Odd Lots - Daryl Fairweather On the Tax That Could Solve the Housing Crisis

Episode Date: June 13, 2022

Housing in the US is a constant source of frustration. On the way up, prospective homebuyers worry that they're missing out on their chance to jump on the housing ladder. On the way down, homeowners worry about losing their equity and their nest egg. So is there a better way? Is there a way to make housing more equitable, and to separate the investment component from the shelter component? On this episode we speak with Daryl Fairweather, the chief economist at Redfin, about a land value tax and how it could help us reposition housing so that it's less of a financial asset that spirals people higher, and blocks so many people out. See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But on Vanguard, at Vanguard, institutional quality isn't a tagline. It's a big line. It's a very big. It's a firm. It's a few. commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad

of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk,

Vanguard Marketing Corporation distributor. Visit Don Valley North Lexus for interest rate reductions of up to 3% for lease and finance rates, resulting in lease rates as low as 0.9% plus delivery credits of up to $1,500, only until April 30th. Visit dawn valley northlexis.com. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Alloway. Tracy, you know, it's like when housing is booming, it seems to cause people a lot of stress, like they want to like get in on a home. And then when housing tumbles, that also causes people stress, maybe if you recently bought a home or something like that.

But either way, wherever we are on the cycle, it feels like in the U.S., like housing is just this huge source of stress. Like sometimes I go on the real estate, some Reddit, and it's just like all these people clearly close to like having nervous breakdowns over the travails of either trying to find a home to buy or sometimes even to rent. Yeah, I mean, you will have very different sources of stress depending on whether or not you're a homeowner or whether you're trying to become a homeowner and source an actual house in the current market. But yes, it seems like an endless struggle in many ways. You know one thing that I just learned about and, you know, this is maybe naive on my part. But as a new homeowner, can we talk about property taxes and

the fact that if I improve my house, I will pay more? That's crazy. So just let it deteriorate. Just like let the... Yeah. ...come in. Let the foundation crack, all that stuff. I mean, that's the incentive that I have now. Although, well, resale value.

But yeah, anyway, there are all these things you discover once you actually own a property. No, owning a property is the worst curse because, like, you think it's like, oh, I finally got a house and all these people are competing and entering bidding wars. And then if you win, you actually kind of lose because then you're like stuck to this thing. and you realize like how much it costs, but yeah, bottom line is like

everything about real estate ups or downs just seems to be a permanent source of stress and okay, like mortgage rates go up and maybe that cool is buying, but it doesn't feel like

anyone has any sort of like it doesn't feel like there's a long-term plan to address this. Like, yeah, at times maybe things soften up a bit, but maybe if things are softening up a bit, it's because the economy is down

and people are getting laid off and then it gets harder or impossible to get a mortgage or be in a position to buy a house. Structurally, it's just seems like a nightmare. Well, I would say the other big thing is it feels like no one's decided what role housing is supposed to have in the economy. So, yes, I think most people would agree that if you can get on the housing ladder, it's probably a way of building wealth. But at the same time, no one wants house prices to go up so high that everyone starts to get priced out of the market. And so it feels like we have yet to decide exactly what role housing should play in the

American economy, certainly. Why do we want houses to be this, like, key asset where your ability to retire, your ability to have some sort of like comfortable economic existences predicated on buying houses? Like, you know, housing could just be like a consumption good? like buy shelter and just the shelter component. But it has become this thing where everyone feels like homeownership is such a key to what we think of as, you know, the American dream or whatever, having a comfortable life

that you'll like pay a fortune just as you put it, like get even the term of the housing ladder. It's like we all have to like climb up. We have to grab a rung. It's also, it all seems so perverse. Well, it also immediately creates that fomo feeling, that sense of missing out. like, oh my gosh, I have to get on the ladder because if I don't get on it as soon as possible, I'm going to be behind everyone else for the rest of my life. But yes, this is a peculiar model. It is not the model used by everyone in every country, by the way. And Europe in particular

is quite different in its approach to homeownership. Totally. It definitely seems a little more saying. All right. Lots of a very pessimistic intro to this episode, talk about how much stress. But maybe there's a way out. Maybe there are policy moves that could actually sure you address some of this. But to sort of understand more why housing is such a source of stress and all of this that we're talking about, we are going to be speaking to Daryl Fairweather. She is the chief economist at the real estate website, Redfin. She might have some ideas on how you can alleviate things or at least understand the roots of this tension. So Daryl, thank you so much for coming on Odd Lots. Thank you for having me. I'm so happy to be here.

