Publication Date: Tuesday, April 8, 2003

Take the money and ruin?
Many fear threatened school budget cuts could affect real estate values

by Carol Blitzer

If Gov. Gray Davis' proposal to take property taxes allocated for local schools becomes law, more than school administrators will worry about how cuts will affect school quality.

Economists, real estate agents and homeowners -- both current and future -- are concerned that the so-called "Palo Alto premium" will disappear.

It's the belief that the area's high-quality schools are worth a premium price that has some home owners settling for a smaller house at a higher cost in Palo Alto, noted Mandy Lowell, president of the Palo Alto Unified School District and a 13-year resident of Palo Alto.

Why else would people be willing to pay more than $800,000 for a tract house in south Palo Alto that would go for $550,000 in Redwood City?

"Part of the fabric of our community is the attractiveness of people who value education so highly," Lowell said, noting that access to Palo Alto public schools is even cited for recruiting new faculty to Stanford University.

Real estate agents have touted the schools for years as a compelling reason to buy in Palo Alto.

"The reality is real estate in Palo Alto definitely for the past 25 to 30 years has been driven by the strength of the schools," said Leannah Hunt, co-chair of the Palo Alto Realtors Association and a Coldwell Banker agent.

With the district facing the biggest financial crisis in its history, real estate agents and home owners fear that housing prices could slide. Davis proposes grabbing $126 million in property tax revenue generated by basic-aid districts, of which Palo Alto is one of 60. For the district that could mean a 25 percent reduction in its $108 million budget, a cut that could mean substantial reductions in the kinds of programs and staffing levels that have made the district so attractive.

Economists and real estate agents project that such a hit, would definitely affect housing prices and sales in the area, though there is little consensus on how far prices would fall.

"I don't think the real estate market will go to hell in a hand basket because of these cuts, but it will have a real impact, if we were to lose that status," Hunt said.

Many in the local real estate community, along with the Chamber of Commerce, are working with the schools to defeat the governor's proposal, she added.

In the past several weeks, real estate agents have passed out literature at open houses to let prospective homebuyers know what they can do to be proactive in dealing with the proposed cuts -- including writing letters to their local assemblyman, contributing to the Palo Alto Foundation for Education and getting more information from the PAUSD Web site.

Carol Carnevale and Rosemary Squires, agents with Alain Pinel Realty in Menlo Park who do most of their business in Palo Alto, feel strongly that "property values are linked to the quality of the public schools, which is why the price of Palo Alto properties has been higher when compared to other communities," said Carnevale.

Although Carnevale and Squires have not seen potential homebuyers dropping out of the real estate market because of fears about next year's budget, they say that property values are intrinsically linked to the value of the schools.

"To the extent that budget cuts impact the quality of education, it stands to reason that there will be a negative impact on property values," said Carnevale.

Jennifer Sherer, a neighbor of Lowell's, and her family moved from San Francisco to Palo Alto because they wanted to live in an area with good public schools.

"We could have gotten much more in Atherton, but we chose Palo Alto for the schools and the neighborhood feeling. Palo Alto is a magnet for families with children. There's not that gated feeling," she said. "We rationalized the prices because we're not going to be spending the money on private-school tuition," she added.

Longtime Palo Alto resident and economist Richard Carlson sees a lot of families basing their home buying decisions on the schools.

"People now pay a premium to live in Palo Alto. ...Go across the creek from me and look at the same home in Los Altos -- there's at least a $200,000 differential."

If the schools were to make drastic cuts, slicing away advanced placement, music and arts programs, Carlson -- who chairs Spectrum Economics Inc. in Mountain View, as well as Palo Alto's Utilities Advisory Commission -- said, "People would think, 'Why not buy a place in Mountain View or Los Altos. Instead of that million dollars in Palo Alto, why not buy for $800,000 or less in Mountain View?' "

Gavin Wright, William Robertson Coe Professor in American Economic History at Stanford, served on Committee 2000, which looked at projected demographics in the district in the 1980s. At that time, he learned that "real estate agents are said to be the most eager consumers of test scores because they use them in their work."

He, too, is concerned that changes of the magnitude proposed by the governor would have an adverse effect.

"If you were to cut the budget by 25 percent that would be a big enough jolt to affect property values."

Although he couldn't pin it down to specifics, he cited the idea of communities investing in their schools as a "fundamental driving force for American public education. ... That connection has become weaker because so much of the funding comes from the state.

"I justify it as an economist as a way for affluent people to stay in the public-school system."

"Housing values are high because outsiders are willing to pay a premium to live here, and that excess will taper off," noted Stanford University Emeritus Professor Henry Levin (and William Heard Kilpatrick professor of Economics and Education, Teachers College, Columbia University), who served on the PAUSD board in the 1980s.

"I would not be surprised if a cut of 20 percent in the budget of the PAUSD led to a 20 percent reduction in housing values. I think that would be in the range of expectations."

His successor at Stanford, Susanna Loeb, assistant professor of education, agreed that one could expect some change, but thought 20 percent a bit high. She pointed to a study of Michigan schools where a district with $100 more in per-pupil spending had .4 percent higher real-estate values. But, she did not know of any studies that looked at what happened to the real-estate market when districts had their budgets radically cut.

She could foresee a 4 or 5 percent change in property values. "It's hard to know. It could also lead to an increase in private schooling for Palo Alto residents," she said.

Noting that the worst-case scenario could not play out overnight, economist Carlson could see a future proposal for a local tax hike. "But the next governor could take that away too. It'll be much more difficult to pass a tax hike to make it up," he said.

"We've long expected we'd lose the basic aid. I think we'll lose that and keep our property tax. That hurts but you're not cutting into the bone," he added.

As for Mandy Lowell, she's focusing on minimizing any cuts, to keep the schools strong. As she says, "There's no ocean view in Palo Alto. It's the schools."

Carol Blitzer can be reached at cblitzer@paweekly.com

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