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Salary Advantage Goes to Children of Homeowners

Salary Advantage Goes to Children of Homeowners

Credit: Richard Mia for The Wall Street Journal

Credit: Richard Mia for The Wall Street Journal

Do home prices affect a child’s future income? A new study by the Federal Reserve Bank of Boston suggests they do—for better and for worse.

The study, recently published in the Journal of Urban Economics, found that when households included a 17-year-old, a 1% rise in prices that year resulted in about 0.9% higher annual income for the child later in life—if the parents owned the home.

If the parents were renters, however, it was a different story. Indeed, if the parents of the 17-year-old rented their home, a 1% rise in the home’s price resulted in 1.5% lower annual income for the child.

The salary findings were based on a sample of about 900 people from an extensive data set compiled by the University of Michigan, from which the researchers measured each person’s average income between 2005 and 2007. They then matched the individuals to their parents and used data from the Federal Housing Finance Agency to account for changes in home prices between 1979 to 1999 when the sample members were 17 years old.

The Wall Street Journal spoke with Daniel Cooper and Maria Jose Luengo-Prado, both senior economists at the Federal Reserve Bank of Boston, about their report, “House price growth when children are teenagers: A path to higher earnings?” Below are edited excerpts.

Two Sets of Choices

WSJ: Can you explain the study and your findings?

DR. LUENGO-PRADO: The idea behind this paper is quite simple. We wanted to see if there was a relationship between house prices when kids are 17 years old and the decisions the kids make about college and earnings later in life.

If home prices are rising, parents who are homeowners may have additional resources to finance a child’s higher education, either because they feel richer or they can borrow against the home’s equity. This may allow their children to attend college or attend a higher-ranked [more expensive] school.

On the other hand, the effect of rising house prices for parents who are renters is the opposite. Rising housing prices often mean higher housing costs. Rents go up. They may also need to save more money for a down payment to buy a house in the future.

DR. COOPER: For renters it’s really a trade-off between saving in a rising-cost environment and financing a kid’s higher education. Increased costs lead to less investment [in education] relative to owners, who can use their house as collateral to finance their kids’ education.

WSJ: Can you put the findings of the study in the context of college costs?

DR. LUENGO-PRADO: We found that the average [annual home-price] appreciation is about 3%. That translates into five months of additional education, an additional semester and a half of college, which is very significant.

WSJ: What variables does your study control for?

DR. LUENGO-PRADO: We control for characteristics of the parents—assets, income and educational attainment. Parents may also have a strong preference for education, so we try to capture how good their school district might be. We control for other economic conditions at the local level, like economic growth and unemployment. We want to make sure we are not just capturing long-term differences in economic growth between different areas; let’s say New York City versus Detroit.

WSJ: What happened when home prices rose during different points of childhood?

DR. LUENGO-PRADO: At age 13, rising house prices affect everyone the same. When house prices are doing well, different localities can collect more taxes and the additional tax revenue benefits everyone within the school district, both homeowners and renters. At age 21, we don’t really see an effect. But house prices at age 17 really affect your decision to go to college.

Ms. Ward is a writer living in Mendham, N.J.


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