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National Real Estate Forum

Released weekly on Mondays, the National Real Estate Forum Podcast is hosted by Dr. Adam Gower, a 30 year real estate industry veteran. Cutting through the clutter, the series features discussions with some of the world's foremost real estate experts in both academia and industry to help enhance your real estate knowledge, hone your skills, and enable you and your business to thrive.
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Mar 5, 2017

Before starting today I would just like to offer a word of appreciation to those folk who are currently considering sponsorship of this National Real Estate Forum  podcast series.  As clichéd as it may be, your name could be here.

Do School Test Scores Influence Home Prices

Now is the time of the year when those among us with children start wondering where they are going to be enrolling those children in school next year.  As a consequence the residential property market starts to heat up as people buy homes in school districts that they consider desirable.  Part of the calculation in making these types of decisions is balancing the relative cost of private school with the perceived additional cost of buying a home in a good school district.  But when you buy into a better school district, how much of the premium in housing is really associated with the performance results from the neighborhood schools, and how much as a result of other factors?

My guest today is Professor Steven Ross who holds the Philip E Austin Chair of Public Policy at the University of Connecticut.  His research specialties focus on housing and mortgage lending discrimination, on residential and school segregation, on neighborhood and peer effects, and on state and local governments.  It was, perhaps, inevitable therefore that a discussion regarding the relationship between property prices and school quality should migrate through a broader discussion regarding school policy and the impact on neighborhoods and on standards, before returning to our discussion on school standards and how they relate to house values.

As the objective of the National Real Estate Forum at NREForum.org, is to provide deeper insights into complicated issues in real estate, I hope that you will find Professor Ross’s thoughts about the issue of school quality and house prices as interesting as I do.  Here is what he had to say.

Historically research saw a large relationship between house prices and local school district test scores.  So for example, it was found that moving from a school district in the middle i.e. an ‘average’ school, to a school in the top 16% of schools (versus being in the top 50% - i.e. a one standard deviation from the average), this could increase house prices by upwards of 10%.  But this earlier research did not take into account other factors that might be moving this needle, such as quality of the neighborhood overall.  Sandra Black, in 1999, first looked at trying to account for these differences by examining house price differences in similar neighborhoods, but that were in different school districts i.e. on where neighborhoods were split by school district boundaries. ('Do Better Schools Matter?')   Black found differences of only 2%, rather than 10%, where schools were in the top 16% of schools, versus those in the top 50%. 

So Ross and his colleagues looked at other factors that might be impacting test scores and found a significant variable seemed to be ethnicity – that property values were more driven by ethnicity than by school scores.  Property values were lower in predominately Hispanic neighborhoods, and it was this that drove values rather than test scores.   One possibility is that in the earlier days when these research papers were written, that test scores were not as readily available as they are today, but more recent research has echoed the same results that a one standard deviation from the average – top 16% versus top 50% of schools by test scores  - result in about a 2% difference in property values.

Giving Parents Choice in Schools Can Have a Big Impact on Property Values

Therefore, if, though small, there is still an impact on property values as a result of test scores for neighborhood schools, what is the impact on property values where parents enjoy the benefits of ‘choice’ in selecting their schools?  In research where choice is a factor, what is found is that the impact on house prices is, actually, very large.  If only one percent of the student body living in one district remains living in that district but chooses to go to school in a different district, then overall house prices in their district of residence rise by 1%.  Put another way, the entire housing stock in their district of residence rises by 1% even if only 1% of the student body elects to attend school outside of the district.  Additionally, the values of homes in the districts into which these students are now attending school, these prices fall because now their families did not need to move into the district, did not ‘need to bid on housing’ to get into the school district. 

It is a zero sum to the house price market overall. ‘They are falling in the places with the best schools that presumably had a price premium, and rising in the places with worse schools that presumably had a price discount,’ says Ross.  The important distinction between Black’s earlier study that showed a small house price difference between school districts with different school test scores, the latter studies are showing a significant impact in the residential housing market from allowing families to choose where to send their children to school. In fact, an important change that is seen is that the incomes of people living in those districts that have the poorer schools, actually rises when you allow for school choice.  But this is not the only change:  The revenues now coming into these poorer districts is also rising because higher income families are moving into the districts and so, presumably, paying more in taxes, spending more money locally,  and taking greater care of their properties and neighborhoods. 

The research is suggesting, therefore, that as choice is given to families as to where they send their children, it has a powerful impact on property values across neighborhoods.  This results in a tendency to see lesser concentrations of neighborhoods with wealthier makeup as distinct from poorer neighborhoods.  Neighborhoods, in short, become less polarized across income and socioeconomic factors.

From a policy perspective, school test scores are not that important as a determinant of house prices.  Moving one standard deviation in quality of school (from top 50% to top 16%), has less of an impact than adding a bathroom, for example.  But it does have a big impact on who is willing to live in a particular jurisdiction, which itself can have a big impact on a neighborhood, and that when you allow for choice, this bifurcation of neighborhood differences between richer and poorer, is ameliorated.  On the other hand, if you are a planner and you want to see neighborhood improvements, improving school quality does have an impact because it draws in people of higher socioeconomic standing, and this can lead to improvements in neighborhood quality.  So one way to improve an area that is in decline, if improving the schools is too long term or financially impractical, might be to allow for residents of that area to choose which school to go to.  This would also draw in higher income residents, which in turn would improve the area.  But although ‘choice is a win’, it may simply allow for neglect of already failing schools.  

