March 6, 2023

The economic fallout from environmental crises

The effect of the Flint water crisis on housing prices.

Source: zhuravlev

The Flint water crisis has been linked to a range of health problems, such as lead poisoning and Legionnaires' disease. Many residents also struggle with PTSD and depression

Now, according to a paper in the American Economic Journal: Economic Policy, damage to the Flint housing market can be added to the list of long-term costs. Authors Peter Christensen, David A. Keiser, and Gabriel E. Lade estimate that Flint’s housing stock suffered more than half a billion dollars in losses.

Given that many Americans’ net worth is tied to housing wealth, the findings illustrate that Flint homeowners have experienced significant economic damages. 

In April 2014, the city of Flint, Michigan, changed their water supply source from Lake Huron to the Flint River as a temporary measure while they moved from reliance on the Detroit Water and Sewer Department (DWSD) to a pipeline partnership with other regional governments.

Flint residents noticed water quality issues immediately following the change, and over the next 18 months it was revealed that the water source change and subsequent corrosion of the water distribution pipes exposed roughly 100,000 residents to dangerous levels of lead and other contaminants.  A public health emergency was finally declared in October 2015, and the city reconnected to the DWSD water supply shortly afterward.

The authors examined the timeline of the crisis in detail, using Google searches and consumer purchases, such as bottled water and water filters, to study residents' awareness of the issue. 

“We were curious to what extent the housing market reflected the understanding that there had been a lead contamination crisis,” Keiser told the AEA in an interview.  “Our results suggest that there had been some limited understanding and response after the switch, but it really accelerated once the residents in Flint had been informed that there was this major public health concern.”


Housing prices and lead tests
The chart below shows the smoothed average housing prices in Flint, the top three matched control group cities, and the emergency manager control cities in Panel A. Panel B graphs the cumulative number of lead tests and tests where lead concentrations violated EPA health standards over time (left axis) as well as the average lead test result in homes (right axis).
Source: Christensen et al. (2023) 


Using a difference-in-differences approach, the researchers compared the evolution of home prices in Flint to three other cities with similar demographics and economic histories: Youngstown, Ohio; Pontiac, Michigan; and Camden, New Jersey.

Compared to this control group, home values in Flint declined by 27 percent to 39 percent after the switch to the Flint River. Approximately 70 percent of that decline occurred after the public health declarations.

The authors also explored whether Flint’s ongoing financial troubles were a significant driver of this decline. Like several Rust Belt cities in Michigan, Flint was put in financial receivership in 2011 and given an emergency manager to address its budget shortfalls. 

However, compared to other Michigan cities with similar levels of financial distress, Flint’s housing-price collapse still stood out. Compared to a control group with emergency managers, average home values in Flint declined 36 percent to 43 percent—with roughly 70 percent or more of the decline occurring after the public health declarations.

In my opinion, unless the mechanisms that led to a decline in housing prices are addressed, there's really no reason to anticipate that they would increase.

David A. Keiser

These two approaches suggest that home values fell by about $27,400 to $29,400 per home, with most areas of Flint experiencing losses of 20 percent or greater and showing little or no evidence of recovery even after the state spent over $400 million remediating the crisis.

According to the authors, the long-run housing market effects could be the result of several factors, such as an erosion of public trust, stigma, the continued use of bottled water, and physical damages done to homes’ internal plumbing. 

“In my opinion, unless the mechanisms that led to a decline in housing prices are addressed, there's really no reason to anticipate that they would increase,” Keiser said. 

This lasting impact on the housing market is important for assessing the benefits of federal regulations. Institutional failures and violations of federal regulatory requirements led to the Flint water crisis. But the cost–benefit analysis for a recently revised Lead and Copper Rule ignores the possibility of system-wide failures.  The authors' results suggest that current and future regulations should account for the possibility of long-term economic costs and diminished public trust.

Economic Effects of Environmental Crises: Evidence from Flint, Michigan appears in the February 2023 issue of the American Economic Journal: Economic Policy.