Something in the Water? Testing for Groundwater Quality Information in the Housing Market

Abstract:     
I test the level of information regarding possible groundwater contamination present in the real estate market in Washington County, Minnesota, where an approximately seven square-mile trichloroethylene plume has affected hundreds of households’ water supplies since at least 1988. By combining house sales and characteristics data from the county tax assessor, geographic information systems data, and data on which houses were chosen by environmental regulators to have their water tested and when, I first test whether the real estate market reacts to the groundwater contamination at all. Second, I test whether this reaction occurs only for homes that are most likely to have contaminated water, or if the market groups some houses that have little realistic probability of groundwater contamination in with those that are most likely to have contaminated water.

The results indicate that the market negatively reacts to groundwater contamination. Depending on the relative availability and accuracy of information, the market is at different times completely informed and incompletely informed as to the location of the plume. A disclosure law passed in 2003 might have added new, low-cost and imperfect information to the market that could explain the change in how informed the market was.

Keywords: hedonic, real estate, information in markets

JEL Classifications: D80, K20

Working Paper Series