When you look at the improvements in student performance from those kids who win lotteries to get into better school districts, we see unequivocally that those kids do better.  So the experiment with choice combined with magnet and charter schools seems certainly to be working.  That said, there are a limited number of resources and so kids are going to be left remaining in the public schools in those districts with lower academic standards, and the big question is how to accommodate these kids.

One way to do this is to impose high stakes testing on schools and results have shown that this has a substantial positive impact on the quality of these lower standard schools.  Accountability does work and adapting a common core, ‘the’ common core, seems not an unreasonable approach in determining what kids need in the workplace to be productive and of value to them as they seek employment once they graduate. 

Influence of Department of Education (Federal) on Local Schooling is Limited 

From a national policy perspective, however, the government does not have much of an impact on education because most spending is driven at the state and local level.  The way past administrations have attempted to maneuver states in the direction they have wanted, is to have been to offer grants to those states producing results that align most closely with their own goals – which in the case of the Bush and Obama administrations, has been in the area of accountability.  These administrations looked at proposals from the states that articulated how they were going to deal with failing schools, including title one schools, and those that failed ‘no child left behind’ standards for two years in a row that then went to choice options, for example. 

The Obama administration started to look at teacher evaluation, where student test score improvements were deemed reflective of teacher performance and grants were to be allotted accordingly.   Seems that now many of these grants, under the Trump administration and Betsy DeVos, is going to be oriented towards how states are going to be allowing for choice.  And, as discussed, this is going to bring with it the possibility that there will be more dramatic shifts in housing prices across neighborhoods depending on whether you are a more affluent neighborhood with good schools where prices may seen downward trends, or in a poorer area where house prices may tend upward.  So this could lead to gentrification of inner city areas, and to the extent that parents can choose where to send their kids to school, there might be more flexibility on where families choose to live, which in turn could lead to less segregation across socioeconomic and ethnic lines. 

But what was seeing come from the Department of Education under DeVos is a enabling of choice but not necessarily within the public school system, but within the private school system, like charter schools.  The administration is also talking about allowing for ways to navigate the idea that incentives can be provided for faith based schools to attract students also.  The way they are talking about doing this is by providing tax credits so that someone can make a wholly deductable donation to a faith based school that is a 100% deduction against their tax liability.

On the face of it this is a good thing.  Provide a mechanism whereby people who cannot otherwise afford to go to a private school may be able to get in because that school now has a scholarship fund available to it.  The problem is the tax credit, which is not equitable, especially if it is a 100% tax credit, even it is capped, this means that private schools can go to donors and solicit donations that will cost the donor nothing, because it is just a reallocation to that school of dollar for dollar taxes that the donor would otherwise have been paying anyway.  The enables the private citizen to decide exactly where these tax dollars are to go and this has been largely how DeVos has been promoting her programs.

Neighborhoods, not Schools Drive Property Prices - Unless Parents Are Given the Choice Option for Schooling

But that is a fuller discussion for another day.  Returning to the question of the relationship between school quality and house prices, the conclusion is that the relationship is, actually, small, and is in fact more driven by who is living in the districts with the good schools.  And that with the implementation of choice for families as to where to send their kids to school, the impact on house prices is likely to be much higher, and so certainly something to watch for in the coming months and throughout the years of the school career of your children.

Well.  What do you think?  I really would like to hear your thoughts about today’s podcast, and, if you like the podcast, to share them also with friends and colleagues on Facebook, or Twitter or Linkedin, as well as any of the other platforms on which the Forum is syndicated.  You will find links to all these social media options on the website at NREForum.org. 

Professor Ross offers plenty of insights that give depth to understanding the complicated topic of how to fund schools, and what the impact is on house prices as a result.  While it may cost a little more to live in a school district with higher test scores, the extra cost is driven in large part by the socioeconomic characteristics of that neighborhood, and less so by the test scores themselves. Watching for where the opportunity to choose which school your children attend might provide you with better value for money in terms of housing, and equally, if you are already in a good school district and choice is offered in your area, you might see your home value negatively impacted.  Also, I am looking forward very much to hearing more about the new Education Secretary, Betsy DeVos, and what her plans will be for funding private schools through the resources available to her at the federal level.

Thank You For Considering Sponsoring the NREF Initiative

As I draw to a close for this week, here is a brief reiteration of my gratitude to those folk who are thinking about supporting this podcast.  Your sponsorship will enable world class research from the top universities and scholars in this country – and consequently in the world – to be shared by the wider real estate industry to the benefit of all.  Thank you sincerely for considering the opportunity of sponsoring the National Real Estate Forum initiative.

Download Professor Ross's research papers:

 

 

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