We're really psyched to have you here. You know, are we right? So people talk about there being a housing crisis in America or a minimum of a housing shortage. Is there a housing crisis in the U.S.? Like, can we, is there data that's beyond just all the anecdotes of stress and comments on Reddit and stuff like that that points to it's like, we have a serious like mismatch with the demand to own a home or the demand to have shelter versus what's available? Yes, we are in a housing crisis. It's not just me saying this. Freddie Mac has estimated that we're almost four million housing in it short. If you just look at California, it's even higher than that. I think maybe some of the confusion is that it's much worse in certain parts of the country where housing prices have really

gotten up and up for the last decade. And there are parts of the country that have not seen that. So maybe people just don't see it where they are, but as a whole, we're definitely in a housing crisis. So how did we get here? Because again, as Joe and I were talking about in the intro, So housing kind of looms large over the American psyche, and it's part of the American dream. Everyone wants to become a homeowner at some point. So you would think that there would be a massive industry that is geared towards producing a good that everyone wants and will pay a lot of money for. So what happened?

We stopped investing so much in housing or really seeing it as this savior. Before the housing crash, there was this idea that if we just made everyone a homeowner, than everybody could achieve that American dream and build wealth. But making everyone a homeowner came with a lot of consequences. It's not something you can just magically produce, produce that kind of wealth. So there were people who were getting homes that they actually couldn't afford. And there was a financial system that was supporting that as well that all came crashing down. So from the crash onwards, we kind of ignored housing, didn't see it as something that we should be promoting.

We built fewer homes in the 2010s than any decade. going back all the way in the 1960s. And millennials are the biggest generation. They're entering into home buying age. They need places to live. And we just haven't been building for them. We're really trying to grapple with why we don't build enough homes to meet seemingly this excess of demand. It's interesting.

We talk about this with commodities all the time, like natural gas and oil and lumber and all these, about the 2010s being this year of underinvestment. And of course, housing is not a commodity, strictly speaking. there's an interesting like parallel of this like 2010s is sort of like the decade of underinvestment and everything and now we're like now we're paying the price for it. It was a very destructive recession and we're certainly still paying the price for that. And we also just didn't we didn't do enough, I think, to get out of that recession quickly enough. We maybe overcorrected in this last recession and did a whole lot and now we're grappling

with the flip side, which is inflation. But I think most economists agree that that that the fallout from the. the recession was more harmful than it needed to be. So I know we're going to get into things that could be done to increase the housing stock. But just on the current trajectory, like if everything continued as it currently is, would you expect some sort of supply response from home builders? Like, would you expect them to ramp up production enough that it would start to fix some of the imbalance between supply and demand?

I don't think that builders on their own are going to be able to build enough to meet demand because they only really started getting ramped up on production when demand was exceedingly high during the pandemic. And now that interest rates are up, they're already starting to see that decline in demand and they want to pull back. Because of the cyclicality of the housing market, builders, they only really ramp up at the peak and then right after that they pull back and they don't want to ramp up again until there's another peak coming.

So I think we do need some kind of government intervention or more policy. making to support home building that actually meets demand. So before we get into that, though, you know, Tracy said something important in the intro. So, you know, like Tracy talked about this in the beginning that, you know, not all countries have the same approach to housing, where housing is so central to their conception of economic life, once personal finances. What is it? Like, where did it come from in the U.S.?

