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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While homes may escape direct damage during a wildfire, there is often interest in understanding the subsequent price impacts on these properties. Loomis [1] observed the property price impacts from a wildfire on unburned homes prices in Colorado. The Buffalo Creek Fire, which began in May 1996, encompassed an area of roughly 12,000 acres and resulted in the destruction of 10 homes in Buffalo Creek, leaving significant areas of burned land in its wake. Subsequently, after significant rainfall approximately two months later, a flash flood occurred taking the town’s water treatment system offline. These multifaceted events underscore the risk associated with real estate ownership in the post-wildfire period.
The author’s hedonic models benefited by having access to data from 500 residential single-family home sales. These sales encompassed a timeframe spanning from three years before the wildfire to five years after the fire occurred. The dependent variable in the hedonic specification was the house price, and the independent variables included acreage, presence of a fireplace, existence of a garage, number of bathrooms, year built, a time trend factor, and binary variables to indicate the period before and after the occurrence of the fire.
Hedonic property models, including both linear and semi-logarithmic approaches, have observed a significant drop in property prices in nearby Pine, a town located 2 miles away from a major wildfire. Property prices in this neighboring community, which was not directly burned by the fire, saw a decline of roughly 15%. This suggests that both prospective buyers and sellers changed their perceptions of fire risk, following the occurrence of this major fire event. Furthermore, the author suggests this adjustment in perception may also signal a potential decrease in the overall desirability of residing within a forested area, ultimately leading to a decrease in property prices.
[1] Loomis, John. “Do nearby forest fires cause a reduction in residential property values?” Journal of Forest Economics 10, (2004): 149-157.