Transcript:
Will Jarvis 0:05
Hey folks, welcome to narratives. narratives is a podcast exploring the ways in which the world is better than in the past, the ways it is worse in the past, where it's a better, more definite vision of the future.
Will Jarvis 0:20
I'm your host, William Jarvis. And I want to thank you for taking the time out of your day to listen to this episode. I hope you enjoy it. You can find show notes, transcripts and videos at narratives podcast.com. Additionally, in this episode, my friend Lars to say joins us as a co host. Well, Daryl, how are you doing this afternoon?
Daryl Fairweather 0:44
I'm doing great. How are you?
Will Jarvis 0:46
Doing great doing great. Thank you for coming on the show. Could you go ahead and give us a brief bio and some of the big ideas you're interested in.
Daryl Fairweather 0:54
So my name is Daryl Fairweather. I am the chief economist at Redfin. As the chief economist of red fin, I study the housing market and I direct our economic research team and coming up with research that is relevant to the housing market to homebuyers sellers, real estate agents and basically anybody who is interested in following it. I speak regularly on topics like housing affordability and other housing market topics. And before working for Redfin, I worked for Amazon as a senior behavioral economist.
Lars Doucet 1:31
Can you tell us a little bit about exactly what Redfin is and does and, if possible, contrast it with Zillow, like most people know Zillow and Redfin and kind of think of them as the same thing. But if you could tell us a little bit about what Redfin is specifically, and how that all works.
Daryl Fairweather 1:47
Sure. So Redfin, we're most known for probably our website and app but we also have a full real estate brokerage, a mortgage company, a rental company now so and also title company. So we really are full service when it comes to finding a place to live. Zillow is a website is well, they, for the most part, don't have a full staff of agents. Actually, I don't think they have any agents now at all. They did for a while, and they had when they were engaged in ibuying, which Redfin does, as well. But Zillow shut down their AI buying unit. So Zillow mostly has advertisements for agents who are outside of Zillow, they might work for another real estate agent. And then maybe they'll have some ancillary businesses, but I'm actually not 100% familiar with everything that they do.
Lars Doucet 2:38
Cool. So that's really interesting. Now, one thing that's very interesting to us, one of the reasons we had you on the pod is you worked for Redfin, this is a major real estate broker in the United States. And at the same time, you're advocating for fixing the housing crisis, advocating for fixing this affordability crisis. I mean, to put it bluntly, aren't high prices good for your employer and real estate professionals in general? I mean, it will tell us all about it.
Daryl Fairweather 3:03
It's not really good for anybody that housing is the way it is in this country. There's a lot of market and efficiencies, things like nimbyism. Also, just like the way that we tax, land, and property is not as efficient as it could be. Which means that we don't build as many homes as we probably should be, to meet demand we underbuild and, you know, even working for a real estate brokerage, we want people to be able to move to be able to buy homes, those are our customers, we want more customers. We'd rather have more customers than charge the customers, we do have more money.
Will Jarvis 3:38
The base makes a lot of sense. As you mentioned two interesting things there. There's a couple of things restricting supply and kind of driving housing prices up nimbyism and kind of inefficient tax structures. Can you talk about those two separate things and how they contribute to the housing crisis?
Daryl Fairweather 3:54
Sure. So I will start with nimbyism. nimbyism is it stands for not in my backyard, back in like the 1970s. It referred more to things like industrial projects going into neighborhood but then it kind of evolved into into residents really being opposed any kind of development in a neighborhood. So you buy a home in a certain area, maybe all the homes are single family homes. You know, there aren't any shadows in your backyard from taller buildings, you have a view of say the lake, nothing's blocking it and then you start lobbying to protect that to make sure that no large apartment buildings go in that might block your view or cast a shadow, even if it means that housing for everybody else is on affordable and inaccessible. So it's kind of just basically a shorthand for I think, being kind of selfish. valuing your property value, your view, your neighborhood character that you want more than building a neighborhood that is welcome for all people or for more people. To be able to afford and live in. So, unfortunately, nimbyism, it's like a consequence of, I think incentives. Homeowners are incentivized to protect themselves not to think about things. More at a larger level, we could address that I'll pivot and so where the land value tax, so a land value tax is basically the idea that you you extract the value of the land and redistribute it back to a community because nobody really owns the land, right? I mean, I guess maybe that's debatable, but it's based on the idea that we all collectively own the land. And so if you build on a certain plot of land, you should be paying some kind of rent. For using that land, anything you do in terms of the structure would be yours. We went tax that with a land value tax as opposed to a property tax. So you can build whatever you want, but the land value has to be shared. And the way that that can actually combat nimbyism is that you would want to get the most value out of your land by building perhaps more housing on your land, instead of just laying the land stay as single family home. And if you didn't want to do that, then you would more likely want to move somewhere else where the land value tax was lower, where you wouldn't be impeding on other people's ability to get the full value of the land.
Will Jarvis 6:20
So it sounds like there's kind of a different incentive structures. So if we tax property, then we'll get less kind of productive uses of land. And if we tax the land, we will will get less speculation. Is that like a fair framing of what you're describing? Yes, I
Daryl Fairweather 6:36
think I think less speculation because the value would be extracted, it wouldn't be something that you would bet on. And I think that that is more equitable, just in terms of like how we distribute the value of land, it's not all going to the people who were just around earlier to buy it before the value went up. The value would be more reflective of all the people who contribute to that value. Because like, if you're in a place that has really exclusionary zoning, say, San Francisco, for example, and you bought your home, let's say in the 1970s, the value of that land today is mostly attributable to the tech sector. And you personally buying a property like you didn't contribute to that necessarily. So redistributing it back to the whole entire city would make that a bit more fair.
Lars Doucet 7:19
Now, Darrell, you're chief economist here at Redfin. So as an economist, what led you to these policy conclusions? You know, what is what was the theoretical basis for them? And how did you personally encounter them?