This idea that, like, housing, we place. at the center of this and that it became like this sort of homeownership became core to the American dream. Oh, I think it goes back to the founding of this country. If you want to look at the real route, property rights are really part of how this country was built. I mean, the denial of property rights to the Native Americans and the idea that an individual can own property is part of how this country was founded. So I think that that is deeply embedded into this country, the idea that you own a piece of property and it's yours and you can build what you want on it. The government can tax a bit, but I think America resists taxing too much because of that idea that

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ready to eat meal delivery service. So why don't we talk about potential fixes or policy solutions, but what could be done? Well, one thing that is kind of straightforward, at least when you say it, it's a lot less straightforward in practice, is to have a land value tax, which means that you essentially pay rent to everybody because you don't own the land. You didn't create the land. The land belongs to everyone in your area or in your country. So having a land value tax corrects for that.

And it turns the value of the home really just more into a commodity, the actual property that sits on top of it. You're not getting some excess of wealth just because the land value goes up. That would mostly be taxed. So how is that difference? So Tracy mentioned that after she became a homeowner, she discovered the awful world of property taxes. So can you talk a little bit further? What is the difference between a property tax and a land value tax? Yes. So your home consists of the land, but it sits on top of that you own and you can do what you want with it. And then there's also the property that is a structure that sits on top of that land that can be modified. The land value value, separates that from the property tax. So a property tax is really a combination. It taxes both the land and the value of the property, but you can think of it as two different parts. The reason for having a land value tax from an economic perspective is that land is a mutative.

you can't change it. If you tax it, it's not going to change anyone's behavior. So it's a really efficient tax to impose when just trying to raise tax surpluses. Also, there's just the idea that, you know, you didn't create the land. So the value should go to everyone. The property tax part, I think, is more motivated by having a progressive tax that if you have some mansion, you are a wealthy person and you can afford to make that, to pay that tax and have it redistributed back to people who can only afford to build a little one-bedroom house or bungalow or whatever it is on the property. So I think they have different motivations, but they get lumped together in just the overall property tax. You know, as Tracy put it in her intro, she gets penalized for improving her property.

So she bought a house and if she makes it more valuable that would raise her property tax, whereas in theory a land value tax, if it's just the land portion of the ownership, then nothing she does on the property development side. That's why you say it's an efficient tax because what what Tracy does with respect to her house would not necessarily change the underlying value of the land. In a very simplistic model of the world, that's true. But I actually want to push back on a land value tax being perfectly efficient. Okay.

Because land value is affected by everything that's around it, whether it's the quality of the air or, you know, what your neighbor's house might look like at the cash. to shadow on the land. There's like a lot of different things that can go into land value with how the access to jobs for that land. So it's not immutable, but it's less likely that what Tracy does impacts the land value. It's a little bit more out of her control and it's more determined by all the factors in the community. So it's the idea here that at the moment we have a property tax, which is basically a tax on the structure on the land that you own. And so you're basically taxing investment. So if I pour money into my house and I make it better and bigger or whatever,

someone is going to come along and charge me more money for that. So if you started doing a land tax, the idea is that you're taxing land, which is in finite supply and kind of exists regardless of whether or not you build on it. But by doing that, you're trying to better align the incentives so that people are going to want to build on the land rather than just leave it alone. Is that how it's supposed to work? Yes, I think that that is how an economist would want to design our tax system. But in practice, our taxes tend to skew towards equity concerns over efficiency concerns. So it's the same reason we have a capital gains tax, because the kind of people who have a lot of capital gains tend to be very wealthy. And from equity,

perspective, we may want to distribute some of that wealth down to people who don't have any capital gains to be taxed in the first place. So it works the same for property. If we're trying to just purely promote economic growth, we would not want the structure of the home or improvements to be taxed. So what does the land value tax theoretically accomplish? Like we talk about, okay, housing is such a big source of stress. If we had one, how does that fix the four million housing deficit? Or how does that get us towards that? that goal of bringing supply and demand into balance? So one is that if you are taxing the value of the land,

