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May 05

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Local Education Foundations can help protect home prices from the effects of school budget cuts.

California’s current economic issues will weigh heavily on the public school system for the foreseeable future.  School budget cuts of $1,000 per student are expected. This is 12% of the current average total spend per student of $8,545. Combined with further decreases in the length of the school year (up to 30 days)[1], these changes severely threaten the quality of public education, no matter how it is measured.

Lower education quality reduces what consumers are willing to pay when they purchase a house, compared to what would be paid in a neighborhood without “good quality” public schools.  Numerous studies analyzed the positive link between the quality of primary school education and house prices.[2]Chiodo et al (2010)[3]find that “houses associated with higher quality schools command a much higher premium” and that consumers are willing to pay $22,000 more on average for a house when is within the boundaries of a “good quality” school district.  (The study considered a series of house characteristics including number of bedrooms, number of bathrooms, age, lot area, living area, number of stories, number of rooms and additional neighborhood characteristics.)

Under Proposition 13, housing prices directly affect real estate taxes under California’s assessment method.  The following graphic shows historical housing prices:

Chart1 

School districts and community colleges command more than 50% of the property taxes collected in the State.  If public schools deteriorate due to dramatically decreased funding, we can expect even more drastic homes price decreases.  State revenues derived from property taxes, which are a fixed percentage of the sale price of the property, will be reduced.  This will likely lead to a vicious cycle of furthering declines.

The following chart is based on the most recent Annual Report from the LA County Office of the Assessor. It shows that the fewer properties sold/transferred as well as the lower residential values are among the factors that contribute the most to the sharp declines in Assessment Roll in LA County.

 Chart2

This report also shows that there is one thing cities with the greatest positive percent change in assessed valuation have in common: they have “great schools”.

Since some solutions (such as negotiation with teachers’ unions) are more difficult to achieve in the short term, it is up to the community members to step in. The traditional Local Education Foundations’ role is to raise funds from the community to support learning and assist public schools with programs that enhance education.  This may be the best opportunity to turn the vicious cycle into a virtuous one:

 

Vicious Cycle Virtuous Cycle
   
Do nothing Support local education foundation
   
Lower quality of education Maintain or improve school quality
   
Less value of property Protect the value of property
   
Lower property tax collection Maintain property tax collection
   
Fewer funds are available for schools tomorrow & schools suffer even more cuts Funding might be available for schools tomorrow & schools become less vulnerable to budget cuts

 Notes:

[1]Noguchi, Sharon. “Schools potentially face tremendous cuts” The Mercury News. 03/31/2011

[2]To cite a few: Figlio and Lucas (2004) American Economic Review “What’s in a grade? School report cards and house prices”; Gibbons and Machine (2008) Oxford Review of Economic Policy “Valuing school quality, better transport and lower crime: evidence from house prices”; Downes and Zabel(2002) Journal of Urban Economics “The impact of school characteristics on house prices”

[3]Chiodo, Hernandez-Murillo and Owyang. (2010) Federal Reserve Bank of St. Louis Review. “Nonlinear effects of school quality on house prices”


About the author

Rocio Ribero

The author is an economic consultant at Fulcrum Inquiry. She holds a Ph.D. in economics from NYU and specializes in the application of microeconomics for litigation support. Her interests include market analysis, competitive behavior, contractual disputes and the calculation of lost profits.

Permanent link to this article: http://betweenthenumbers.net/2011/05/local-education-foundations-can-help-protect-home-prices-from-the-effects-of-school-budget-cuts/

2 comments

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