Daryl Fairweather 7:31
So I Redfin as the as the chief economist. We are Team, The Economist team studies, the housing market, and our directive is to just inform people on what's really going on. So just telling the truth is, it's a big part of what we do. We do the research, and then we report on it, we try to report on it as factually as possible. So people know what they're getting into when they buy a home. They understand why values keep going up, why housing affordability keeps getting worse. And you can't really explain that without talking about things like nimbyism, or property tax structures. These are the root problems. These are the root thing, our policy choices that have gotten us into the situation that we're in today.
Lars Doucet 8:10
Now, you've shared some videos on your Twitter, one, one of them you shared was the housing crisis is the everything crisis. Now I've I've heard of this theory before, which is known as also known as the housing Theory of Everything. And can you explain what this theory is about and what your thoughts are about it?
Daryl Fairweather 8:26
Yes, so? Well, I think there's two parts of it. Part of it is that housing affordability issues cause a whole lot of other problems in the economy. So when housing prices go up, people have to devote more of their income just to housing, they're not able to buy other things are not able to consume, but not able to invest in things outside of land, which doesn't like add productive capacity to the economy, it's just land. And that makes the economy overall less productive than it could be a mix as poor as a society. I think another way to think about the housing Theory of Everything Is that what's wrong with the housing market is really what's like the root cause of what's wrong with the housing market. When it comes to things like nimbyism is what could potentially be our downfall with other big crises, like climate change, for example, if people have this mentality that they're only going to be concerned about themselves, and they're going to block policies that could potentially help everyone if we all just, you know, stop thinking. So individually, that's gonna prevent us from making investments and in a carbon free or neutral future. So those are two ways I think about how how have you understand what's going on in housing, you can really understand how we're failing as an economy and other and every in every other aspect.
Lars Doucet 9:47
So one question I want to follow up on there is that inflation is really bad right now. Right? And as an economist, I'm sure you have opinions about inflation. Now, housing inflation, according to your argument here seems to be kind of a separate sort of thing from Like bread inflation, but at the same time, like, I guess my plumber and a nanny or whatever any any laborer who has to live in the city has to pay rent in the city. And so the cost of that labor is probably affected by some degree by housing affordability. So to what degree is just, and then you pay more for a nanny or a plumber? I'm not an economist, I don't know, you please correct me, to what degree is inflation? To what degree is it? Or is it not driven by the housing crisis.
Daryl Fairweather 10:28
So I'm gonna separate out inflation, and stagflation. So inflation, the kind of inflation that the Fed has control over is driven by increases in demand for something and increase in demand for something could cause home prices to go up, it could cause the price of bread to go up. And the root cause of that is that there's too much money flowing around in the economy, there's too much demand, if you just want to reduce that you increase interest rates reduce the money supply, demand goes down. The other side of that is stagflation, which is driven by a lack of supply. And the primary reason that housing prices are so high is not because there's too much demand, it's because there's not enough supply. And that's not something that the Fed has any control over the only way to increase supplies to increase the productive capacity of our economy. And that's just a fancy way of saying like, we need to just stop doing things that hurt us for no reason, like having single family zoning is just like a very silly policy choice. We all know, we shouldn't have it, if we want to improve housing affordability, let's just get rid of it. Or things like having a carbon tax, for example. That's kind of a straightforward thing that a lot of economists agree on. If we did that, then we would get a lot closer to a carbon neutral future. And we could even redistribute the gains of the taxes, so doesn't hurt low income people who tend to consume more carbon relative to their income. So there's a lot of economic solutions that I think most economists agree on that we should just try to figure out a way to do. But I think this goes to my political economy side, I did take a course in political economy, you Chicago when I was a grad student. And the main takeaway from that is that we don't get a lot of these policy solutions. That seems straightforward, because it's just difficult politically, to get people to vote in the interest of everyone instead of the instead of their own personal interests. And that can create some like bad policies.
Lars Doucet 12:26
I have one real quick thing going back to a word you said, you said stagflation. Could you just define what that is for our audience?
Daryl Fairweather 12:32
So Stagflation is an increase in prices that is caused by a reduction in supply. A big example of this was actually we can we can point to an example right now we're experiencing stagflation. From the war in Ukraine, we aren't buying oil from Russia, so we have less supply of oil. And that has caused an increase in gas prices and the Fed, if they tried to raise interest rates, it's not really going to solve that problem. It will reduce the amount of money in the money supply, and people will buy less oil, but they won't like there still isn't enough oil for what we would want. You know what I mean?
Lars Doucet 13:09
Yeah, my understanding of the word I first heard it, like referred to from the Carter administration, that traditional macro problem is inflation, because economy is growing, but we also have inflation. So good thing and bad thing. And stagflation I think is the stag word is that stagnant plus inflation like economy is not growing, and you have inflation. So two Bad's is that
Daryl Fairweather 13:29
yes, I think that I never actually thought about where that portmanteau came from. But that makes a lot of sense. Yes, the economy is not growing, it's not that we have too much demand, demand is a good thing, you just have to make sure it's not too much. But a reduction in supply is overall bad. And then if you reduce demand, then you're making things worse on top of that, and it's like you're getting punched from both sides, just to fight inflation.
Lars Doucet 13:52
So the point is, you can't use your traditional monetary policy lever of pick up point on the trade off between growth and inflation to solve stagflation. Is that what you're saying?
Daryl Fairweather 14:01
Yes, there is no, like, there is the there is no trade off. It's just worse all around. I mean, inflation is bad in and of itself. So you can't let inflation get too bad because of stagflation, either. The Fed like they did during the oil embargo and the issues in the 1980s. They had to, they had to raise interest rates then too. So anyway, it's kind of a tangent.
