At the height of the housing boom in the early 2000s, it was natural for homeowners to feel wealthier than they were. Inflated property values translated into a so-called wealth effect: Confident the value of their homes would climb ever higher and bolstered by the cash obtained by easy refinancing, owners spent freely.
A new study published by the National Bureau of Economic Research looks into what role this housing wealth — a household's overall finances — played in homeowners' decision-making when it comes to sending their children to college.
The study -- "The Effect of Housing Wealth on College Choice: Evidence From the Housing Boom" and co-authored by Professors Michael Lovenheim and C. Lockwood Reynolds -- found homeowners that experienced a windfall from the housing boom were more likely to send their children to college, to send them to four-year public institutions instead of two-year institutions and to send them to state "flagship" institutions — which are better resourced, have higher faculty-student ratios and SAT scores and are also more expensive to attend -- rather than nonflagship public institutions.
More specifically, the study found that a $10,000 increase in a family's housing wealth in the four years leading up to a student becoming college-age increases the likelihood he or she attends a flagship public university by 1.8%. It also lowers the probability that a student will attend a community college by 1.6%.
If your family owned a home in the Miami area in 2004, for instance, you experienced a huge increase in housing wealth, compared with, say, Jacksonville, Fla., where the increase was less notable. "In some sense, think about it as a lottery: Kids born in the right place and the right time — their families have seen a massive increase in wealth in the early 2000s," says Lovenheim, assistant professor in the Department of Policy Analysis and Management at Cornell.
So if your parents owned a home in an area that saw big jumps in property values during the four years before you turned 18, chances are you attended a flagship public institution. For example, you were more likely to go to the University of Michigan, Ann Arbor, than to Western Michigan University (no offense, WMU). Another key finding: An increase in housing wealth meant students were more likely to apply to flagship schools. (Private institutions were included in the analysis, but Lovenheim and Reynolds found that housing wealth had no effect on whether students go to a private versus a public university.)
Lovenheim says the effects were most pronounced among lower- and middle-income families making less than $75,000 a year. These families are too well off for the generous federal Pell grants, which are based on financial need. (The authors used data from the National Longitudinal Survey of Youth 1997, which includes family background and demographic information of children ages 12 through 18, and home-price data from the Conventional Mortgage Housing Price Index, or CMHPI.)
So the natural question is, does the housing wealth-college choice effect work the other way around? Would the housing bust that followed the boom — and which some have declared over — have the converse effect on college choice and graduation rates?
Lovenheim says it's difficult to make a direct correlation between the housing bust and college choice, but in the paper says the evidence suggests home price declines — starting in 2006-07 — will have an impact on the quality of schools students attend, particularly lower-income students. And, he says, "to the extent that these changes in attendance decisions translate into declines in graduation and labor market outcomes, the housing bust may have long-run effects on the supply of high-skilled labor and on income inequality."
What do you think? Do you think the housing crash will have an effect on the quality of schools teenagers go to — or whether they go at all?