then people are going to be less likely to stay in their property beyond, like the value that they would get out of it. So right now we have an issue in the country of people just staying in place, aging in place. There are baby boomers who don't have children staying in their three-bedroom home or four-bedroom home when that house may be more of value to something. who is younger just starting a family. But because the older person in the home is not paying the full value of the land,

they would rather just stay put than to move somewhere else and potentially have to bear more of the cost or to rent and bear more of the cost. So there's a bit of a problem in terms of allocation of real estate if you're not taxing the land. There's revenue to be gained from taxing the value of land. You could put that money towards building more properties. If somebody is being taxed the value of the land, they're going to want to get more out of that land in order to make a profit. So instead of building a single family home, you might build a multifamily home instead of having a land just sit as like a golf course

or something. You might try to have that be commercial space. It would be of more value to the entire community or to the economy. So just on that note, I mean, you mentioned the value of the land and the potential thing that could be built there. How do you actually measure land value for the purposes of a land tax? And would you incorporate like potential use? So would you look at a site and be like, well, you could build, you know, a massive multi-residential building here. And so it's going to be a lot higher than a different type of land.

Like, how do you do that exactly? Because that on the surface would seem to be quite tricky potentially. Yes, it is quite tricky. And I think that is lost a bit when we talk about a land value tax because in theory, it seems great, like, oh, just do a land value tax and everything will be efficient. But I think actually assessing the land value tax in and of itself would necessitate a bureaucracy of appraisers who determine what the value is. And any time you're doing an appraisal, I mean, it's basically an algorithm that might determine the value of the land.

And there's always algorithmic bias. So one issue with the current property tax, current property taxes in America is that black people sometimes are paying more property tax than white people. because white homeowners are more likely to debate what the actual appraisal is. Go fight that and try to get appraisal that gets them a lower tax burden. So there's room for this kind of bias to crop up just in terms of who is pushing back on what the appraisal might be or what the appraiser is saying is a valuable land. They might introduce their own bias if part of that is a human error or algorithmic. That's interesting.

I hadn't realized that about, but it makes total sense about this sort of, a symmetry or inequality of who has the resources to fight their appraisal. Those same issues, they would theoretically arise in either one, either a property tax or a land value tax or these issues of subjective human judgment, or is there a way because you don't have to gauge the actual value of the structure? Is there a way to make a land value tax somehow more equitable and less able to be gamed? I think we have to look at it on whole. Having a land value tax in the first place, I think would promote equity because it's it's taxes that would be collected more efficiently and could be distributed back to a community and possibly help people who are lower income or have socioeconomic disadvantages. But it's not going to be perfect in terms of collecting that money. It's not perfectly efficient. So I think you just have to look at it from both sides and make a determination as to whether it would be good for society as a whole. I think it would be. But I think we would have to really have a lot of transparency and how appraisals are made and make it easy for anybody to fight an appraisal if they feel like they've been wronged.

There are ways, I think, through the court system to make it fair or make it fair as long as we're paying attention. So land taxes do already exist in other parts of the world. Can you talk more about those existing systems and what impact it's had on house prices and I guess society as a whole? So one example that comes to mind is Israel. It actually, they call it a hundred year lease. So you lease land from the government, but it's effectively the same as a land tax because you're paying this money monthly to the government and just you have to pay it regardless of what the size of the property is.

You can still do whatever you want on the property. So it works in effect the same as a land value tax. I'm not actually, I should look a little bit more into housing affordability in Israel. They have their own land issues because a lot of the country is desert. and there are other land issues there that I won't even get into, but that is one country that comes to mind. But, yeah. It's interesting, though, and I think, like,

Singapore also has the system where a lot of people don't actually technically own their property, but they're in these, like, ultra-long-term leases. But I guess, like, one of the implications, and you sort of hinted at it in the very beginning, which is it, it sort of muddies our contract, of property ownership a little bit. If you're always paying, whether it's a monthly or a yearly land value tax, then to some extent implicitly, like, you're always sort of renting your land. And I think you even use the term rent, but it sort of just introduces this idea that, like,

everyone is kind of a renter to some extent in this framework. Yeah, I think that's an ideological hurdle when it comes to land value taxes. In the book, Gone with the Wend, Scarlett O'Hara's dad, always railing about property taxes. I always found it really ironic that like this character that owns people is mad that he has to pay for this land that he thinks he owns is entitled to. Anyway, I think this is another side. I think there's like a lot of ideological stuff and whether somebody can actually own land or not. Yeah. So just on this note, I mean, so two countries that spring to mind for me that have this sort of land tax system or a rental agreement where you're effectively renting the land from the government for long periods of time, Mozambique and China.