Will Jarvis 14:24
Darrell, you mentioned something really interesting earlier around the political economy of just throw up problems around political economy and passing things that would be good for the collective for all of us. Particularly, I'm thinking about nimbyism. It seems like a real challenge to solve nimbyism, because these decisions are made zoning decisions are made at the local level you can get out of your town council start yelling, I don't want this you know, high density housing project to go up behind in my backyard. For x reason it might drop my property values down. And there's this concentrated kind of incentive for me to prevent this from happening. And to kind of this we would all be better off but it's a small other incentive for all of us to kind of band together and and, you know, prevent this person from stopping us from building more high density housing. What can we do to solve that kind of problem? Is it moved these kinds of zoning decisions up to the state level or the federal level? Or is it some other solution?
Daryl Fairweather 15:16
I think that going to the state level is has been affected has been somewhat effective. And that's what California has done. They're still getting a lot of local opposition. But they have been pretty good about standing up to that local opposition, and really going after municipalities that try to evade the zoning laws. I still think that it's not a perfect solution to go to the state level, because we do I think we do want communities to be on board. And the only way to really achieve that, I think would be like through some kind of PR campaign. We got people to stop littering, people used to litter all the time. And now they don't. Now the highways are clean, even though like it's easier to throw your trash out the window. We got people to stop doing it. So I think we could do something like that for nimbyism.
Will Jarvis 16:02
So it's something where we just need to shame people who don't want to build and if we shame them enough, perhaps we can, we can kind of get there.
Daryl Fairweather 16:08
I don't I don't want to use shame. I would say like indoctrinate
Lars Doucet 16:13
something more like the NBA movements. I mean, we're already starting to see some policy wins come out of the NBA movements where they're starting to repeal some blanket, single family zoning policies. Is that kind of more along the lines of the campaign you think would be successful?
Daryl Fairweather 16:25
Yeah, I think I think I think I think just educating people on the on what's actually happening on why nimbyism is bad. I think just changing people's hearts will be it will help even more I think it's a state level response and changing people's hearts. I don't think the federal government can do a whole lot. Because I mean, it would violate the Commerce Clause, I would think for them to get directly involved in zoning that can use carrots and sticks like they how they do with alcohol ages, they like withhold state funding for highways or something like that. They could they could withhold funding for states that don't get their zoning under control. But I don't think that that is a is going to work because California is already being punished for having bad zoning, they're losing people to states like Texas, and Florida. So if it was just about like that, if it was just about residents seeing the error of their ways, because they're losing tax revenue, then we would already have this problem solved.
Lars Doucet 17:22
So following up on that on political viability, you know, so the MB movement seems to be on to something, and and hopefully they'll continue this seed. The other half of your policy proposal is property tax reform. And I've seen some property tax reformers were also land value tax advocates, advocate for what they call a revenue neutral property tax shift. And the idea here is in your local appraisal district or property tax district $6 million, because that's the budget, then you just assess the value of the land, ignore the buildings and collect the same amount of money, but just from the land this time. What do you think of that kind of proposal? Do you think that's something that could be an easier sell? Or Or have you? Have you ever heard that specific policy proposal proposal before?
Daryl Fairweather 18:07
Yes, yes, I think that where I want to learn more is that part of assess the value of the land, because I think there's a lot of hand waving that goes on at that step. And it's actually, it'd be a big burden bureaucratically to assess the value of the land. I mean, we already have property taxes. So obviously, we're like capable of estimating land value or property value. But if that's going to be a major, the major way that we that we solve this problem, I think we're going to have to be pretty careful about how we assess land value and try to think through that. So here's why I think it's hard. land value isn't fixed, it can change things like air quality would affect it access to jobs, access to parks, it's subjective, you could include non monetary or non pecuniary, like dollar value things in it, like how much carbon could potentially be captured. If this land was turned into a park, how much do we value carbon, then like, you can go down a lot of rabbit holes, when trying to figure out how to assess land value. I'm not to say it couldn't be done. But I think it's a bit more subjective than just some, you know, appraiser professional appraiser coming in and putting $1 value on it, it gets it gets kind of complicated.
Lars Doucet 19:22
Right? It's interesting, because we're actually, we're actually somewhat involved in the field. We have a grant right now to do mass appraisal. And so one of the people working on a project is Paul dansette, who's worked for the International Association of assessment officers. And so I've, we've been learning a lot about this. One of the things he talks about is recent advancements in mass appraisal technology. And I won't bore you with all the details. But one thing I would like your opinion on is from the position of red fin, you're sitting on a treasure trove of data for the whole, you know, United States. What do you see II in the world, do you have any contact with valuation? You say you have an eye buyer program? To what degree is your access to data give y'all insights on the potential to do mass appraisal and things like that.
Daryl Fairweather 20:14
So I think that we are that just the fact that we have all this data it can put up a Redfin estimate can make can make purchases based on these algorithms that kind of goes to show how far we've come. And I think that it has had a huge impact on the market. But algorithms contain bias. They're not perfect. I mean, Zillow. I, you know, I don't work for Zillow. But from what I've read, it seems that Zillow got caught flat footed with their eye buyer program, because they weren't being as questioning of the outputs of their algorithm as they should be. So it's it's algorithms plus judgment when it comes to valuing a home. It's not just the algorithm, and we have a whole team of agents. So when our customers are looking at their Redfin estimate, their agent is also helping them understand like, here's the context of the estimate, and why your home may sell for more or less than that amount, or by how much more. So yeah, there's a lot of judgment that goes into it. That's why I'm still a bit skeptical that it can be deployed in a way that is, is more efficient, it is efficient in the way that these that the land value tax enthusiast want it to be. And it's also just like, bias that no matter how good we get, or how much data we get are still gonna be there. So racial bias can crop up, there's bias, or so Redfin did an analysis of how much a home was worth in a black neighborhood, compared to a white neighborhood when the home is exactly the same. And the neighborhood's exactly the same, at least according to all the data that we have. And homes and black neighborhoods were valued, I think it was around $40,000 less than homes in white neighborhoods. And you could call that a problem with, with how, like an algorithm might determine the price, but it's actually people on the ground who are determining the price, and they carry with them their own potential bias for where they want to live. So is that the correct value, though, when you're coming up with something like a land value tax, and another factor issue to be wary of is that even in property taxes, people can dispute their property taxes, and the kind of people that dispute their property taxes are tend to be wealthier and have more resources, they tend to be white on average, whereas, you know, people who maybe don't have the resources, just end up accepting higher property taxes. So that's a bias that I would be worried about, Jim. But I think that the big question, though, is, is are the kids always about trade offs? Can we create a system that is more efficient, that is less biased than the current system?
