Macro Seminar - James Graham (University of Sydney)

Title:  Public education and intergenerational housing wealth effects

Authors: Michael Gilraine (NYU), James Graham (University of Sydney), Angela Zheng (McMaster University)

Abstract: While fluctuations in local house prices are known to generate wealth effects for current homeowners, we document a new channel through which house prices have intergenerational wealth effects. Using detailed micro-data on school quality and house prices within a large US school district, we find that local house price growth is associated with improvements in local school quality. Thus, when local house prices rise, parents face a tradeoff between moving neighborhoods to consume out of housing wealth and staying in place so their children can earn higher human capital from improving school quality. To quantify the effect of house price shocks on child income, we build a heterogeneous agent life-cycle model with neighborhood choice and endogenous school quality in spatial equilibrium. In the model, house price shocks are associated with intergenerational wealth effects around a third as large as the contemporaneous housing wealth effect on consumption. Almost all of this intergenerational wealth effect is due to endogenous changes in school quality rather than direct parental transfers of wealth.