Estimating the Value of Water from Property Sales in an Arid High Environmental Amenity Region: A Difference-in-Difference in Approach

This paper reports results from an analysis of residential property sales in a high environmental amenity region of Washington State characterized increasingly by water scarcity problems. Kittitas County sits on the dry Eastern side of the Cascade Mountains and is in close proximity to the greater Seattle metropolitan area. While water law restricts any additional uses of water without purchasing an existing water right there was a domestic well exemption until 2009 that allowed wells to be dug without acquiring a right. This exemption became increasingly controversial as the number of new homes in rural areas increased in the 1990’s and 2000’s. A moratorium was put in place in 2009 that removed this exemption but was only applied to the upper half of the county. We exploit this fact to use a difference-in-difference estimation strategy that helps remove other unobserved factors that would make a more straightforward hedonic analysis difficult. Our goal in estimating the hedonic regression is to estimate the impact of the moratorium under the idea that the value of water is capitalized into home prices following 2009. We compare sales of properties with a house and those without a house to provide a robustness check. A so-called difference-in-difference-in-difference model is estimated which provides additional controls thanks to the fact that the moratorium did not directly affect houses in municipalities which always had to acquire a water right. Our results are important in the development of water markets in the state which are an efficient way to reallocate water from low to high value uses, but are only just beginning to be used in the region.