2014 Series • No. 14–13
Research Department Working Papers
House Price Growth When Children are Teenagers: A Path to Higher Earnings? 
The United States has a long history of promoting homeownership through the mortgage interest tax deduction, and home equity constitutes an important source of borrowing collateral. There is a sizable body of work studying how fluctuating house prices impact consumer behavior. Since college tuition costs pose a large financial burden for many U.S. families, access to housing equity may impact decisions about pursuing a post-secondary education. This paper adds to the literature by using MSA-level house-price variation and data from the Panel Study of Income Dynamics to study the link between future adult earnings and the house price growth that occurs around the time children are 17 years-old, when most college enrollment decisions are made, and how this link varies based on whether parents own or rent their homes. The sample period runs from 1979 through 1999.
Key Findings
- House price growth benefits the children of homeowners, but not the children of renters living in similar locations. When children are 17 years-old, a 1 percentage point increase in house prices results in roughly 0.9 percent higher annual average income for the adult children of homeowners, while the adult children of renters have 1.5 percent lower average annual income.
- Based on the median annual earnings for the two groups, a 10 percentage point increase in house prices results in 8.8 percent higher annual income for owner's children and a 14.6 percent lower annual income for renters' children. This translates to roughly $4,985 additional yearly earnings for the children of homeowners, and $5,487 less annual income for renters' children.
- House price growth when owners' children are 17 years-old leads to higher college enrollment when these children are 19 years-old and increased attendance at higher-ranked post-secondary institutions.
Implications
The results do not reflect the housing price boom in the early 2000s, so it is possible that the effects would be even stronger if this latter period was included. Yet the fact that the authors found that a majority of homeowners increased their housing-related borrowing for the first time in the years when their children are college-aged suggests that home equity loans may have been used to finance college tuition payments, as the impact of house price fluctuations on children's future earnings likely works through the education channel.
Abstract
This paper examines whether a rise in house prices that occurs immediately prior to children entering college has an impact on their earnings as adults. Higher house prices provide homeowners with additional funds to invest in their children's human capital. The results show that a 1 percentage point increase in house prices, when children are 17 years-old, results in roughly 0.9 percent higher annual income for the children of homeowners, and a 1.5 percent lower annual income for the children of renters. House price appreciation at age 17 also leads to higher college enrollment rates at age 19 and an increased likelihood of attendance at higherranked post-secondary institutions for the children of homeowners, as well as lower college enrollment rates for the children of renters.