Lars Doucet 22:43
Right? And how close do you have to get right? You know, I've seen you can go into San Francisco, and you can find an empty lot, next to a $3 million home that's worth like 2.5 million, you know, and it seems like the dirts problem for both of those is probably 2.5 million, you know, how close do you have to get, you know, I mean, you don't need to do 100% tax on the land rental value, you know, what's your margin of error? I mean, you don't have to put a number on it. But just like, can we get put in a policy that's, that's good enough, even in the face of imperfect information,
Daryl Fairweather 23:16
I absolutely think that we can do better. And there's like, a lot of just small ways that we could do better. One is like getting rid of something like prop 13, that caps the increase in your property tax, we could try to value the land instead of the structure and not tax the structure. So we're not taxing investment. Yeah, I feel like it would like the current system is very flawed, and we could do a lot of improvements. And then another option for municipalities besides land value tax is leasing land more often cuz it's in effect, the same thing. Like instead of giving a plot of land away to a developer, you just set a rent and then the city can charge the rent that they feel is appropriate. And they can even take auctions on the rent to you. That's another way to assess the value is to just have an auction at the auction determine it.
Lars Doucet 24:04
Right. Um, you know, I've recently seen some talk about what's happening in trailer parks, for instance, you know, and that a lot of the rents on trailer park land is going up in that I mean, Trailer Park Lane is literally a parking lot. I mean, it's a special case. So I wonder if, you know, do you have any special insight on what's going on in the trailer park market right now?
Daryl Fairweather 24:23
I am pretty confident that it's a consequence of the housing affordability problem, people have been priced out of non manufactured homes and they have to resort to manufacturing because against what they can afford, the more inequality increases the more demand there is like the most affordable type of housing. So that doesn't surprise me.
Lars Doucet 24:43
I'm really interested in this talk about racial bias and assessments, right so if we're trying we're basically trying to do is predict what a home will sell for, you know, and so if all the people who are making offers are well frankly racist, that might reflect you know, depressed value for this place, you know, if racist people don't want to live here, you know? So, um, but I guess in terms of like policy, which is the worst outcome if if it's like, okay, I valued your property at its low, it's like, well, you pay low taxes. I've seen some presentations on racial bias where the fancy guy's house who lives on a hill, and it's worth $2 million, the property tax, it's like, oh, that land is worth nothing. So he pays like, you know, not very, very little in property taxes, but this person here, who lives in the project, so that lands really, really valuable. So they're hit with this very high property tax. So I mean, I was wondering if you could speak to that aspect of things, we're actually over valuing your property can be a form of bias.
Daryl Fairweather 25:42
Yeah, I mean, when you when you when you're applying for a loan, you want your appraisal to be high. And when you're getting your property tax bill, you want your appraisal to be low. So there, there are different kinds of appraisals. And unfortunately, for black people, they get hit both ways when they're applying for the loan. There's a lot of anecdotes about black people having to like take down pictures of their family have a white person standards, that they get a higher appraisal when they're applying for a loan. But then when it comes to the property tax bill, on average, black people are hit with higher property taxes relative to white homeowners, because of what we talked about earlier about white homeowners being more likely to appeal their appraisals when it comes to the taxes. So it can cut both ways. I think a land value tax, though, has the potential to correct for some of that innate injustice and how homes and black neighborhoods are undervalued because yes, they would get hit with a lower tax bill. And you could even have a negative land value tax, like maybe a place like Flint, Michigan, we should be sending checks to compensate for the way that their land value was diminished due to the lead crisis.
Lars Doucet 26:53
Oh, interesting. So like you destroyed land value, so you need to like it's like a what what do they call it a Pigouvian. Tax when you pay for something bad? You've done? I guess that's what a carbon tax is. Right? Yes. And land value tax has often been paired with what used to be called Citizens dividend. And it's now called universal basic income. Is that another thing you would get strung out with like negative land value tax? Or was that a separate concept?
Daryl Fairweather 27:17
I haven't, I haven't heard UBI linked to land value tax, and that way I consider them separate policies. And that's yeah, I'm not sure. I haven't heard that before.
Lars Doucet 27:26
Yeah, that's just the historical single text Georgia's movement. They often were like, Okay, we'll do a land value tax, and we'll use it to fund a citizens dividend, you know, to take so you can use it to
Daryl Fairweather 27:36
fund all kinds of great things. I guess that's one good option. There's a million options for what you could put the money and yeah,
Lars Doucet 27:43
so one thing I'd like to pivot to is this notion of I've heard this policy called value capture, which seems a lot like all the things you're advocating for just in a specific use case, like we put in that rail line, you know, downtown, or, you know, we put in some transit, and the land values go up nearby. But for some reason, we can't fund public works. And they all go bankrupt and takes forever. And so some people are saying we should capture the value of those rising land values by building public works. Are you familiar with those policies? And do you have any thoughts on those of the whole value capture with public good spending?
