School Spending Raises Property Values #Education #PropertyValues

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The Right School District: How Much Do Schools Affect Real Estate Prices?

When people buy a home, a plethora of factors influence their decision. The look of the home, as well as its size, layout, age, and proximity to amenities are all important to varying degrees, depending on the individual buyer.

The local school district is one factor with significant influence. We’ve always known that good schools attract families with school-age children, but recent statistics add concrete numbers and surprising trends to the storyline.

Extreme School Buyers
When looking at trends, it’s often entertaining to find the extremes. The best school districts near Seattle have recently seen a huge influx of buyers from China, paying premium cash prices for homes that many are purchasing for their future grandchildren. Neighborhoods on the east side are seeing large numbers of buyers who merely want to know where the best schools are, and are then buying remotely, without viewing the houses in person. These buyers greatly value education.

The domestic home-buying population also clearly values the right school. Realtor.com’s recent survey of nearly 1,000 prospective home buyers showed that 91 percent said school boundaries were important in their search.

Dedication to Education
I personally know the importance of school boundaries. When our first child reached school age, my wife and I went house hunting with school-boundary maps in hand. If a home was one block outside our favorite elementary school’s boundaries, we didn’t even go in. The look of the home, the neighborhood, and how it was laid out were all factors that could disqualify it from our list, but the primary hurdle for every home was that school boundary line.

Consumers are willing to sacrifice certain things to live in the right school district. Some of Realtor.com’s survey results were surprising: One out of five buyers would give up a bedroom or a garage for a better school. One out of three would buy a smaller home. A full 51 percent would give up shopping for schools (maybe just the male half of the respondents).

Buyers are also willing to put their money where their mouths are. One out of five home buyers said they would pay 6 to 10 percent above their budget for the right school. One out of 10 would double that to 20 percent. Considering that number could be $100,000 in a lot of markets, it makes one wonder: How much investment in a school district is appropriate?

Do Schools Influence Home Prices or Vice Versa?
Conversations about schools and their effect on a home’s value are often of the “chicken or the egg” variety. Homes in the best school districts, on average, sell for higher prices than similar homes in less-popular school districts. A simple analysis might say that good schools are wholly responsible for this added value.

At the same time, on average, more affluent home owners live in more sought-after school districts. Statistics often show that for large sample sizes, the more affluence there is in a community, the higher test scores will be in that same community. Test scores are just one measure of “good schools,” but they’re a highly quoted measure. There can be a self-reinforcing mechanism here that might overemphasize the effect of the school itself on the prices of those homes. One might even hypothesize that the high home prices make the schools better.

Consumer Demand Shows Clear Connection
In the end, though, it’s hard to deny that there is strong consumer demand for good schools. Demand drives prices higher for a limited product like real estate. We probably can’t pinpoint exactly how much that demand has on home prices, because the market is so complex and every home buyer’s decision weighs so many different factors.

Clearly, though, consumer demand is large enough that we can conclude that good schools do increase home values in some measure. Half of the home-buying population is willing to pay more than their intended budget to get into the right school district, and more than half would give up other amenities. Making a decision on buying a home should definitely include an analysis of the school district, even for buyers who don’t intend to send children to those schools. Good schools provide stability for a community, and that’s good for the property values of everyone who lives nearby. Source

“… A $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure.”

An enduring question in education policy is whether spending additional public resources improves schools. Those who argue against strategies to increase public spending argue that current spending levels are too high and that public schools spend their current revenues inefficiently.

In Using Market Valuation to Assess Public School Spending (NBER Working Paper No. 9054), co-authors Lisa Barrow and Cecilia Rouse first examine whether an additional dollar of public money spent on schools increases residential property values. If it does, then consumers presumably value the additional spending because it increases school quality. Further, the authors evaluate whether the current level of spending is too high.

School expenditures are financed with both state and local contributions. Each state has a financing formula for determining the state aid to each district, and these formulas are revised periodically. The state portion of the contribution often is negatively related to property values because states try to equalize expenditures across rich and poor districts. Thus, it is difficult to assess directly the effects of an increase in state aid on school quality as it may reflect a worsening of other conditions in the local district that also affect school quality. To overcome this difficulty, the authors examine 1980-to-1990 changes in property values resulting from changes in state aid for schools that arise solely from changes in state financing formulas — they control for an extensive list of district and county characteristics that may also affect property values.

Their results suggest that, overall, a $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure. Further, their results suggest that some of the increase in value reflects lower local tax burdens, but most reflects increases in total per pupil district expenditures. Finally, they conclude that there is no evidence that school districts are overspending, on net.

However, this overall result may mask important differences, because some school districts may operate more efficiently than others. Specifically, the authors note that because households with greater income can afford to consider a wider range of schooling and housing options, school spending in districts with wealthier residents may be more efficient. Similarly, the degree of external competition that a school district faces (from having many neighboring districts) or the district’s size may also affect the efficiency of school spending.

To test whether wealthier and more educated school districts spend their revenues more efficiently, the authors categorize school districts by average household income and education level of the adult population, as well as by the degree of competition faced by the district, and the district’s size. Although potential district residents on average value additional state revenues, the authors find that “large school districts, and those areas with fewer homeowners and in areas in which residents are poor or less educated” are more likely to overspend. — Linda Gorman  Source

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