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Educational Quality, Facilities and Real Estate Value

Investing local tax receipts to improve public education benefits all homeowners in a community, whether they send children to its schools or not.

According to realtors, American homebuyers perceive a positive correlation between the quality of public education in a community and rising residential real estate values. From coast to coast, buyers agree that Good schools equal desirable neighborhoods equal sound investments. Arguably, many elements play in the determination of a locality’s real estate prices. These include macroeconomic conditions, proximity to workplaces, adequacy of residential housing supply and property tax rates, to name just a few. Nevertheless, after curb appeal or adequacy of space and amenities, the quality of a community’s schools ranks high among buyer influences.

Why is that? Are there clear, empirical bases for our widespread belief that schools influence housing prices? To what degree are measures of school quality capitalized in housing values? Who benefits when housing prices rise? This brief summarizes research by leading economists that show a clear property-value benefit associated with strong neighborhood schools. What homebuyers’ anecdotal experiences suggest, more than three decades of empirical studies have proven: good schools pay for themselves through enhanced community real estate values.

Review of information compiled in assessing the topic
These findings are confirmed by two generations of academic studies seeking to examine the various measures that influence local housing prices, all starting with a key 1956 insight by Northwestern University economist Charles Tiebout concerning ways that affluent, mobile societies like ours evaluate and pay for local government services.

As a theoretical foundation, Tiebout’s “Pure Theory of Local Expenditures” became a seminal paper in municipal finance, with direct application for understanding consumer interests and pressures, the role of the central versus local governments, and the effects of consumer mobility and knowledge. Tiebout recognized that “if families can choose among a variety of communities, each with independent powers to tax, spend, and regulate, they will choose the one whose combination of housing and public services is the best match for themselves.” In other words, we habitually reward places that best meet our social needs with a premium reflected in higher housing valuations.

Tiebout’s hypothesis went a long way towards explaining the disparities in property valuation that exist among adjacent communities where all other things appear equal, but he stopped short of suggesting empirical means to confirm his hypothesis. Fortunately, later researchers leveraged advances in statistical modeling to add fresh impetus to his theory. Today, a large body of public finance literature is available confirming Tiebout’s insights regarding community choice in public goods like education, sanitation, or fire protection, and numerous studies correlate property values with area taxes and services. These papers demonstrate undeniable links between a community’s investment in public education and its housing prices.

Among the first to pierce the evidentiary veil, Princeton economist Wallace Oates in a 1976 examination of northern New Jersey communities applied hedonic pricing and the statistical method of multiple regression analysis to the Tiebout hypothesis. His findings confirmed that, “if a community increases its tax rates and employs the receipts to improve its school system, the [statistical] coefficients indicate that the increased benefits from the expenditure side of the budget will roughly offset (or perhaps even more than offset) the depressive effect of the higher tax rates on local property values.”

Writing in 1997, Federal Reserve Bank of NY economist Sandra Black asked:

“Do parents value school quality? Indeed they do. Using an approach that compares houses that are close to each other but are associated with different elementary schools, I find that parents do care about school peers and other unmeasured components of school quality. As such, they are willing to pay about 2.1 percent—or $3948—more for houses associated with test scores that are 5 percent higher at the mean. My findings also suggest that a move from a school that scores in the twenty-fifth percentile of my sample to a school in the seventy-fifth percentile would result in a house price increase of $5452.”

In another 1997 report appearing in the National Tax Journal, authors William Bogart, chairman of the economics department at Case Western Reserve University, and Brian Cromwell of Deloitte & Touche used evidence from neighborhoods in which houses receive public services from overlapping jurisdictions to isolate the effects of public school quality from other local government services on housing values. They reported “a robust finding among this group of cities is that high-quality school districts provide services valued in excess of the higher taxes that they levy.”

But what measurements of school quality are homebuyers willing to pay for? A 1998 review of school quality measures capitalized in housing prices by Philadelphia Fed economist Theodore Crone concluded that:

“Prospective homebuyers are applying an appropriate yardstick when they focus on average test scores to help decide what the school premium should be. The peer group effect justifies higher house prices in areas where schools have higher test scores. It is not easy to disentangle the school premium from the value of many other neighborhood characteristics. But the premium clearly exists, and it is an important factor in the difference in house prices across neighborhoods.”

Dartmouth economist William Fischel argues that adjacent municipalities frequently engage in a “race to the top,” vying to support rising home values for their voters with school districts that compete vigorously through upgraded facilities, programs and test results. Citing findings that “residents who own their homes have a stake in the outcome of local politics that makes them especially attentive to the public policies of local governments,” Professor Fischel attributes the success of four-out-of-five local school funding initiatives nationally to enlightened self-interest by “homevoters,” his term for citizens who vote their pocketbooks very adroitly in local matters. This is notwithstanding the demographic reality that only about one third of American households have children in public schools. Clearly, someone else sees profit in better schools.

