Housing disease and public school finances

We propose a new mechanism to explain part of the large increase in expenditures per student in U.S. public schools in the 1990s and 2000s: housing disease is a fiscal externality from housing markets in which unexpected booms generate extra revenues that school administrators have incentives to spend. We establish the importance of housing disease by (i) assembling a novel microdata set containing the universe of housing transactions for a large sample of school districts; and (ii) using the timelines of school district housing booms to disentangle the effects of housing disease from reverse causality and changes in household composition. We find housing price elasticities of per-pupil expenditures of 0.16–0.20, which in turn account for 20 percent of the growth in public school spending for districts with at least one housing boom. School districts primarily spent the extra resources on instruction and capital projects, not on administrative expenditures, suggesting that the cost increase was accompanied by improvements in the quality of school inputs.