Real Estate Value Impacts from Fracking: Industry Response and Proper Analytical Techniques

By Roddewig, Richard J.; Cole, Rebel A. | Real Estate Issues, Winter 2014 | Go to article overview

Real Estate Value Impacts from Fracking: Industry Response and Proper Analytical Techniques


Roddewig, Richard J., Cole, Rebel A., Real Estate Issues


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. …

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