Six Reasons Why You Should Not Buy a Home in a Good School District
My businesses are usually built around challenging conventional wisdom, so I tend to gain by taking the other side. It’s been very profitable and entertaining for me — Mark Cuban
The conventional wisdom is that it is always a better investment to buy a home in a good school district. Just like with much other conventional wisdom, this commonly held belief is often wrong. Good schools may have been the number one factor in real estate appreciation at some point in the past, but I don’t believe that is true today. However, after decades of being told specific trends are true, people stop looking at the data and fail to notice the changes that have taken place.
From an investment perspective, choosing a home because it is in the best school district often turns out to be the wrong choice. I am not going to argue that you should never buy near good schools, or always buy in bad school districts, but in many cases, the conventional wisdom on this topic is out of date, incomplete, or just wrong.
Analyzing a Denver area home appreciation map from the past 20 years, I noticed that the greatest appreciation seemed to occur in what were considered the worst school districts, while the areas with the best schools had sub-par appreciation. When I started analyzing data from around the country, I found this trend to be common in many other areas as well.
Let’s look at the six reasons why you should not buy a home in a good school district:
1. The appreciation is already accounted for in the price of the home.
The idea of buying a home in a good school district has been around for decades. Because of this, homes in the best school districts appreciated years ago. There is evidence that when data on the quality of school districts first become more readily available, neighborhoods housing the best schools appreciated more rapidly than those of poor schools.
Currently, in the market for houses, the quality of the schools is already priced in, as the data on the best schools is so easy to find. You shouldn’t expect appreciation based on good schools if the good schools have already been identified. This is a case where the efficient market hypothesis applies–the asset price already reflects all the knowns in a market. You can’t expect to make a gain on factors already known to the general public. Investing in something that has already appreciated doesn’t mean it will continue to appreciate, it just means that you bought something expensive. To put it another way, if you are buying a home within a good school district, you are the one paying the inflated price.
2. Demographic trends are more important than school quality in long-term price movements.
Decades ago when people started preaching about the financial virtue of buying a home near good schools, people got married much earlier, and had more kids. These two elements made local schools an important aspect of the home buying decision for the vast majority of buyers. Over the past 40 years, the average marriage age for Americans has increased from 22 to almost 29 years old. Along with that, more women than ever before are going childless. This has caused a major shift in where young adults chose to live. These singles and childless couples are much more likely to live in a cool urban environment with sub-par schools, than in a sterile suburb with top performing schools.
3. You have less upside and more downside risk with your investment.
If you buy a home in an expensive, top performing school district, you are less likely to see a positive price shock, like schools getting better, than you are in a lower performing area. Think about it this way, if you pay a premium for what is already considered the best, there is not a lot of upside potential, but there is plenty of opportunity for your investment to remain stagnate or go downhill. On the other hand, if you buy in an average or poorly performing district, there are many different factors that could improve your local school outlook and real estate value.
4. Government and district policies change the makeup of schools.
Remember, public schools are schools run by government entities. Government policies can quickly change, and with those policy changes, your local schools can change dramatically. Here are a couple of examples:
- Mandatory busing was implemented in metro areas across the country in the 1970s. Although this helped promote racial integration in the most segregated schools, it exacerbated “white flight”. Many people who lived within areas of high achieving schools were not happy that their kids would be attending class with students of other colors. They responded by moving to other, less diverse cities. This caused– you guessed it– a decrease in home values in areas that had previously been known for good schools.
- School choice has been gaining steam across the country, and with Betsy DeVos, Trump’s new pick for secretary of education, a huge proponent of charter schools and vouchers, you can expect even more school choice in the coming years. I don’t know what the exact effects of greater school choice will be on real estate values, but my guess is that it will decrease the impact of local school performance on home values. If you will have a variety of choices of where to send your kids to school, the specific neighborhood in which you live becomes almost irrelevant to which school they attend.
5. Significantly higher cost of living.
Buying that home in the best school district is going to saddle you with significantly higher living costs. Because you are buying in an expensive area, in addition to more of your paycheck going to pay your mortgage, you will also be on the hook for much higher property taxes and home insurance premiums.
Homes in higher achieving school districts are significantly bigger than those in lower achieving districts. Buying a bigger home will result in higher maintenance and upkeep costs, as well as greater furnishing and utility costs for all those extra rooms.
6. The Joneses effect is real.
If you surround yourself with high spending people in expensive neighborhoods, the societal pressure to spend more money on cars, toys, vacations and fancy landscaping will either break your bank, or make you feel insufficient. Maybe you have nerves of steel and don’t care that the neighbors constantly upgrade their phones and cars, while you attempt to live in a more responsible manner. Your kids, however, will feel the social pressures much more than you will. Don’t kid yourself – schools that rank as the best are almost always wealthy and homogeneous. If you send your kids to these schools, they are either going to need the newest and most expensive everything (ex: a new $900 cell phone every year), or they will be made to feel like outcasts and losers.
The whole idea that homes near the best schools don’t always appreciate faster, came from this chart that a Realtor friend of mine sent me last year. Analyzing the chart of home appreciation in the Denver area over the past 20 years, I noticed that the areas with what were considered the worst schools in the 1990s seemed to have the highest appreciation rates. I compiled all the numbers, and found that this was in fact true. The neighborhoods and districts that were best known for having great schools appreciated at a significantly slower rate than those that were known for having the worst schools.
I found that the two districts that were known as having the best schools, Cherry Creek and Douglas County, had half the total appreciation over the past 20 years as the Denver Public Schools, which were notoriously bad in the ‘90s . Another interesting observation is that the areas that fed into what were considered the very worst high schools in Denver have had the highest appreciation of all. That is right, over the past 20 years, the best investment strategy for Denver area home buyers would have been to pick the neighborhoods with the worst of the worst schools and buy houses there.
I would have liked to compile home appreciation and school quality data from across the entire country, but that would be a PhD thesis level task which I am not up for. The patterns I started to see in my research were that poorly performing schools correlated with higher appreciation, most often in gentrifying cities (Washington DC for example), and the mainstream view of “homes appreciate in areas with good schools” was more likely to be true in smaller towns and economically stagnate areas. (However, the values of homes often didn’t even keep up with inflation, even in these “good” school districts.)
If you are curious about the area you live in, you should check out the data for your area. This link from Zillow research contains an incredible amount of home appreciation data from across the country. You can compare home appreciation data with this school performance data as well. Feel free to share the findings for your area. Have homes appreciated more around the good schools, or like Denver, has the best appreciation taken place around the worst schools?