Daryl Fairweather - Property Taxes, Housing Affordability, and the American Housing Market

The housing affordability crisis gripping much of the United States isn't just about supply and demand, it's fundamentally a story about how we tax property. As assessors, we understand better than most how tax policy shapes behavior, but the full implications of our work on housing markets deserve closer examination.

The California Cautionary Tale

Redfin's chief economist Daryl Fairweather recently highlighted what many of us have long suspected: California's Proposition 13 may be doing more damage to housing affordability than even single-family zoning.

"There are people who bought homes in California back in the 1980s, their property taxes were fixed at that point, only allowed to grow by a couple of percentage points every year," Fairweather explains. "Now there are so many homeowners who have homes worth millions and millions of dollars, and yet they're paying almost no property taxes, like $1,000 in property."

This creates what we might call "assessment lock-in." When property taxes are capped far below market values, homeowners have powerful incentives to never sell, regardless of whether their property use makes economic sense. A single-family home on land that could support multifamily housing stays frozen in time because the tax advantage is too valuable to give up.

The Improvement Penalty Problem

The perverse incentives extend beyond just holding patterns. When we tax improvements at the same rate as land, we actively discourage property owners from making their parcels more productive.

As Fairweather notes about his own Wisconsin property: "It would actually hurt me if I wanted to, say, build an ADU in my backyard. I would have to get my house reassessed. I would pay higher taxes because I have that ADU in my backyard, and I would just rather keep my home the way it is."

This is the assessment paradox we all grapple with: our current system often punishes the very development that could ease housing shortages. Every assessor has seen properties that could contribute more to their communities but remain underutilized because the tax code rewards the status quo.

Beyond Zoning Reform

While much attention focuses on zoning reform, Fairweather's analysis suggests we may be missing the forest for the trees. Minneapolis eliminated single-family zoning and saw meaningful results, rental prices stabilized and inflation moderated compared to peer cities. But in California, similar zoning reforms have had minimal impact.

Why? "Just because the zoning laws change doesn't mean we're all of a sudden going to see all this development," Fairweather observes. Without addressing the underlying tax incentives, zoning reform alone cannot unlock land's productive potential.

The Assessment Professional's Dilemma

This presents a fundamental challenge for our profession. We're tasked with fairly valuing property within systems that may inherently create unfairness. When long-time owners pay a fraction of what new buyers pay for identical properties, or when improving property triggers higher taxes while letting it deteriorate doesn't, we're administering a system at odds with its own goals.

The data bears this out. Despite mortgage rates approaching 8% and widespread affordability challenges, home prices have remained remarkably stable. Why? Because the supply remains constrained not just by zoning, but by tax policies that make holding onto underutilized property economically rational.

Looking Forward

Some jurisdictions are experimenting with split-rate taxation, assessing land values separately from improvements. Others are exploring more frequent reassessments to prevent the extreme disparities seen in California. These aren't just academic exercises, they're attempts to align our tax systems with broader community goals around housing affordability and economic development.

As Fairweather notes, the underlying dynamics haven't changed: "We're still in a situation where housing is very unaffordable." But understanding how assessment practices contribute to this crisis is the first step toward solutions.

Key Takeaways

For Assessors: Our work directly impacts housing markets. Systems that create vast disparities between similar properties or penalize improvements may be technically correct while being economically destructive.

For Local Leadership: Property tax reform isn't just about revenue, it's about shaping community development. California's experience shows how assessment caps can freeze housing markets for decades.

For Policy Professionals: Zoning reform without tax reform may be insufficient. True housing affordability requires examining how we incentivize land use through our assessment and taxation systems.

The conversation about housing affordability often overlooks the fundamental role of property taxation. As assessment professionals, we're uniquely positioned to understand, and potentially influence, how tax policy shapes our communities. The question isn't whether our current systems create distortions, but whether we're willing to acknowledge and address them.