Daryl Fairweather 28:17
The context I've heard it in is an inclusionary housing. So if you give a developer the right to build, like a luxury condos, certain number of the units have to be priced below market value. And that is like giving back a public good. I think that they are an imperfect solution. But if that is what is politically viable, then, you know, it's better than nothing. But I think that a land value tax would be more efficient, because when you have that kind of mandate of including affordable housing in the condo unit, you may be discouraging a developer from considering the project. But, you know, I guess you could argue that the developers will do it anyway. And if you if there's if they are doing it anyway, and then I guess that supports that idea.
Lars Doucet 29:02
If you buy affordable you mean rent controlled, right? Yeah.
Daryl Fairweather 29:05
Or below market value. Yeah. I see. Gotcha.
Will Jarvis 29:09
Darrell, recently, you've been on the Breakfast Club and talked about challenges facing the black community around the history of redlining in the US. Can you talk about to what extent and degree this legacy still persists today? And kind of the mechanics that perpetuate it, I know you've talked about it a little bit already. Yeah. So
Daryl Fairweather 29:24
redlining was one of the discriminatory systemic functions in our housing market, before the civil rights movement. So the way redlining worked was that banks would essentially draw lines around black neighborhoods and would not lend to those neighborhoods. And because of things like racial covenants and mortgages, black people also could not buy into the white neighborhoods or mortgages were being provided. So it was an effect and in effect prevented most black people from becoming homeowners. Pre civil rights It's era, the work of the civil rights leaders, Martin Luther King, the Fair Housing Act, redlining was abolished, but the effects still persists today. Because housing is one of the main ways that people build wealth in this country is a source of intergenerational wealth. People who are homeowners are more likely to have to have had parents who were homeowners. So there's like even just knowledge that's passed down, or a model that set when your parents and grandparents were homeowners that black people were prevented from experiencing. And it's one of the reasons that we still have inequality today. And it's not it's an example of how the policies of the past and discrimination segregation in the past is still, it's still affecting inequality today.
Lars Doucet 30:44
So Darrell, one question is a big thing that often comes in with the intersection of, you know, race, and housing is this topic of gentrification? You know, people move into the neighborhood, and the prices go up, you know, and there's, there's tension between the current residents, and the ones just moving in. I was wondering if you could, you could talk about that, you know, because sometimes it seems like I mean, don't we want to improve neighborhoods? But how can we do it without kicking out the people who already live there?
Daryl Fairweather 31:09
Yeah, I don't. I don't love the term gentrification. Because I feel like it's just us so much, that's kind of lost its meaning. I think that what it is actually describing is the vulnerable, vulnerable position that renters are in when land value goes up, because if everyone all of a sudden wants to move into their area, they don't own the apartment, or a rental that they're in, they now have to move because they can no longer afford to live where they are. And that is a disadvantage that is only really borne by renters and not by homeowners. What's interesting about a land value tax is that burden would not be shared by both homeowners and renters, because the land value tax would go up when more people want to live in the area, because the land is more valuable when it's more demanded. So if we're trying to reduce inequality, I think that that is another angle for why a land value tax would help the problems of gentrification maybe it wouldn't completely eliminate it, but I think it would make it so that the burden is not shared so unequally.
Lars Doucet 32:14
So, Darrell, your chief economist at Red fin tomorrow, I wave a magic wand in your chief economist of the United States, what
Daryl Fairweather 32:24
I probably would have started a commission to investigate a land value tax I could that is, that wouldn't be a very popular position because people wouldn't know what I'm talking about. But I think that is what I would do. Cool.
Will Jarvis 32:39
Darryl, you're clearly a super smart person. You've worked with Amazon, University Chicago, PhD in economics, incredible program. I'm curious, why spend time on this problem? What Why housing? Is it because it is this like just fundamental thing? It's a huge lever, or is it something else?
Daryl Fairweather 32:57
So I specialize in behavioral economics when I got my PhD. And I also first started studying economics during the housing crisis. I worked as a research assistant at the Boston Federal Reserve in 2009. And I surveyed homeowners who were facing foreclosure or who had recently entered foreclosure, about the roots of why they got in that position. I asked them all kinds of questions about their income, their employment, their health history, things about their knowledge of finance, how risk averse they were, how much they understood the terms of their mortgage, it was like a really long survey, and I gave it hundreds of times. It really just made me realize, like how housing is this huge financial decision that people take, and they have no experience going into it. So it's a very prime example of where people can make mistakes. Because whenever you're doing something you never done before, that's when all the biases started to kick in. And it's a very emotional decision to because it's your home, it's where you live. And in America, homeownership carries so much emotional weight for people. So for someone interested in behavioral economics, studying the housing market is is, is perfect.
Lars Doucet 34:12
So Darryl, one question I have is, you got your studies at the Chicago at the University of Chicago, there's this whole school in the non University sense of economics called The Chicago School. And I was wondering, you know, I'm fairly familiar with that school of thought, but this seems like an entirely I don't hear most people talking about land when they talk about economics, at least not until recently. Mostly, it's like capital and labor and interest rates and supply and demand. But like land is seems seems like a relatively new part of the discourse to me, and I was wondering if you could situate what makes lamb special economically.
Daryl Fairweather 34:51
I felt like land was discussed a lot when I was in graduate school, because it's the perfect example of an inelastic Lee supplied good when you're Are you going through like what is an elastic good versus inelastic good land is the prime example. It can't be created, it just exists. So its value is determined by demand, not by supply because supply is fixed. And then housing is another, it's like an in between because in the short run housing is an elastically. supplied, there's a fixed amount, but then over the course of a couple of years, you can build or even maybe one year, you can build another housing unit. So in the longer run, it is more elastically supplied. So housing came up again and again, in my studies as examples of how the economy works.
Lars Doucet 35:37
Yeah, I never got an economics degree. So I don't I don't know what they're teaching in schools these days. But But it's interesting to me because like, the Chicago School of Economics is very associated to to a less ignorant layperson like me with this. What's the guy's name? Milton? Friedman, Milton Friedman, very libertarian, but I guess he was a land value tax advocate, too.
