Floor Under Prices?

Homes that Pay Dividends

Everyone knows that stocks pay dividends, but few know that houses can, too. Not just the psychic rewards of ownership or the aesthetic enjoyment one gets from a beautiful home in a great location -- but actual, concrete dividends (albeit in-kind).

The best example is the value of a good school district.

Unlike a generation ago, parents can no longer take for granted that the local public school will do a good job educating their kids. Truly great public schools are now few and far between, seemingly crowded out (literally) by increasing student-teacher ratio's, tight budgets, and myriad social ills that inevitably show up in the classroom.

As a result, more families are electing to send their kids to private school. The ones that don't want to, or can't financially, are being ever more discerning about the quality of the public schools serving their community.

Unlike proximity to a nice park or an exciting commercial district, it's possible to put a price tag on the value of a "free" education. A good starting point is cost: taxpayers nationally appear to spend about $10,000 per pupil on public education. When kids defect from declining public schools to charter schools, that $10,000 per head "bounty" follows them.

Ten thousand dollars per student is also about what the thriftiest parochial schools spend annually. At the upper range, elite prep schools can spend double or triple that.

Using the conservative figure, $10,000, the value of a good, "free" public school education to a family with the "average" 2.3 kids is . . . almost $25,000 a year! That’s equal to what PITI (principal, interest, taxes, and insurance) payments are for the prototypical, $250,000 American home! Even stipulating that the education “dividend” is in-kind, for a family contemplating a dozen years of pre-college education per child, the associated benefit can easily amount to a quarter million dollars.

Not surprisingly, sophisticated families take cognizance of that, and incorporate that into their criteria when shopping for a home. As a result, demand for homes in good school districts is higher, which translates into a housing premium. There are plenty of examples just in the Twin Cities where one home, just inside a desirable school district, fetches 5%-10% more relative to an almost identical home literally across the street that’s just outside the district. Free public schools, indeed.

Savvy stock market investors know that, in down markets, stocks that pay dividends often hold up better than stocks that don't. There are two likely reasons: 1) dividends provide a significant percentage of investors' total return -- a fact that gets overlooked in prolonged bull markets (capital appreciation is the other component); 2) companies often pay dividends because . . . they can. In an era of opaque financial statements and turbulent markets, one of the most reassuring signs that a company you own stock in is prospering is a cold, hard dividend check in the mail at regular intervals.

Similarly, a strong school district -- and its "stream" of in-kind education dividends -- can set a floor under housing prices.

Like dividend-paying stocks, at least some communities undoubtedly spend more on education because . . . they can. Higher per capita school spending correlates with all sorts of desirable things: more disposable income, more expensive and better maintained housing stock, a higher concentration of nearby amenities to serve the foregoing wealth, etc.

In turn, those attributes bode well for long-term housing price appreciation.

Conversely, not being able or willing to spend on public education can be a proxy for community decline. Chronically under-funded schools can also be a sign of an aging population, whose budgets and priorities lie elsewhere.

For taxpayers, scrimping on education is like under-investing in house maintenance. There may be short-term savings, but at the expense of greater, long-term costs (“a pound of cure later vs. an ounce of prevention now”).

Home buyers looking to protect their housing investment in a tough market should take note . ..