Booms, Busts and College Ambitions

Home prices soared in San Francisco in the late 1990s, boomed in Miami in the early 2000s, and rose throughout that period for many New York City residents. And many of the low- and middle-income home owners who saw the value of their houses climb in the several years before their children turned 18 used their newfound assets to enroll them in more selective (and more expensive) colleges than they would have otherwise, researchers at Cornell and Kent State Universities have found.

Their study, published Monday by the National Bureau of Economic Research (abstract available here), examines data from the (uneven) housing boom of the late 1990s and early 2000s to explore how those families who were fortunate enough to reap a windfall from living in the right place at the right time altered the choices they made in sending their kids to college. The answer, in short: They grew significantly more likely to enroll their children in flagship public universities (rather than regional publics) and less likely to send them to community colleges.

While the study does not extend into the housing bust that affected much of the United States in the last five years, the researchers say the flipside of their findings is likely to be occurring now: Lower- and middle-income families whose home values have declined since 2008 are probably looking at lower-priced colleges than they might have before their housing assets dipped. And it is also possible, they say, that the choices some families made during the housing boom may be coming back to cost them now, in two ways: their own home-based assets may have shriveled, as has access to home equity financing generally.

The researchers, Michael Lovenheim, an assistant professor of policy analysis and management at Cornell, and C. Lockwood Reynolds, an assistant professor of economics at Kent State, say they believe the role of housing wealth is underexamined in discussions of college access, especially given that home values make up a greater portion of the overall assets for lower- and middle-income families than they do for wealthier Americans.

Studying the effects of increases in housing prices on economic behavior is often difficult, Lovenheim said in an interview. Because increases and decreases in housing values are often closely linked to ups and downs in the labor market or other financial indicators, parsing the impact of housing shifts is hard. What was distinctive about the boom (which turned out to be a bubble) of the late 1990s and early 2000s, Lovenheim noted, is that it was driven (as we've all come to learn, somewhat painfully) by what he called "financial innovations" and other factors unrelated to the general labor market.

For those homeowners who were fortunate enough to live in the right metropolitan areas at the right times, "it was almost like winning the lottery," Lovenheim said,as they found themselves with significantly greater assets.

Using the National Longitudinal Survey of Youth, Lovenheim and Reynolds looked at how changes in short-run home prices affected families with college-age students. They found that for every $10,000 in additional assets a family gained in the four years leading up to a child's enrollment in college, the child was 2 percent likelier to attend a flagship public university rather than a regional public institution, and 1.6 percent less likely to enroll in a community college. The lower the family's overall income, the bigger the impact of the increase in housing values; those with annual incomes of under $75,000 were 8.3 percent likelier to attend a flagship university for every $10,000 gain in home value, while the impact was statistically insignificant for those with incomes above $125,000.

(There was no greater likelihood to attend a private institution; the authors speculate that that's because private colleges are likelier than public institutions to consider a family's home assets when calculating how much a family should pay out of pocket, and because private institutions are on average enough more expensive than public colleges that a small bump in home values isn't enough to put them in range for a student.)

Did the students' and parents' choices to use their "lottery" winnings to change where they went to college mean they got more for their money? The authors acknowledge that they are constrained in answering that question by higher ed's broader inability to gauge value. But the paper notes that every $10,000 increase in a family's home values resulted in their child attending a college with somewhat higher SAT averages, expenditures per student, instructional expenditures per student, and graduation rates.

And each $10,000 increase in a family's home values resulted in a 1.8 percent increase in the student's likelihood of earning a bachelor's degree, the authors note.

What's Happening Now?

While their data can't show it, the authors acknowledge that the positive benefits that lower- and middle-income families appeared to derive when their housing values increased may be reversing themselves now that the housing market in so many places has crashed.

With housing prices having fallen about 35 percent from 2006 to 2010, said Lovenheim, "that price drop can have a huge equity effect, wiping out all the equity you have." Additionally, he noted, the market for home equity loans has "totally dried up." So to the extent that some of those families used their newfound resources to enroll their children into more expensive flagship universities, they may now be struggling to find the funds to cover the increased costs.

The authors say their study offers evidence that it might not be wise for federal policy to generally ignore housing wealth in the calculation of financial aid. "It's great for families when housing prices are rising," Lovenheim said. "But when people have basically all of their wealth tied up in their house, and their home values drop, the financial aid system doesn't see it, because they're not paying attention to it."