Academic journal article The Journal of Real Estate Research

Sinkholes and Residential Property Prices: Presence, Proximity, and Density

Academic journal article The Journal of Real Estate Research

Sinkholes and Residential Property Prices: Presence, Proximity, and Density

Article excerpt

"A Florida couple is facing up to 20 years each in prison today for selling their home without informing the buyers about an enormous sinkhole that they knew was underneath it." ABCNEWS.go.com, October 9, 2015

Location matters. Spatial amenities, along with structural characteristics, have definite effects on residential property values. Although the bundle of structural characteristics is typically the primary value determinant, studies have shown that externalities and other factors can affect property values.1 Externalities/factors such as golf course, ocean or lake view, proximity to a church, school quality, and presence of trees have a positive effect on house prices while other externalities /factors such as environmental contamination, landfills, proximity to power lines, flood plain, abandoned buildings, and proximity to an interstate have a negative effect.2 In recent studies, Dumm, Smersh, and Sirmans (2016) show that waterfront properties command a price premium and Nyce, Dumm, Smersh, and Sirmans (2015) show that homeowner's insurance premiums have a negative effect on house prices.

We use Florida data to examine the effect of sinkholes on residential property values. We consider the presence, proximity, and density of sinkholes. As with other externalities, a sinkhole may be both a property characteristic and a negative externality since it may affect the value of surrounding properties. Along with hurricane and tropical storm risk, Florida ranks highest in the nation for sinkhole risk. However, sinkhole location is less random and more localized than hurricanes and earthquakes because their occurrence is more likely in areas where the land surface covers the types of rock (limestone, carbonate rock, and salt beds) that are naturally dissolved by groundwater.

Although states located primarily in the eastern United States are the most susceptible to sinkholes, other parts of the country are not exempt. Sinkholes have appeared in Texas and Louisiana as a result of collapsing salt domes. States such as Oklahoma, New Mexico, South Dakota, and Wyoming sit atop gypsum, another type of soluble rock that can dissolve rapidly in water. Although Florida is especially identified with sinkholes, if all underlying water soluble rock (karst, limestone, carbonate rock, gypsum, and salt) across the U.S. is considered, 40% of the ground cover of the U.S. is susceptible to sinkholes.

Our results show that sinkhole exposure has an adverse impact on real estate values. Although the coefficient for the presence of a sinkhole is negative, it is not statistically significant (likely a function of too few observations). However, proximity to and the number of sinkholes within a certain distance (density) have a significantly negative effect on residential real estate selling prices for nonsinkhole properties. These effects decrease with increased distance from a sinkhole and increase as the number of sinkholes increase.

Negative Externalities and Property Value

There is scant evidence explaining the relation between house prices and sinkholes, either in regard to sinkhole presence, proximity, or density. Only one previous study has examined the effect of sinkholes on house prices. Fleury (2007) applies a hedonic pricing model to 1990 census data and the Florida Geological Survey's Sinkhole Database to examine the relation between the presence/density of sinkholes to the home values. Using data for the Tampa Bay, Florida area, he estimates OLS and probit models with median home value by census block as the dependent variable. He finds no significant effect of sinkhole presence or density on home values. He posits as possible explanations: homebuyers may not be aware of sinkhole locations and that sinkholes may be viewed as water features where homebuyers do not distinguish between man-made lakes and sinkholes. However, another explanation may be that using census level data, such as median home value by census block, obscures the true price variation across properties that are affected by sinkholes and those that are not. …

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