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Top Notch Public Schools Add $1 Million in Property Value

A family could afford $1,000,000 more in property value if they do not send their child to a top-notch private school.

Chris Kolmar

Chief Armchair Economist

158 articles, 137 comments

Desks by Flickr user alamosbasement

A high-quality private school is extraordinarily expensive. We are talking numbers similar to tuition for a top 5 college or university; $33,708/year on average, based mostly on 2010-2011
tuition figures (which are only higher now, due to inflation). So how does that translate into property value?

Well, the ultra-low cost solution to private school is–I bet you guessed it–public school. And because private schools are so stupidly expensive, people are willing to pay more for a home in a good public school district so that they can get an equivalent education for their children at 0% of the cost. A home buyer can afford to pay more for a house if they don’t have to pay for school.

The extra demand causes homes values to rise in areas with great public schools, because more people want to live there. All parents know this. School districts are important when thinking about the location, location, location of real estate.

We wanted to know by exactly how much a quality public school can affect home prices. So we went to the drawing board.

Two Kids, A Dog, and $1,000,000 More for a Mortgage

Two key assumptions:
Assumption 1: Each child goes to private school their whole life, which makes schooling a fixed cost for the entire period of time owners live in their home.
Assumption 2: Assume all that school money can go directly to a mortgage. No increase in property taxes or whatnot.

And the math:

    • The average American family has 1.5 kids. We rounded up to 2 kids.
    • Top notch private schools cost an average of $33,708/yr.
    • That translates into $67,416/yr for both kids
    • Therefore, a family could afford $5,618/mo more in mortgage payments. (67,416 / 12 mo)
    • Today’s interest rates for a jumbo loan are somewhere south of 5%, but we are going to use 5% to be cautious.
    • Using a handy dandy mortgage calculator, a $1,000,000 loan would cost $5,368/mo.
    • Thus, a family could afford $1,000,000 more in property value if they do not send their child to a top-notch private school.

Does Money Even Matter to Families with Kids in Private School?

UF Norman Auditorium Chalkboard Flag by Flickr user cdsessums

The whole rationale for this analysis depends on the idea that people who send their children to private school are cost conscious. Put differently, these consumers would need to actively care about the price of private school. If they have enough money that their kids would go to private school no matter what, then they would not put upward pressure on property values near good public schools.

We have discussed previously how people put too much value on views and big houses, and not enough value on the commute to work. It may be that people acknowledge the importance of quality public schools, but do not do the required mental calculations to find its true value. The result would be lower than expected values in areas with high-quality public schools.

Are Quality Public Schools a Deal?

Given the implicit value people place on private school, it may be that homes in a quality public school district are, in fact, under priced! Even in places like Palo Alto CA, Millburn NJ, and Brookline MA, property values do not fully encapsulate the value of high quality public schools.

I think we may have just found the Moneyball equivalent of real estate.

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posted on: July 10, 2012
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