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January 2024 » thefivestar.com 35 January 2024 F E A T U R E S T O R Y being purchased, that meant that tenure went down. I think it was a temporary effect. In general, people are continuing to remain in their homes for a long time, and I think that's probably going to per- sist because tax and mortgage structures encourage people to stay put. I don't see that changing next year. Q: Do you see any other factors that could help break the logjam of insufficient housing inventory, especially affordable housing or for entry-level buyers? Fairweather: I think we're going to get a little bit of a release, like a slight change in new listings next year, for the reasons I discussed. But for any major change, we need new construction. We did have a boom in new construction last year, but it wasn't enough to move the needle on overall inventory. And most of that construction was larger homes, like those big single-family homes. That can help because people upgrade from their starter homes into bigger homes, which releases inventory at the bottom. The economics don't work to build new $200,000 single-family homes. You can't do it, so we need to just build whatever we can build, and then that inventory will age and become more affordable, but it just takes a long time. Finally, I would say the health of the economy in general [will be a defining factor.] If there's a recession, that is a wild card that could change the direction of the economy. I know the Fed is poised to pull off a soft landing, so I think it's un- likely that we will enter a recession. But if we do go into a recession, all bets are off the table because mortgage rates could drop precipitously and super-charge the housing market. Last year we hoped rates would drop, but instead, they went up. We've seen rates come down recently, but they are still higher than they were last year. Last year, I thought it was a foregone conclusion that rates would come down, but they went up before they went down. You never really know what's going to happen with rates, because you never really know what's going to happen with the global macro-economy. Q: Are there any stories happening within the economy that you find fascinating but think are underreported? Fairweather: I think it's underap- preciated that rents have stabilized. They even went down this last month. I would expect some of the people who are buy- ing homes to have moved into the rental market and pushed up rent, but I think what happened instead was that people downsized overall: they got roommates. Instead of household formation, we had the reverse of households consolidating, so the demand for housing overall went down, which allowed rents to fall. Next year, rents may be due for an increase to correct for that because you normally don't see these big gaps between rental and housing affordability. They tend to converge over time. I love talking about how land value taxes are superior to property taxes. There is hope that there'll be some legis- lation on that in Detroit and Minnesota to phase away from property taxes and into land value taxes, which are better for affordable housing. It encourages development instead of discouraging it. It takes away some of the rent-seeking that you see, especially in places like Detroit with people holding vacant properties and hoping that the value will go up one day. It would be a great piece of progress if we see that pass in Detroit. Property taxes discourage develop- ment because if you turn the single-fam- ily home into a department building, you are taxed at that apartment building's new value, whereas land value taxes are only based on the land. So, it encourages people to make the best use of their land instead of encouraging them to leave land vacant or to keep it undeveloped. More broadly, it's a great tax because land is immutable. It's always there, it doesn't distort the economy. When you tax income, it discourages work. When you tax consumption, it discourages peo- ple from spending money. When you tax capital gains, it discourages investment. The land value tax doesn't discourage anything because the land will be there, no matter what, so it's a much more efficient tax. "In general, people are continuing to remain in their homes for a long time, and I think that's probably going to persist because tax and mortgage structures encourage people to stay put. I don't see that changing next year." — Daryl Fairweather, Chief Economist, Redfin