Daryl Fairweather 35:57
Yeah, he understood economics. He was one of the best in terms of understanding economics. Maybe I'll I don't agree with all of his views. I think sometimes he tried to apply economics to things that are more nuanced than that probably require more of a social, sociological or a psychological lens. But he definitely understood economic principles.
Will Jarvis 36:18
Definitely, definitely interesting person we had a son on a couple of weeks ago on the on the podcast. I'm curious, Darrell, do you mind if I throw out a couple of explanations for the housing crisis? And just have you talked to him? Are there things we haven't kind of covered so far? Sure. Okay. So the first one is, you know, corporate investors are just buying up all the homes. What do you think about that?
Daryl Fairweather 36:38
No, not buying them all up? Are by our estimates, I bought at 18.4% of homes at the end of last year.
Lars Doucet 36:45
Nice. Perfect it. Can I just say that, so cool that you have that?
Will Jarvis 36:51
That's good. That's good. What about foreign investors or foreign investors buying up all our homes?
Daryl Fairweather 36:56
We don't have great data on that. Because most foreign investors buy through like a trust or an LLC or something like that. But anecdotally, from our agents, it's really only comes up in a handful of markets. And it's not by any means, like the majority.
Lars Doucet 37:10
Gotcha. Now, I doubt your coding has this specific one in it, but I'm just gonna ask anyway. Are tech bros buying up all our homes?
Daryl Fairweather 37:17
Okay, this one maybe? I don't know. I mean, can we be tech Bros and sisters? Like? I'm sure that there are women out there who are buying up homes day by day. It is. It is true that Californians are leaving expensive metros, like LA San Francisco and are moving to the center of the country, the Sunbelt, or just some more affordable inland metros, and they are the ones buying homes, people moving in from outside a metro area often have much bigger budgets in the locals. So if it feels like all these outsiders are the ones who are buying the homes, there's some credence to that.
Lars Doucet 37:53
Gotcha. Okay. Yeah, my bad on that one. But interest rates is it all just because interest rates to what degree the interest rates drive housing stuff,
Daryl Fairweather 38:01
interest rates matter. But the only effects of the demand side of the equation are okay, in the short run, it only affects the demand side of the equation. The supply side in the short run is fixed. So when interest rates went down, and 2020 did create an excess of demand, I think a lot of that demand was just pulled forward. And we're gonna see some slow demand for the next year or two to compensate for that strong demand and the last few years, so it affects things but it doesn't really impact the fundamental problem that we haven't built enough homes for everybody who wants to buy them.
Lars Doucet 38:36
So some people have said, you know, okay, my there might be a recession coming housing market starting to cool now that they twiddled with the interest rates. It's a bubble that's gonna burst and everything's gonna be okay. Like, whether there's a recession that destroys us all, will it at least deflate the housing market or things going to continue to get worse?
Daryl Fairweather 38:56
If there's a recession so bad that deflates the housing market, but that's a that's a very bad recession. So I don't think we should be wishing for that, or expecting that or hoping for that. The last housing crash is very special, because the recession started in the housing market, the problems of too loose lending of securitizing mortgages creating these complex step products. And just the general, the real real problem was, was the belief that home prices only go up and don't go down? We are not at that place right now. You know, at most, I would maybe say we're in a 2001 situation where the housing market hadn't been really strong going into 2001. There was a mild recession, the housing market, kept going up through it and then kept going up and kept going up and kept going up and kept going up until it burst in 2007. So the fact that interest rates are up right now I think helps us avoid that future. Because we're very far from it right now.
Lars Doucet 39:54
Okay, okay. And so, would you say that, can you make a prediction? It's If you can't that prices have been going up pretty steadily is it now at least getting worse slower.
Daryl Fairweather 40:07
So prices spiked in 2020 and 2021, the median sale price is up 15% from last year. And it was up even more kinda even more between 2020 and 2021. This next year, we expect home prices to close or at the end of this year, we expect home prices to close up around 7%. And then for home price growth to slow to around 3%. After that these forecasts are always subject to changes, interest rates change and our numbers change. But that's about what we're forecasting right now. So basically, we're expecting home price growth to slow but to remain up each year.
Will Jarvis 40:48
So I'm curious, you mentioned something interesting about 2008. Do you think 2008 is a good example of a bubble? Or is it more like a, you know, market monitors thing where, you know, housing prices have so kind of like random walk and you know, it wasn't really a bubble, it's actually fairly efficient back in 2000, because I know you worked on this in 2009, kind of coming out of it kind of talking to people about what had happened with you know, in a lot of individual cases.
Daryl Fairweather 41:12
Yes, it was a bubble. The lead up to the housing crash was built on the belief that home prices would not go down. Despite the fact that home prices were climbing at an unsustainable rate. People kept that belief and it allowed them to make riskier and riskier bets, like lending to people who wouldn't be able to afford their mortgage payments, and would have to foreclose, if home prices went down, creating debt products that were built off of those mortgages, and then creating financial products that were derived from those debt products, it was just a it was just a whole house of cards. On top of the idea that home prices would never go down. I think that we're pretty still pretty scarred by that experience. And just knowing that home prices could go down has prevented us from getting back into the same situation, lending standards are much stricter. Now. Although home prices went up quite a bit in last two years, almost all the loans went to people with excellent credit with large down payments. Some people, a lot of times people paying even cash. So even if home prices go down, those people aren't going to lose their homes, which is why the situation we're in is very different.
Lars Doucet 42:22
Right? So what regulatory things have changed since 2000. That you mentioned a couple but like, broadly speaking, what what provisions that we changed from that what lessons that we learned What lessons do we not learn?
