The effect of school performance on local home prices

When people buy a home, a variety of factors influence their decision. The look of the home, price, size, layout, age, and proximity to all their needed amenities all play a role in the selection process.
Here are some basic questions to ask yourself when you start shopping for a home:

• Where do I want to live? (location, location, location)
• How much can I afford? (or can I afford to live in the location I want?)
• What is driving home values in the area?
• Is it in a good school district?

For people starting families, the quality of local schools is very important. 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. Redfin, an online real estate brokerage, recently conducted an analysis on the relationship between school performance and home prices. Redfin looked at homes on Multiple Listing Services (MLS) databases used by real estate brokers that sold between May 1 and July 31, 2013 to calculate median sale price and price per square foot of homes within school zones. For this study, they analyzed home prices compared to the test scores of elementary schools across the country. School and home coverage consisted of 10,811 elementary school zones across 57 metro areas and included 407,509 home sales. What they found is what we all have know in our hearts for years – that home buyers will pay more per square foot for homes located within top-ranked school districts. The company used MLS databases to calculate sales prices per square foot of homes located within the boundaries of particular school zones and compared them against the standardized test scores of the area’s elementary schools.

What the study found is that homes could be identical and just a short distance apart, but the prices could vary by sometimes as much as $130,000+ because of the difference in school districts. A good example in the Dallas area is Highland Park, where the Highland Park ISD and Dallas ISD both exist in a very prestigious area. Homes just a short distance apart with nearly identical attributes are selling for drastically different prices.

This study suggests that potential home buyers are not only willing to pay more, but are also willing to take less in a home. The report showed that the homes in high-scoring school districts were not necessarily bigger, of a higher quality or in a prime location with nice views or quieter streets.

Arguably, there are many factors that may play in the determination of a locality’s real estate prices. These factors include proximity to workplaces, shopping and convenience, the quality and 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. In my market study days, I was surprised to see that commercial real estate was as affected by the same parameters. Why? Quality schools mean strong graduation rates, and a lack of young unemployed hanging around. In the past when we did market studies, we found that it was the lack of quality schools and community involvement that made an investment area undesirable, rather than location.

Why do we think that is? Are there clear, empirical bases for this widespread belief that schools influence housing prices? To what degree are measures of school quality capitalized in housing values? Who benefits when housing prices fall / rise? During this recession, did quality school district communities keep their values better?

First, the data we pulled show that homes in our Texas neighborhoods that have excellent schools sell for more money than similar homes in neighborhoods having lower rated schools.

Second, when the economic downturn hit, home prices in Texas metros with excellent schools did not fall as much and have recovered better than home prices in areas having lower rated schools. Almost all of these areas have a high ‘community involvement’. Which in turn affects their real estate values.

Third, consider why some areas have schools with better ratings. Families having more money and putting a stronger emphasis on education move to areas having higher rated schools. Even those with less money, but more emphasis on education as shown by the school’s rankings have better values. These families help build the reputation of the schools

Empirical data in Texas metros show as much as a 70+% difference in values over exemplary school vs. low performing. Yes, some of the value could be in the more desirable locations of those school districts, but historically we have seen schools add value, sometimes almost to an extreme.

Do better school districts have bigger homes, higher quality homes, larger lots, or more desirable locations (views, quiet streets, etc)? In general, not necessarily. When accounting for size, on average, people pay more per square foot for homes in top-ranked school zones compared with homes served by average-ranked schools. This means that the price differences for similar homes located near each other but served by different schools can range from tens to hundreds of thousands of dollars.

Whether you agree with the hypothesis of this or not, if you have kids, you personally know the importance of school boundaries. When your first child reaches near school age, you and your significant other begin house hunting with school-boundary maps in hand. If a house is one block outside of your elementary school’s boundaries or district, most scratch it off the list. The look of the home and other factors could disqualify it from our list, but for parents the first hurdle is finding something in that school boundary line.
Buyers are willing to sacrifice certain things to live in the right school district. In a survey this summer, 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.

In the same survey, 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?

In my history of looking at empirical data, 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. And because of that, more affluent families seek and 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. Some of this is the effect of both parents being very involved in pushing their children’s education. These 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 argue that the high home prices make the schools better, as school districts in Texas are funded by property taxes. More valuable real estate means more tax revenue for the district.

Demand drives prices higher for a limited product like real estate. There are just so many homes in each school boundary or district. The old adage of supply and demand and limited supply drives up the price. Yes there are many other factors, but school districts are near the top on most consumers list. 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 and continuity for a community, and that’s good for the property values of everyone who lives nearby. Many quality schools and districts have been that way for years due to the quality of participation from all ages in improving school and community involvement.

The 2012 “Profile of Home Buyers and Sellers,” a separate survey released last year by the National Association of Realtors, also measured the importance of school districts to home buyers. This survey found 61 percent of recent buyers ranked the perceived quality of the neighborhood as important in their home-purchase decision, and 43 percent said convenience to jobs was a desirable characteristic. Forty-six percent of buyers who had school-aged children highly valued the quality of schools, the same proportion of this group that ranked employment proximity as important.

Earlier in this article, I mentioned that commercial real estate values are driven by the same parameters. Historically, not only do sales values remain higher, but so do rental values. To build an office, commercial, retail, etc investment in a less than desirable school district is challenging. Both from the equity side as well as the absorption velocity. ‘Shelter’ in any quality school boundary or district is historically more expensive.

This issue examined historical and current empirical research and published papers by leading economists and analysts and found general 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. This may be one reason, that 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.