The Unbounded Home

Michael Lewyn's picture
When you buy a house, you might think that you are in control of that house and its value.  But in reality, your house's value depends on a wide variety of factors beyond your control, such as the perceived desirability of your neighbors, local highway and transit policies, and trends in national and regional housing markets.  Your home may be your castle in a physical sense- but its value is heavily affected by what goes on outside the residential setting.

In her new book The Unbounded Home, University of Chicago law professor Lee Fennell addresses the implications of this reality and of homeowners' attempts to reassert control over property values through restrictive covenants and zoning.

Covenants are usually designed to protect property values by excluding certain obnoxious activities.  Through covenants, homeowners contract to give away some of their property rights in exchange for a veto power over nearby homeowners' use of their property rights.  Zoning, by contrast, involves municipal ordinances rather than enforceable private contracts.

But under either system, a city or group of homeowners must either absolutely prohibit or absolutely allow certain activities.  Fennell points out that this approach often leads to inefficiencies- that is, rules that create X amount of harm to one homeowner (or group of homeowners) while creating less-than-X amount of benefit to others.  Fennell suggests a statue of a gnome as an example.  Suppose Beasley lives in a community that has banned yard art such as garden gnomes.  Gnome privileges will win Beasley $600 in intangible psychic benefits, an amount in excess of the $500 cost the gnomes will impose on the community as a whole.    Fennell suggests that a more efficient system would allow Beasley to install the gnome and compensate the community for its "loss", thus resulting in a societal surplus of $100. However, both zoning law and covenant law are not flexible enough to allow these type of transactions.

Fennell suggests a variety of market-oriented solutions to the gnome problem, and critiques each proposed solution. One simple option would be to create fee schedules for rule violations; homeowners could pay for the right to install gnomes.  But a set fee schedule might be too inflexible, or lead to definitional problems. Fennell proposes a more complex but possibly more equitable solution: using self-assessed valuations to set fees.  Under this system, the homeowner would set the value of his right to install gnomes, and the city or association would have to either purchase his right or let him pay for the right.

At the end of the book, Fennell makes a broader attack on homeownership as currently conceived.  She asks: if a buyer of ice cream doesn't have to buy a stake in the company, why should the buyer of a home have to purchase the risk of national and international housing trends?  The current system forces homeowners to put nearly all of their capital in one investment, thus creating economic catastrophe when house values plummet.

As a remedy, Fennell proposes "Homeownership 2.0"- unbundling the physical value of a home itself from the broader economic risks of the housing market.  Ideally, investors would create financial products that would allow a homeowner to alienate some of those risks.  For example, an investor would sell a kind of insurance against declining property values, promising to make up some of the difference between existing values and a future price in exchange for an insurance premium.   Or the investor would bet on housing price premiums, buying the right to receive part of a house's appreciation; the homeowner would benefit by using the money to invest in more diversified holdings.  But as Fennell admits, there are "many [design issues] that would have to be confronted in translating the H2.0 concept into a workable policy."   So someone else will have to do the detail work of figuring out how to make Homeownership 2.0 profitable.
Michael Lewyn is an assistant professor at Touro Law Center in Long Island.



Real Estate Options market

There was some work and discussion a while back about an options market that could effectively do this, but I don't know how much traction it will ever have. People are fearful of deriviatives because fearmongers have told them to fear them and there is probably widespread misunderstanding about them. It would be difficult to have a clearinghouse for these types of securities/instruments because occupants have some power over the value of their home and thus, could swing an investment. Consequently, I believe there are some listed options on the Case Schiller Home Price Index, by region. But, that's about it. It's probably beyond the desire and reach of most homeowners and its still to broad to work really well.

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