Daryl Fairweather 42:35
Um, so the big one, I will point you is Fannie and Freddie becoming government sponsored entities and their portfolios being managed by the US government. Like one thing that we did during the pandemic is we implemented forbearance, we were able to do that, because of that kind of control we had over the housing market, we were able to put extra fees on things like second home mortgages, investor mortgages, large loan mortgages, which slow down some of the exuberance in the housing market without hurting first time homebuyers quite as much. Yeah, so those two things have kind of shifted the risk that Fannie and Freddie have on themselves. And then I think, even just from private markets, private markets have gotten more conservative, it's been a problem actually, for new construction, that builders have lost some of their risk taking because they're under building. And they really do need some kind of government support to get back to a place that where they're building enough to meet demand. Builders tend to follow the cycle, which means they're always a little bit late. They just got to got started. And now interest rates are up. So they're already pulling back before they can actually build to meet like the next wave of demand. So it's just an inherent problem there. But lenders have gotten more prudent, I think, for the benefit of the health of the housing market.
Lars Doucet 44:00
So that reminds me of something. You know, that was another factor we didn't talk about is construction costs, right? Is some people say, well, all construction costs are just inflating. And that's why housing is out of control. To what degree is that true or not true?
Daryl Fairweather 44:12
It's if you talk to builders, it's true. They have a lot of evidence to point to that labor costs are going up. Land costs affect them, too, because how are you supposed to hire somebody to build a house in San Francisco? Where are they supposed to live? You have to pay them a certain amount. And if they're commuting in from Sacramento every day, during the three hour drive, you're gonna have to pay them more money. So you can get into these like cycles of despair with rising land costs that make it even harder to build. And also, her immigration policy plays a role. I know builders would like us would like the US to have immigration policies that allow more foreign workers into the construction industry because they've had trouble recruiting them from Americans without that foreign labor supply. That's another political topic that is whole different animal than just land value tax.
Lars Doucet 45:03
Well, so it's interesting, you know, so you, you seem to be very focused on these kind of universal get to the root of the problem kind of solutions. You know, there's some been some other proposals I've heard where it's like, oh, we just need to ban like, second homeownership or we just need to ban, we just need to like have a vacant lot tax, or we just need to, like, Ban corporate buying of homes and all these things. So regardless of like political viability, what do you think of that kind of approach versus the ones you've just advocated for?
Daryl Fairweather 45:35
I just, I just don't have a lot of patience for solutions that aren't going to help. I feel like it's distracting. I don't know. I like, I know, people, it's an easy thing to want there to be some like, boogeyman for the problems that we have. But I think a lot of it like we're going back to the housing, probably about housing problems, everything is that we just like aren't thinking about things in a rational way of what would be best for all of us, instead of like this narrow minded view of what's best for us individually, in the short run.
Lars Doucet 46:09
So that's really interesting, interesting takeaway, I really liked that. So what is you mentioned before about solutions that are kind of equivalent to land value taxes? You talked about, like a government leasing? You know, in that case, it's like, well, the land value is whoever gets the lease. And that's the prevailing market price, at least I suppose. And then the tax agency just collects that, how did how does that work in practice?
Daryl Fairweather 46:33
So it's like, if you just like blindly writing a check, it's the same, it's exactly the same value tax is the same as a lease, you're just paying the government, a fixed amount each month can follow the tax, you can call it rent, it will be the same. We already kind of do that, in effect with property taxes. So I don't think it's like too hard of a pill to swallow. I think if we try to raise them too much, it might face some political backlash, because I do think that, especially in America, people like the idea that they that they themselves on the property and not the government. And if you make it too high, maybe people will start to question whether they own it or somebody else does. But I think we already do it in small doses, so we can at least try to increase the dose. Texas does it. And they're like, the super freedom libertarian state, right. So if they have some of the highest property taxes, I don't see why California isn't doing right. Higher land value.
Lars Doucet 47:25
Yeah, I'm from I'm from Texas, actually. And so yeah, I can confirm. But what's really interesting is like you talked about, like the problem of assessment, and like, we can do better, like my property taxes just went up. And right now we don't have a split, right? tax, tax policy, like they just tax the whole thing. So it doesn't really matter what the division is. But I looked at my bill, and they're like, Yeah, your house appreciated in value by this many, like 1000s of dollars. And I'm like, my house, this giant money pit that is constantly degrading and value and I keep having to put more money into it just to keep it afloat. That's what went up in value. Like seriously, guys. You know, I was wondering, just like, like a house is a depreciating asset and economics. I guess you would classify that as capital?
Daryl Fairweather 48:08
Yeah, yes. The actual structure you man, right? Yes.
Lars Doucet 48:12
Yeah. And so one of my questions would be, is there. You know, I know Singapore has these land leases, you're talking about? I've heard that the Empire State Building was actually built on leased land. Do you have any, when you advocate for some of these things, if there's some particularly salient examples you'd like to point to? Or is it was it mostly just something that you know from economics is a good idea,
Daryl Fairweather 48:35
I'm a parent, my mom used to own a condo that was on 100 year lease from the city of Austin. So it was it was in downtown Austin, pretty close to capital. So if this is something that cities and municipalities use, it can be, it can be safer for them, because they might not know the value of the land moving forward. So if they're just charging one upfront for you to hand over the land, and they like kind of lose control up to that point. So the lease can be helpful, and it'd be harder for them to do a property tax politically. You have a two year question of like, who's done it really? Well? I'm not sure. I feel like I should look into that a bit more.
Lars Doucet 49:09
What about you know, so one thing if taxes go up, taxes can also go down. But we can also talk about what kind of taxes we have, right? We have property tax, we have sales tax, we have income tax, we have capital gains tax, we have wealth, tax, inheritance tax, we got all the taxes you could possibly want. I mean, one political sale could be if land value tax goes up, some of these others come down, which are your least favorite taxes and why?
