A different kind of investment

Education is often referred to as an investment in our future, and undoubtedly it is, as we prepare our young people to enter the workforce with creativity, energy and entrepreneurship. However, modest investment increases in public education also have an immediate, and direct, beneficial effect upon those making the investments.

A recent study by the Brooking's Institute revealed

An analysis of national and metropolitan data on public school populations and state standardized test scores for 84,077 schools in 2010 and 2011 reveals that:
Across the 100 largest metropolitan areas, housing costs an average of 2.4 times as much, or nearly $11,000 more per year, near a high-scoring public school than near a low scoring public school. This housing cost gap reflects that home values are $205,000 higher on average in the neighborhoods of high-scoring versus low-scoring schools. Near high-scoring schools, typical homes have 1.5 additional rooms and the share of housing units that are rented is roughly 30 percentage points lower than in neighborhoods near low-scoring schools.

This is clear evidence that investing a few hundred dollars per year to increase your local schools performance will have a dramatic effect on your home values - typically $11,000 per year, according to this study. The reason is no secret of course, people with school age children want to live in areas that have excellent schools, and are prepared to pay a premium for it. These results have been found to be true over and over. The St Louis Fed found

Traditional empirical models of the capitalization of education quality on house prices have established that the quality of primary school education is positively correlated with house prices. Recent capitalization studies have used various approaches to address concerns about omitted variable bias induced by failing to account for the correlation between school quality and unobserved neighborhood characteristics. Most of these variations on the traditional hedonic approach (including the boundary discontinuity regression) have assumed that the house price premium is constant because in all these models the contribution from school quality on house prices is constrained to be linear.

In this paper, we propose an alternative formulation that allows for nonlinear effects of school quality. We show that this formulation is preferred by the data over a baseline linear boundary fixed effects model and that the rate at which the house price premium rises increases over the range of school quality. In other words, the standard linear specification for test scores overestimates the premium at low levels of school quality and underestimates the premium at high levels of school quality.

In the St. Louis metropolitan area, houses associated with a school ranked at 1 SD below the mean are essentially priced on physical characteristics only. In contrast, houses associated with higher-quality schools command a much higher price premium.

Interestingly, and in contrast to many studies in the literature, the price premium remains substantially large, especially for houses associated with above-average schools. This is true even in our most conservative estimates, which complement the boundary discontinuity approach by explicitly controlling for neighborhood demographics. These estimates also reveal that the racial composition of neighborhoods is capitalized directly into house prices.

This then makes the move to downgrade Ohio's schools based on some new, arbitrary standard all the more baffling. Not only will this move potentially produce lower school ratings, it may also destroy tens of millions of dollars worth of housing value at a time when house prices are already under extreme stress and the economy struggling to improve.

Consider this then, when they vote one levies. A few hundred bucks could add thousands of dollars to the value of you home. One can only imagine the added wealth that could be created if the state lived up to its constitutional responsibilities and invested properly in public education too.