The effect of educational test scores on house prices in a model with spatial dependence

The hedonic modeling literature is rich with analyses of the importance of public school quality on real estate markets. In this paper, spatial dependency is incorporated in a hedonic model based on housing, neighborhood, demographic, and school quality attributes readily available on the Internet for home sales in Howard County, Maryland. The importance of using readily available measures is that perceptions in the public are formed by them. The study also addresses potential omitted variable bias by incorporating school assessment measures over the K-12 grade range. The consideration of spatial dependency in hedonic models is imperative since the findings are sensitive to appropriately modeling the spatial component of home prices. The results indicate that there is consistent and significant evidence of the capitalization of 8th grade test scores and SAT scores in home prices, and inconsistent evidence of the capitalization of 3rd grade test scores. The elasticities of house price with respect to test scores are all in the inelastic range and smaller than those found in other studies. This study provides clear guidance on how to test for spatial heterogeneity and non-normality of error terms before proceeding with hedonic analysis.