Wildfires and house prices

There’s no keen insight in the realization that homes on lake shore will command higher prices and those on an airplane flight path will be discounted. But there’s strength in the notion that, through math, you can ascertain a level of certainty about relationships. By stacking a whole set of prices up against numeric representations of features like crime, school districts, and transportation access, a methodology called Hedonic Regressions will generate a sense of the significance of the tie.

This paper about wildfires provides an easy-to-read example of how it works: Wildfire risk and housing prices: a case study from colorado springs. The method has been around since the early seventies, as mentioned in the paper.

The hedonic price method was originally developed by Rosen (1974) and since has been used to estimate the effect of a wide variety of environmental amenities on residential property prices. Typically, house price is regressed on a series of variables that describe the physical characteristics of the house (e.g., area of the house), the neiborhood (e.g., school district), and the environmental amenity under study. Household utility may, therefore, be ‘expressed as
U = u(X, Y, a),
where X is a vector of house characteristic variables, Y is a vector of variables describing clzaracteristics of the neighborhood, and a denotes the environmental amenity under study .

The authors observe that home prices are affected by proximity to wildfire risk. They note some other interesting factors. When a website provides more risk information, the relationship strengthens. More knowledge impacts the market. Also as time passes, and the memory of the fire retreats, the impact on prices also dampens. This all illustrates a milling and churning of a market process.

Many papers have been written since this one about the environmental effects on house prices. Pollution is a big focus. Proximity to road arteries as well. This use of hedonic methodology only scratches the surface of gleaning information from consumers’ choices.