And I mean, I don't know why those two spring to mind other than I've spent time in those two countries. But like, both of those were a legacy of the communist government in the respective countries. So I'm trying to think how to rephrase this. But what's the likelihood of a land tax getting enacted in a place like the U.S. where people really associate. property rights with freedom. And, you know, if I buy land, I own it and I shouldn't have to pay a continuous stream of taxes that looks a lot like rent to the U.S. government. We already have the land value tax embedded within the property tax. So I think we already have it in some effect. I think the question is how high could it go where people still feel like they

own their land? Like if it was, you know, right, like I think most property taxes are around one to three percent, maybe higher in some places. So that's not a huge amount you're paying every single every single year. But if that creeps up to say 10%, maybe people won't feel like they truly are owning the land. And also it would cut into the wealth, the equity that they gain. One of the reasons that home prices go up so much is because people aren't actually paying for that value of the land. It gets to accumulate instead of going back into the government or back into the public coffer. If you are extracting some of the wealth and putting it into the public coffer, then people won't have their house as an asset anymore. And people might not like that in America.

It's interesting, okay, like to this point, that the land value tax is to some extent embedded in the existing property tax. And I'm thinking about like the difference between California and Texas. And California, and I forget what the law is, but it seems like really hard to raise property taxes on some people. And what's the law that like makes it like super like people get like these really cheap property tax assessments in many cases? Prop 13. Yeah. Whereas in Texas, property taxes are really high. In fact, there's no state income tax. And so the primary revenue generator or one of the primary revenue generators for cities and towns is the property tax. And Texas is having a housing boom right now. And home prices like in Austin and some cities are.

sky high. But generally speaking, it seems as though Texas has avoided some of the housing affordability issues that have really become a major crisis in California. Yeah, I think property taxes are working the way they are supposed to in Texas. I was in Austin just a couple months ago, and every single apartment building that was, you know, over two decades old was being remodeled. And that's what you would do if you have a high property tax. When you see that your property tax bill is about to go up, because home values have gone up, you really are motivated to improve the properties so you can make up that loss from the property tax. And landlords are also passing that on to their renters. Many renters are getting hit with big rent increases that aren't capped and they have to move out.

And then that gives the landlord another opportunity to upgrade the property so that they can get a higher return or just to rent it to somebody who has more money to pay. So I think it is causing a lot of disruption to the people who actually live in Austin. and I'm sure that it's not easy to get that big rent increase and just be told, well, this is the economy, pay the market price. But it's working as intended in Austin from what I can tell. Do you think, I mean, just going back to what Joe and I were sort of discussing in the intro, but do you think the balance or the emphasis that America puts on home ownership, would Would things be better if I guess people were more accepting of being lifelong renters? Because,

you know, again, I don't mean to denigrate the American dream or anything like that. But in other countries, you know, places like Germany or Austria, people will just live in an apartment for a long period of time. They have more rights as tenants. So maybe a greater sense of ownership, even though they don't actually own the space. But would that be a solution to the housing crisis to just not have so much focus placed on ownership versus renting? I mean, I'd like there to be more of a balance for renters to not feel like they are boxed out of creating wealth or that they're always being displaced by higher and higher prices. But I think that I think there are some advantages to homeownership. I mean, it gives you the ability to improve your property. If you actually own your house, you can be responsible for mowing the lawn and maintaining it, putting a new roof on.

