Location, location, location can mean different things to different people. To a home buyer, the words may evoke visions of the urban sophisticate lifestyle, the All-American small town, a paradise by the sea, or a mountain retreat. To a builder, they more likely suggest low-priced, easily developed land close enough to jobs, entertainment, and retail to promise the buyer a better life. To the Realtor, however, the words often mean a safe town—with really good schools.

“People do pay more to live in places with better schools,” says Gary Painter, Associate Professor at USC's School of Policy, Planning, and Development.

But while the correlation is one that many understand—it's no surprise that the top housing markets perfectly overlay Newsweek's “Top of the Class: America's Top Public High Schools in 2008” (see “Head of the Class,” page 30)—the question remains whether schools make the town, or vice versa.

SMART SCHOOLS: Barnhart Inc.'s Del Norte High School in San Diego, Calif.'s Poway Unified School District was designed under the Collaborative for High Performance Schools program, which aims at providing students with an energy- and resource-efficient environment that contains the amenities necessary for a quality education.

David Figlio, professor of education, social policy, and economics at Northwestern University, took a crack at it when he co-authored with former director of assessment and zoning for Alachua County Public Schools Maurice Lucas, “What's in a Grade? School Report Cards and the Housing Market,” a treatise published in The American Economic Review in 2004. Figlio and Lucas studied properties in Florida and determined “that there is an independent effect of [school performance] on house prices and residential location, above and beyond the estimated effects of test scores and the other components of the school grades.”

Figlio told BIG BUILDER that while there is definitely a “chicken and egg problem, development is stoked by a high-quality school because it attracts affluent buyers. We don't know for sure if it's the school quality or new housing [improving the school's ranking],” says Figlio. “We are really trying to nail down which came first, and we are leaning toward school quality driving housing.”

Dranoff Properties specializes in urban infill development, like the adaptive reuse of the former RCA Victor headquarters in Camden, N.J.

Either way, school quality is a factor every home builder should consider when acquiring land. And many do.

“The evaluation of schools is part of the corporate feasibility study,” says Phillippe Lord, director of corporate market research for Meritage Homes. “We will definitely not purchase [land if it's] not in a good school district.”

That said, Lord allows that not all markets are equally concerned with education quality.

“On the East Coast, we really have to understand the school system. In California, the schools are important, but not in areas like Vegas,” where affordability weighs more heavily than eductional quality. In Colorado, Lord says “people would rather rent to be in a good school district than buy in a bad one.”

DOING THE MATH Figlio has put together an equation based on his research to determine the effect of school quality on home values: “We see that for every 10 percent increase in [test] scores, there is a 2 percent increase in housing value,” he explains.

Learn more about markets featured in this article: Los Angeles, CA.