31 Mar

Real estate pricing research provides evidence that properties potentially exposed to perceived or actual risks may experience price impacts. Looking Under the Hood reviews publications that illustrate the theoretical, methodological, and data challenges faced by scholars and practitioners studying detrimental conditions and their impacts on property values.

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Herrnstadt and Sweeney (2019) [1] conducted a research study aimed at quantifying the diminution in property value (PVD) of residential properties nearby existing natural gas pipelines following the San Bruno, California explosion. The explosion was a catastrophic natural gas pipeline explosion that occurred on September 9, 2010, in San Bruno, California, a suburb of San Francisco. The explosion was caused by the rupture of a 30-inch PG&E (Pacific Gas and Electric) natural gas transmission pipeline, resulting in a massive fire that destroyed 38 homes and damaged 70 others. The explosion caused eight fatalities and dozens of injuries. The pipeline rupture and explosion resulted in significant property damage and legal consequences for PG&E, which was liable for the incident. The San Bruno explosion was one of the deadliest pipeline accidents in US history and highlighted the need for improved pipeline safety regulations and infrastructure maintenance.

 The authors collected an inventory of thousands of sales from CoreLogic's DataQuick database from January 1996 to June 2012 and geospatial data from S&P Global Platts. The authors controlled for market conditions, including the 2008 recession. Several hedonic regression models, including difference-in-differences, triple difference, and difference-in-differences by quarter specifications, were utilized by the researchers to test their hypothesis. 

For further context, difference-in-differences (DID) is a statistical technique used to estimate the effect of a treatment or intervention (such as the pipeline explosion in the case of the San Bruno study) by comparing changes in an outcome variable (such as property value) over time between a treatment group (homes located near the pipeline) and a control group (homes not located near the pipeline). Triple difference (TD) is an extension of the DID method, which involves adding a third group, such as homes located near a different pipeline. The TD method allows researchers to control for the effect of other pipelines and better isolate the impact of the treatment on the outcome variable. Difference-in-differences by quarter (DIDQ) is a further refinement of the DID method that divides the analysis into specific quarters or time periods, allowing researchers to account for changes in market conditions and control for seasonal trends or other time-varying factors that may influence the outcome variable. 

The difference-in-differences regression model's initial output showed that buyers of single-family residential homes located 2000 and 1000 feet away from existing natural gas pipelines were willing to pay 1% to 3% less, respectively, after the explosion. However, the authors noted that it was challenging to determine whether the impacts were due to perceived or actual risks. Other model specifications did not reveal any significant impact on property values. In conclusion, the study suggested that pipeline risk can have a negative impact on housing market capitalization.

[1] Herrnstadt, Evan and Sweeney, Richard, Housing Market Capitalization of Pipeline Risk: Evidence From the San Bruno Explosion (July 16, 2018).  

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