Last month a jury awarded a Texas family nearly $3 million, including $275,000 for the loss in market value of their property, in a lawsuit against a gas company that was using fracking techniques near their home. It was the first case involving fracking to go to trial, but it’s doubtful it will be the last one.
The jury’s award is certainly not the first strike against fracking. A recent working paper released by the National Bureau of Economic Research1 argues that fracking has mixed effects on property values. The paper shows that shale-gas development analyzed across broad geographic areas has an overall positive effect on house prices, but this benefit diminishes over time. And more importantly, this benefit is not shared by all houses in a local area—it depends on their source of water. The authors looked at data from Pennsylvania and New York between 1995 and 2012 and found large drops in prices for houses dependent on groundwater near shale-gas developments. These losses in property value did not depend on the discovery of contamination due to fracking, but rather seemed to be caused by fears that the fracking process might pollute local aquifers. In real estate valuation, we refer to this as stigma,2 and it underscores the disconnect between actual and perceived contamination or risk.
Fracking does involve actual as well as perceived risks. A report by Anthony Ingraffea, a Cornell engineering professor, shows evidence that 6% to 7% of wells drilled in Pennsylvania between 2010 and 2012 have compromised structural integrity. That type of risk can cause banks to be hesitant to approve mortgages for property where fracking is taking place. We’ve discussed the risks associated with fracking many times before.
It’s important to note that not every fracking well will fail or have a problem.
“When you’re thinking about lending on these properties, there are a lot of different possible outcomes other than a disaster,” said Harry Weiss in a recent webinar. He is in the Environment and Natural Resources practice of the law firm Ballard Spahr.
Fracking can certainly be done in a safe way, but the risks outweigh the benefits for many banks. The presentation by Ballard Spahr listed Freddie Mac, Fannie Mae, and the Federal Housing Administration as others who do not allow gas leases on their loans.
As fracking has risen in the public eye, it has become a hot topic for gas companies, lenders, and those who live near fracking wells. During the trial between the Parr family and Aruba Petroleum Inc., we offered our analysis of the loss in property value. You can read more about it here.
Greenfield Advisors has studied the effects of fracking on the property values of those who live near fracking wells. To learn more about the experts available at Greenfield Advisors, call (206) 623-2935.