If you want to know which schools are good, ask a realtor—so goes the conventional wisdom—and families often do so. Some experts suggest that linkages between home value and school quality are crude or even misleading, but wisdom becomes conventional for a reason. A new report from the Economics of Education Review takes advantage of a unique natural experiment to examine how school quality impacts housing prices through school zoning and rezoning.
In 2013, after years of conflict among various communities, Tennessee’s Memphis City and Shelby County consolidated into one school system, creating one of the largest districts in the country. Then, after a year in and out of the courts, six Memphis suburbs were allowed to—and subsequently voted to—create their own separate municipal districts. Thus the big merger became an even larger splintering of districts. In the process, some homes in the county remained in their original school zones, while some were assigned to different schools. Researchers from Rhodes College (in Memphis) and the University of Southern California used these variations to construct a difference-in-differences model that allows them to disentangle school and neighborhood characteristics and identify the impact of school quality on home prices—independent of who controls the schools or of their demographic composition.
First, analysts were able to verify that the boundary changes created variation in home values that were unrelated to pre-existing trends. Also, critically, for their statistical model to work, houses rezoned to different schools within the same original school catchment area need to be as similar as possible relative to observable and unobservable characteristics. Thankfully, since many homes have been sold multiple times over the eighteen years for which they had property-sale data, analysts could compare the price of the same house in two different school zones before and after the zoning changes (in stats lingo, these are “parcel fixed effects”).
The major findings replicate previous studies in that a 1 standard deviation increase in state test scores increases housing prices by 4 percent. Likewise a 1 standard deviation improvement in ACT scores increases housing prices by 2.6 percent, and the same improvement in graduation rates results in a 1 percent housing increase. These estimates are roughly similar across elementary, middle, and high schools.
As for zoning status, homes in the smaller independent municipal districts sold for 6 to 8 percent more than comparable homes in the large unified district, holding constant school-level performance on standardized tests. The researchers interpret this as buyers’ preference for closer-to-home control of schools versus control by a larger unified district.
Next, they looked at the role of race. A 1 standard deviation increase in school-level racial diversity had a negative impact, resulting in a 1–2 percent decrease in home values, independent of academic performance and regardless of district oversight. Interestingly, there was no difference in demand across schools with varying percentages of non-white students. Looking at each factor separately, the negative impact of racial diversity is similar in magnitude to that of academic quality on home prices but substantially smaller than the impact of school administration by smaller local districts.
The analysts close by asserting that the literature reflects agreement on the “capitalization of school quality” in housing markets, with numerous studies (using a variety of different methods) consistently finding that a 1 standard deviation change in test scores leads to home-value increases or decreases in that market between 2–3 percent. In other words, this is the public’s “willingness to pay for academic performance in public schools.” It’s not surprising, then, that realtors make it a point to include discussions of school quality in their marketing. And that they also bake it into home prices.
SOURCE: Courtney A. Collins and Erin K. Kaplan, “Demand for School Quality and Local District Administration,” Economics of Education Review (June 2022).