making it what you want to be and putting pride into that. So if you're only renting, it might detach people from their homes a bit more. But I think that there should be more balanced and people shouldn't feel like they're not achieving success just because they're renting it might just fit better with their lifestyle and their own personal financial goals. I'm sort of fascinated by this idea that with a land value tax, you would sort of be punished implicitly for un-economical uses of your land. So if you just built a single house on a property that could theoretically have a duplex or a condo, you're sort of, you're going to pay more, you're going to pay a cost for that. Or if you just have a golf course, then you're going to pay a

cost for that. Or if you just want to have a huge property all to yourself, you're going to pay a cost for that for not developing. How much do you think that could catalyze just more creation of the housing stock itself? Oh, I think it would certainly help if it was paired with relaxed zoning laws. I mean, part of the housing crisis, I think, is single-family zoning. And if you had a land value tax

and the home was only single-family zoning, then the value of that land would be less and if it was multifamily zoning. So maybe that would actually be an incentive for even cities to rethink their zoning if they knew that they could get more tax revenue with better zoning. So that could help in that sense.

But yes, I think that a land value tax motivates a homeowner to sell if their home would be more valuable as a duplex or a triplex. Or maybe they would be the ones to actually add in those extra units or put a granny flat in or whatever so they could get revenue to make up for the property tax or for the land value tax rather. So even if a land tax was enacted, you know, let's say tomorrow, it feels like it would take just because housing takes a while to build, it feels like. it feels like it would take a while until we got fresh construction and greater supply. So I guess, I don't know, it just kind of feels like this particular generation of homeowners or potential homeowners, like millennials are just screwed. Yeah. Like, you know, it just feels like there's, we've come up against like a choke point in the

system and there's no good way of rectifying it quickly. I think from a certain perspective that is true, especially for millennials who, grew up in a certain place and always dreamed of owning a home like their parents did in that place. I think that is very difficult. You can't stay in the same socioeconomic status and still expect to achieve the things that your parents did just because we didn't build enough homes for everyone to have that same American dream. But if millennials kind of rethink what the dream means for them, maybe living in a more affordable area, moving to a different part of the country, living in a condo or a multifamily home instead of a single family home, I think that they can still

achieve economic prosperity. It might just not look the way that they thought it would look 20 years ago. Well, are the millennial parents, are the boomers ever going to sell their homes? I mean, you mentioned people staying in their homes for longer than maybe they need to, even after the kids have moved out. And it feels like this has come up on prior episode. Like it feels like everyone is waiting for this to happen. This wave of support. apply that's going to come to the market. But like, is that actually going to happen or is it always going to be like years out? And it's always like this sort of dream that it happens, but it never actually transpires. I mean, I don't think it's going to happen in the next decade just because

baby boomers aren't that old and life expectancies are going up. And it's hard to predict out farther than a decade because it's so much a policy choice. Like people ask me a lot about like, oh, there's a witness wave of millennials. What about Gen Z? Because Gen Z is slightly smaller than millennials. But Gen Z is a smaller generation because of a policy choice. We had much more immigration that promoted the size of the millennial generation and we kind of cut back on immigration since then. So we could choose to be a country that can grow and can accommodate more people if we had better housing policies. But we can also shoot ourselves in the foot and not promote immigration or growth and keep in this kind of same state. Eating well shouldn't be.

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That's 11 meals, free shipping and free sides for life, but only with the code fit at factoramills.ca. Factor, Canada's number one ready-to-eat meal delivery service. Don Valley North Lexus for interest rate reductions of up to 3% for lease and finance rates, resulting in lease rates as low as 0.9%. Plus delivery credits of up to $1,500, only until April 30th. Visit Don Valley Northlexus.com. So the other thing that we spoke a bit about in the intro was just the stress of the housing

market and people get worried when house prices go up and it affects affordability for potential buyers and then people get worried when they start going down because if you're a homeowner, you're losing equity and losing wealth. Is there a way to, you know, especially in the current environment where mortgage rates have gone up and we are starting to see some softness in the market. Like, how should we be looking at house prices in the current environment? Because there were plenty of people saying that the past year has, past year or two have been problematic because people are getting priced out of where they want to buy. And on the other a lot of people who bought over the past couple of years, myself included, are probably going

