Department of Environmental Control (DEC) considers the scope of necessary regulations. As shown on Figure 2 below, many cities and towns in New York State have adopted zoning and land use laws either prohibiting fracking or significantly limiting its use as a drilling technique.
See full PDF below.