Why do empty-nest “homevoters” support their local schools? Wharton economists Christian Hilber and Christopher Mayer suggest in a current working paper that older citizens often anticipate a shorter expected duration in their residential property and take pains to safeguard or increase its value. Hilber and Mayer examined data from the Census Bureau’s American Housing Survey and concluded that “the median successful homebuyer outside of center cities has school-age children, even if the median resident does not.” Furthermore, they found that, in places where land to build new homes is scarce, such as Bernardsville, school spending is more rapidly and completely capitalized in prices for existing houses. In other words, buyer demand for existing houses in a community compensates school quality improvements for all sellers, regardless of their status as consumers of school services.

But voters don’t need to hunker down with dry economic journals to understand that better schools are good for homeowners. Popular newspapers are no less positive when reporting the correlation between school quality and strong real estate investments. A recent USA Today study entitled “Better Schools Mean Higher Property Values” concluded:

“In city after city, it’s customary for a house to be worth at least 10% more than a comparable house across the street if that street is the boundary line between a highly rated school district and a laggard. In some cases, houses in the best school districts cost almost twice as much as those nearby.”

In a May 2003 article aimed at homebuyers in suburban Northern Virginia, The Washington Post observed:

“But what makes land more expensive in one area compared with another? Basically, the amenities found there. The neighborhood schools are one of the most important of those amenities. Even though not all buyers have school-age children, a healthy school system can add greatly to property values in the surrounding area. Buyers concerned about schools will often ask for a house in a specific school district. For-sale listings in the area’s multiple listing service, Metropolitan Regional Information Systems Inc., state clearly which elementary school, middle school and high school serve a house’s neighborhood.”

Looking back, a 1997 commentary in the St. Louis Post-Dispatch seems to have said it best, noting, “Research shows that the single most attractive strategy for luring business and middle-income people to a community is to maintain a top-quality school system. Good schools are associated with good property values, a low juvenile crime rate and a temperate tax rate.”

Conclusion
This Brief examined empirical research and published papers by leading economists and found general scientific confirmation that communities with better schools are rewarded with higher housing prices, that the premium commanded by good schools can be quantified, and that ongoing investments in schools are returned to taxpayers faster in communities experiencing high housing demand.

Perhaps intuitively, homeowners of all ages rely on the underlying principles at work in these studies when they vote to improve their local schools. Whatever motivates buyers and sellers, newspapers regularly cite instances of strong community schools in describing healthy resale markets for housing.

Financially speaking, improving local schools is a matter of common sense that is borne out in published scientific analysis.

For more information on this topic, voters are encouraged to consult local experts, including leading realtors, appraisers and mortgage lenders who can supply anecdotal examples of recent residential sales that have been influenced by schools considerations.

Sources of information
Black, Sandra E., “Do Better Schools Matter? Parental Valuation of Elementary Education,” Quarterly Journal of Economics, 114(2), 1999: 577-599. Originally published Sept. 1997, Federal Reserve Bank of New York.

Bogart, William T., and Brian A. Cromwell, “How Much More is a Good School District Worth?” National Tax Journal 50: 215-232, 1997.

City of St. Charles School District, St. Charles, Missouri. “Proposition S, November 5, 2002 Election, Answers to Commonly Asked Questions,” available 04/2/03 at: http://www.stcharles.k12.mo.us/propS.htm

Crone, Theodore M., “Housing Prices and the Quality of Public Schools: What are We Buying?” Business Review of the Federal Reserve Bank of Philadelphia (September/October): 3-14, 1998.

Fischel, William A., School Finance Litigation and Property Tax Revolts: How Undermining Local Control Turns Voters Away from Public Education (Working Paper). Lincoln Institute of Land Policy, 1998.

Fischel, William A. , The Homevoter Hypothesis. Harvard University Press, 2001.

Hayes, Kathy J., and Lori L. Taylor, “Neighborhood School Characteristics: What Signals Quality to Homebuyers?” Economic Review, Federal Reserve Bank of Dallas, Fourth Quarter 1996, pp. 2-9.

Hilber, Christian and Mayer, Christopher, “Why Do Households Without Children Support Local Public Schools? Linking House Price Capitalization to School Spending” (Working Paper), Wharton School Zell-Lurie Real Estate Center, Univ. of Pennsylvania, December 2002.

Jud, G. Donald, and James M. Watts, “Schools and Housing Values,” Land Economics, 57 (1981), 459-72.

Oates, Wallace E., “The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis.” Journal of Political Economy; 6 pages 231-242 (1976)

Rosen, Sherwin, “Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition.” Journal of Political Economy, Jan 1974, 82(1), pp.34-55.

Washington Post, The, Wednesday May 20, 2003, p. G03: “Figuring a Home’s Price, for What it’s Worth”, as seen at http://www.washingtonpost.com/ac2/wpdyn?pagename=article
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