to be worried when house prices start going down. Yeah, I think you said it well that if you haven't bought a home, home prices going up is a real problem. If you already own a home, home prices going up isn't so bad, but it can have other perverse effects on the economy that might impact you. So maybe if you live in, let's say a city like Austin and home values have gone up, you're going to be paying more in property tax as home values go up. You're going to probably paying more for groceries because people need to make more to work at the grocery store to afford their rent. And you might just see more inflation across the board. Redfin did a study of where inflation was going up the most and it's going up faster in migration destinations,

the places people are moving to, than the places people are leaving like San Francisco or New York or Los Angeles. Do you think it's possible that we'll see a nationwide price decline? Like, because I think people have been skeptical. Like, oh, other things will slow down or we'll see it into bidding wars, but the underlying average price is still going up. Do you think an actual, like, nominal home price decline as possible? Redfin is forecasting home price growth to slow to 7% by the end of the year. That's compared to the previous year.

And by 2020, 3% for annual price growth to slow to about 3% by spring. So home prices we're expecting to stay positive, but to really start to slow down to a very slow pace. One interesting thing we didn't talk about is negative land value taxes. So the idea is that a place like Flint, Michigan, for example, their land value was deteriorated because of the lead in the water. So maybe we should be sending checks to the people who own land there because of the way that the government kind of failed them in terms of the infrastructure. That's interesting. I hadn't thought about that. So would that necessitate in theory, though, that any sort of land value tax be sort of done on a national basis? Or like, would it be optimal in general to not have this highly patchwork system of property taxes that are idiosyncratic by city and state and to come up with some sort of more national tax code when it comes to real estate? Possibly. I mean, the government does it for flood insurance. They come up with a property level flood insurance premium that's done at the national level. So they definitely could. And I think the more data you put into the model, the better it would be in theory. I mean, models are never perfect, but the more data, the better generally. So one thing I was wondering about was, I guess, conservation versus incentivizing people to build on things, because there would be some areas.

presumably where you wouldn't want people to be incentivized to build a skyscraper or, you know, multi-story residential housing or whatever. Is that, would that be taken care of by zoning laws? Or like, how do you reconcile different potential uses of land with the land tax and the incentives that it creates? I mean, you could put a value on just about anything. You could incorporate the carbon value of land if there, is some, like say that carbon is valued at some dollar per ton and having a bunch of trees on

land absorbs that carbon, you could put a dollar value on that value, on the value of having the land remain vacant. And you can give credits to people who do that kind of activity. So I think land value tax, you can get really creative with it and try to incorporate a lot of different kind of values. Like you mentioned, there's value in having a park that goes to the public, even though you're not actually charging people to use the park. But I'm sure clever economists could come up with some estimate of the value to be used. So one of the perverse things about right now is like, okay, housing up until very recently with the mortgage rate jump, but housing has gotten less and less affordable.

And so people are stuck in renting. But renting itself has all kinds of problems too. For one, rent prices have surged. Two, you can't lock in a rent price very easily. So they keep going up year after year. you're not on the housing ladder, but you're also falling behind potentially if your wages don't keep up with your rent. What do you see happening on the rental side? And you know, you mentioned that prices or that your forecast are for prices to cool off, would you expect rental inflation to cool

off roughly in line with cooling off of housing prices? Or can the two move separately? It really depends on what measure of rental inflation we're talking about. because asking rents for rentals that are on the market currently, those peaked last month, I think it was 18% up year every year, and now it's down to like 17% year every year. So we seem to be past the hump in terms of home or apartments that are on the market. But that's going to trickle into all other rentals in terms of what people are paying on their lease each and every year.

Because if you're in a rental for a long time, then maybe your rent was actually set a couple of years ago and isn't updated as frequently. landlords tend to like keeping tenants because it's lower cost for them than finding a new one. So I don't think it's the end of rental inflation in terms of how much people are actually paying, but at least the fuel is no longer being poured on the fire, it seems. So obvious question. What is the possibility of a land tax actually getting enacted in the U.S.?

