Algae and Real Estate: Hedonic Pricing Analysis
University of Wisconsin--Stout
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This year the economics research group of the LAKES REU, in part, looked at how the housing market is affected by the algae problem in Lake Menomin and Tainter and the results were clear. The housing prices in Menomonie are much lower than they would otherwise be because of the presence of the algae blooms, especially the lakefront homes. We used a technique called hedonic estimation in order to isolate the effect of the lake on housing prices. Essentially it works by pulling out everything that affects the cost of a house; number of bedrooms, bathrooms, square footage, region, lot size, garage size, etc., and utilizing regression techniques to see how each individual attribute affects the price of a house. The median non-lakefront house in Menomonie is actually more expensive, around $133,055, versus $121,869 in the Chetek area and $107,100 around Cumberland. This is capturing the differences in desirability of the area, local labor market effects, and other area-wide idiosyncrasies. However the story changes when lakefront houses are considered instead. The typical lakefront house in Menomonie is worth $169,078, while in Chetek is worth $170,927, and is worth $175,215 in Cumberland. The lake premium is the difference between the lakefront and non-lakefront house within each region. The lake premium is what reveals the cost of poor lake quality and the estimated values reflect this. Cumberland’s lake premium, with the clearest major area lake in our study, is around $68,000, while Chetek’s is around $49,000, and Menomonie's is only $36,000. This suggests that if Menomin and Tainter were as clean as the lakes in Cumberland, the typical waterfront house would increase in value by $32,000. The lake premium results match what we would expect from water quality of the areas, which we measured by Secchi depth. Secchi depth measures water quality by looking at how clear the water is. The higher the number, the clearer the water. The Cumberland area has by far the best water quality with summer Secchi depth readings averaging between 8 and 13 feet. Measurements of lakes in the Chetek chain have the most variety with summer averages between 2 and 10 feet. Lake Menomin and Tainter both have the lowest average, which is around 3 feet in the summer. Our model also analyzed how much the value of a house would increase if the lake it were on increased in clarity. For each additional foot of Secchi depth, the housing value of a waterfront house goes up by $3,650. While this increase would cause some waterfront homeowners to spend more in property taxes, the added amount of property taxes would only be a bit more than $3.65 per house or slightly less than a non-happy hour beer at the Raw Deal. Aggregated, that $3.65 per lakefront house would be a huge, meaning more money for schools and community projects without increasing the overall tax rate. Even though our analysis failed to conclusively establish numbers for the houses that are not directly on the water, in part because it is difficult to separate from regional effects, it is highly likely that their value would also increase substantially though not as much. Future research will continue to explore this question. It’s important to note that perhaps the most valuable part of this research is how it reveals how much people value clean lake water by looking at behavior instead of asking them explicitly. Our survey results indicated that people often understated how much they were willing to pay to clean up the water but by looking at market behavior, we are able to get a more accurate estimate. Clean lake water is worth more to people than they perhaps realize.
Economics at Reed College