School Accountability Ratings and Housing Values

During the past decade, states have constructed elaborate systems for rating the performance of individual schools based on student test scores and then have released this information in the form of school “report cards.” The federal No Child Left Behind Act of 2001 will accelerate that movement by requiring states to test all students in grades three through eight, publicly report each school’s student test performance, and sanction schools when they fail to achieve specific standards. Earlier research has documented the cross-sectional relationship between housing values and student test scores at neighborhood schools. 1 Given the magnitude of the relationship between test scores and housing prices in the cross section, one might expect the release of school report cards to have important effects on housing values and, indirectly, to provide incentives for schools to improve performance. However, there are also reasons to believe that the housing market would downplay the information in school report cards. In particular, school test scores are noisy measures of school performance and may provide homeowners with little new information about which schools are the best ones. 2