And is there anyone out there currently who's making noises about this or advocating for it? There's an online community of people who are very into land taxes. The Lincoln Land Institute, I'll shout them out. They do a lot of work in terms of educating at more the municipal level, how policymakers should use their land, should tax it, or lease their land as an alternative to land taxes. So there are, this is happening at a local level. At a federal level, I'm not sure it's even constitutional for the government to have a federal

land tax, I think it violates the commerce clause or something like that. But perhaps they could at least set up the infrastructure for it to be easier for municipalities to adopt one. There's definitely a very vocal online community about fixing all of these sort of zoning reforms and changing land taxes. But the gap between actually sort of like, yes, this makes a lot of sense on paper versus, okay, we're going to have this sort of new framework where your house is not necessarily going to be your economic nest egg still seems like a pretty huge wall to overcome, so to speak. Well, we're starting now.

You got to start somewhere. You got to start calling your local politician. Yeah, everything starts online through tweeting these days. So eventually, eventually, just like it was your tweet, Daryl, about, you know, that's like, oh, this is why we have to do an obloat episode. Anyway, you start with tweeting and then the world changes. Absolutely. All right.

Well, Darrell, thank you so much for coming on outlaws. Thank you. This is great. Yeah, this is really hard. Thank you so much. So I thought that was really interesting. And this idea that we talk about renting or owning property versus say renting it very long term from the government, those seem like really two different things. but they're not necessarily like that different.

And some of it is just like slightly reframing how we think of things or is this a tax or rent. What seems like a radical difference may be maybe a bit more subtle. Yeah. But part of me, I mean, part of me just thinks whenever someone says we're going to solve this problem with an extra tax, like you will immediately get a knee-jerk reaction, certainly in Washington. And I think there's something about homeownership in America in particular that just makes it such an emotional topic that it feels like it's a very difficult system to change. Oh, it's incredibly difficult to change. Or the idea, like all these zoning requirements and despite all the housing shortages,

is and the frustration because, like, you want to change one thing. Like, you'll read about, like, the Herculane efforts that a developer had to go through to be able to, like, build a duplex somewhere. Or, like, in California, they, like, try passing a law so that a condominium building can be, like, built within a few blocks of a train station. All of these things that seem kind of modest just run into incredible blockages politically. Still, though, like, thinking about these, like, all their countries. where they might do something like a 100-year lease as opposed to owning the land outright.

And, you know, Singapore has that. And we don't think of like Singapore as being like, you know, I think Singapore is a reputation for being like a pretty free market economy. So it is interesting that even within the sort of free market economies, there are different ways of conceptualizing homeownership or what it means to occupy a certain piece of land or property. Yeah. Well, I mean, I do agree.

that there, and I think a lot of real estate developers would probably say this too, but like, there is a perverse incentive that is created by the emphasis on property tax and the idea that if you improve a property or if it goes up in value, you're going to have to pay more for that. Like, that just on its face seems kind of weird, especially when we're talking about a housing shortage and the need to create more units and better units preferably. Well, and I like that point, though, and it seems like a case for the land value tax, which is, okay, if you're going to, you know, the property tax, or in your case, it might seem like it's penalizing you for improving the property.

But if you also had a penalty for not improving your property because you're essentially paying more for the same thing because the value of the land were going up, then you might counteract that and you might get this sort of like the, uh, greater economic incentive to actually build out property. So I sort of think it's an interesting idea from sort of basically counteracting the perverse negative effects of the property tax alone. Totally. I mean, I mean, I guess I'm just cynical nowadays, but yeah, I am. Yeah, okay, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allo. And I'm Joe Weizenthal. You can

follow me on Twitter at the stalwart. Follow our guest, Darrell Fairweather. She's at Fairweather, PhD. Follow our producer, Carmen Rodriguez, at Carmen Armin. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.