A recently published paper by economists at the Federal Reserve Bank of Boston demonstrates a link between home price gains – and homeownership in general – and the educational attainment and future earnings of children. The paper contributes to the broad academic literature demonstrating the positive social and individual impacts of homeownership.
Using data from the Panel Study of Income Dynamics (PSID), the authors, economists Daniel Cooper and Maria Jose Luengo-Prado, find that when the homeowners’ children are 17 years-old, a 1 percentage point increase of their parents’ area house prices yields approximately 0.9% higher average annual earnings later in life and 1.5% lower average annual income for renters’ children.
The research also indicates that home price growth when children are aged 17 increases higher education enrollment rates at age 19.
The empirical test used data constructed from the PSID. Individuals’ income data running through 2007 were linked to their parents’ information from when the now-adults were aged 17. The ability to track data over time is a key benefit of panel data like the PSID. This process created a dataset of 892 individuals who had their 17th birthday between 1979 and 1999 and were 25 to 45 years old in 2007.
The statistical test controlled for a variety of factors including parents’ income, education non-housing wealth. The authors also used a number of different house price measures and different ages for the children. The statistical results did not vary substantively given these changes, suggesting the findings are robust.
The paper’s results indicate that homeowning parents are better able to invest in the education of their children. The authors conclude that the statistical findings are consistent with prior research concerning the social and private benefits of homeownership (see Robert Dietz and Donald Haurin [Journal of Urban Economics 2003] for a broad review of homeownership impacts from studies in economics and the other social sciences).
The paper does not provide a firm answer on whether the relationship between housing wealth and future college enrollment and higher earnings of children is due to a wealth effect or eased credit constraints for the homeowners to access financing for education. However, the authors do note that the majority of homeowners increase housing-related borrowing for the first time as their children approach college age, thereby suggesting that the home price effect is related to eased borrowing conditions, which enables more investment in their children’s education.