Working Paper

Capitalization of the quality of local public schools: what do home buyers value?

Abstract: The expansion of state-mandated tests in the 1990s and the testing requirements of the No Child Left Behind Act have supplied researchers with an abundance of data on test scores that can be used as measures of school quality. This paper uses the state-mandated test scores for 5th grade and 11th grade in Montgomery County, Pennsylvania, to examine three issues about the capitalization of school quality into house prices: (1) At what level do prospective home buyers evaluate the quality of local public education?at the district level or the level of the neighborhood school? (2) After accounting for student achievement as reflected in test scores, are other aspects of the local public school system, such as class size or expenditures, capitalized into the value of a house? (3) Are the positive results we get for the capitalization of school quality into house prices due simply to the correlation between high test scores and other desirable neighborhood characteristics? The results of our investigation suggest that to home buyers some test-score averages are significantly better indicators of the quality of the local public school system than others. In particular, home buyers seem to evaluate the quality of public education at the district level rather than at the level of the local school. Class size at the high-school level has some independent effect on house prices, but not class size at the elementary school level. And once we account for student achievement, expenditures per pupil have no further effect on house prices. Finally, restricting our sample to similar neighborhoods along school district boundaries confirms our earlier results for high school test scores but not for elementary school scores.

Keywords: Education; School choice;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2006

Number: 06-15