Daryl Fairweather 49:33
Um, that's a good question. That's like a it's like a question on a first date or something, which is my least favorite tax. any tax on something that is an investment for somebody of a lower wealth or income status would be like the worst tax. I'm trying to think what that would be. I guess if like, I mean, like a tax on a state on capital gains in a savings account or something like that. It's so silly. We even do that. And if you like get $2 Extra, you have to like go report it. I mean, I don't think this is like really the biggest issue in America or anything but just sort of like a purely why are we doing this perspective? Anything like that? What about
Lars Doucet 50:14
like sales taxes on you know, some people come off and talk about like sales taxes are aggressive because they're mostly borne by the poor or whatever. Do you agree with that? Are there less worse sales taxes?
Daryl Fairweather 50:25
Um, so sales tax, your sales taxes are disproportionately borne by the poor, there are different kinds of sales tax, like a blanket sales tax, I think would probably be pretty bad. You can have sin taxes like taxing cigarettes, taxing liquor, taxing sugar that I could see, I could see arguments for black guys also see arguments against that you don't want the government telling you what you can and can't eat? Or something like that. So, yeah, I guess sales taxes are not great. But some of them maybe you could justify, like a luxury tax, maybe you know, you tax yachts, because one of those rich people need so many yachts for that's something that people might be down for. There's like taxes or different purposes, there's taxes for collecting revenue, and those taxes for nudging people to do things that you want to do, or punishing people for being, you know, too wealthy.
Lars Doucet 51:17
So we're getting to the end here. We have two big questions we want to ask you, before we see out his one will be a big wrap up question. Before we do that, I think I see what looks like some board games in your background. Is that is that the case of what's your favorite board game and why?
Daryl Fairweather 51:33
And every board game is castles of Burgundy. And it's my favorite because I'm good at it. I can be just about anybody at it. So like that's my favorite kind. But the game that I like, the more I don't care if I lose or not, is probably classes, the macking loop because you get to build these cool little castles. And even if I lose, I still have fun.
Lars Doucet 51:55
Okay, cool. So I guess my last question is, it's like, so there's NIMBYs there's LVT. Advocates? We definitely I'll just out ourselves, we're definitely in that group. Yeah. You're talking to a pair of art in Georgia seer. You know, we like we said before, we're working on an open source land valuation model. Right? We we have a grant from Asheville Codex tend to do it. And we were wondering if you could tell us a little bit about what locational factors have the greatest influence on land values? Like where is land value the highest? And and why like people talked about like, how LVT will ruin farmers, like is farmland out in the boonies particularly valuable? Is it really all about that urban land? What's the deal?
Daryl Fairweather 52:40
I do think it's mostly about urban life, we're I guess we're to figure out where's value come from is value the market price if nothing was built on it?
Lars Doucet 52:49
Yeah, it lets us just the marginalist view of just like what people will pay for
Daryl Fairweather 52:53
even even something like land out in the boonies. One of the reasons it's not valuable is because there's no infrastructure connected to it, like you would need to like lay down the plumbing, you need to get internet connection. So I think that in and of itself, prevents presents an interesting problem, like one example is, I want to point to a South Lake Union before Amazon headquartered in South Lake Union, it was just like a bunch of warehouses, nobody wanted to live there. And then Amazon moved in, they created all these jobs, and the land value went up. So in a world with the land value tax, would you charge Amazon for that? I guess, maybe you would have given the negative land value tax at first to incentivize them to come in. And then, you know, once they do what they do, then you increase it, but I think that George some, some land value tax advocates hand wave away, where land value comes from and how its endogenous. So that's something that I would be really interested in researching and finding out more about,
Lars Doucet 53:49
okay, so is that kind of, like, similar to the argument of it's like, okay, this value, this land could have this value, but it's oppressed by zoning right now. And so if I can buy it up, and then repeal the zoning, then poof, the value will go up, because now you can build this on it. And so the kind of the value is, there's that kind of what you were talking about just now.
Daryl Fairweather 54:07
Yeah, it's just the land value is mutable, like it's sometimes a policy choice. Sometimes it's based on just the the whims of whoever decides to set up and invest there and and build out jobs or investments or whatever it may be.
Lars Doucet 54:22
Let's do it let's do it a little narrowly them so so forget, like, Marxist theory of value, a marginal theory of value just I'm trying to predict the price that this would sell for in the market, you know, assuming restrict that just to land, right? What factors drive that is it just like you go near the city center and line go up, or what's the nuance?
Daryl Fairweather 54:41
I think the if I was to create a function of it, the things I would want to put in my function in my equation would be access to jobs, access to green space, access to transit, environmental factors like air quality, weather, demographics, cuz at the people I mean, the live land values who lives there who like you want to move to New York because you want to be around people who live in New York and in the industries that are there moved to LA to be in the entertainment industry. So, um, demographics would be part of it, too. That's where I would start.
Will Jarvis 55:15
Great. Great. Well, Darrell, thank you so much for coming on the show. Really appreciate you taking the time. Where can people find you? Where should we send them? Where can people find your work?
Daryl Fairweather 55:25
You can follow me on twitter or instagram at fairweather PhD, you can go to the Redfin news site, just Google Redfin news to see all of our research. You can find me on LinkedIn tube, I don't really check LinkedIn that much. I should really shout out the Lincoln Land Institute. I just went to a conference of theirs. I talked a lot about land value taxes and land capture. So check them out if you want to learn more about these topics.
Lars Doucet 55:49
Awesome. Thank you. Well, thanks for coming in. I think we all learned a lot here. And I hope everyone follows you and reads all your cool research and we wish you the best of Redfin.
Daryl Fairweather 56:00
Thanks, good talking to you.
Will Jarvis 56:08
Thanks for listening. We'll be back next week with a new episode of narratives. Special thanks to Donovan Dorrance, our audio editor. You can check out documents work and music at Donovan dorrance.com
99: Daryl Fairweather - The Housing Crisis