Homeownership 2.0

Northwestern University Law Review

Volumn 102, Issue 3, 2008, Pages 1047-1118

  Fennell, Lee Anne ^a  

^a UNIVERSITY OF CHICAGO LAW SCHOOL   (United States)

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EID: 51149094555     PISSN: 00293571     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (286)

1. See Robert J. Shiller, American Casino, ATLANTIC MONTHLY, Mar. 2005, at 33, 34 (discussing how consumers' exposure to market risk, including home price volatility, "threatens to transform the United States into a nation of gamblers").
2. See, e.g., William A. Fischel, Why Are There NIMBYs?, 77 LAND ECON. 144, 146 (2001) (likening a home purchase to the use of nearly all one's assets to invest in "a single firm that produced one product in a single location"); Walter Updegrave, The Right Size House, CNNMONEY.COM, July 16, 2004, http://money.cnn.com/2004/07/ 16/pf/expert/ask_expert/index.htm ("[A] house is inherently an undiversified asset. You own a house in one city in one neighborhood on one block.").
3. See infra Part II.C.3 (discussing how transferring upside risk could make housing more affordable).
4. See, e.g., ANDREW CAPLIN ET AL., HOUSING PARTNERSHIPS: A NEW APPROACH TO A MARKET AT A CROSSROADS (1997); ROBERT J. SHILLER, MACRO MARKETS: CREATING INSTITUTIONS FOR MANAGING SOCIETY'S LARGEST ECONOMIC RISKS (1993) [hereinafter SHILLER, MACRO MARKETS]; Matityahu Marcus & Michael K. Taussig, A Proposal for Government Insurance of Home Values Against Locational Risks, 46 LAND ECON. 404 (1970); infra Part I.C. (surveying some of the past and proposed models for rearranging risk). Recent examples include Home Value Protection, http://www.syracusesni.org/equitysite/ index.html (last visited Feb. 18, 2008) (pilot program in Syracuse, New York, offering home equity insurance); REX & Co., http://www.rexagreement.com (last visited Feb. 18, 2008) (U.S. investment firm that has recently begun offering funds in exchange for a share of home equity); Equity Finance Mortgage, http://www.efm.info/ (last visited June 29, 2008) (presenting a shared equity mortgage product offered by Rismark International through Australia's Adelaide Bank); Advanced e-Financial Technologies, Inc., SwapRent, http://www.swaprent. com/ (last visited June 29, 2008) (presenting a product that would let homeowners toggle to and from an "economic renting" mode in which some or all of the upside and downside home price risk would be offloaded). See also RICK JACOBUS & JEFFREY LUBELL, CTR. FOR HOUS. POLICY, POLICY BRIEF, PRESERVATION OF AFFORDABLE HOMEOWNERSHIP: A CONTINUUM OF STRATEGIES (2007), available at http://www.nhc.org/pdf/chp_se_strategies_0407.pdf (surveying a range of home equity arrangements designed to deliver affordable homeownership); Marjorie Ramseyer Bardwell & James Geoffrey Durham, Transfer Fee Rights: Is the Lure of Sharing in Future Appreciation a Flawed Concept?, 21 PROB. & PROP. 24, (May/June 2007) (discussing transfer fee rights that use covenants to retain some of the home's future appreciation); Ian Ayres & Barry Nalebuff, Price-Protect Your Home, FORBES, Sept. 16, 2002, at 101.
5. In spring 2006, futures and options based on housing indexes developed by Robert Shiller and Karl E. Case became tradable on the Chicago Mercantile Exchange (now CME Group). See infra Part I.C.4 (discussing these hedge instruments). These housing market derivatives grew out of many years of work by Shiller, Case, and Weiss. See, e.g., SHILLER, MACRO MARKETS, supra note 4, at 78-87; ROBERT J. SHILLER, THE NEW FINANCIAL ORDER: RISK IN THE 21ST CENTURY 118-20 (2003) [hereinafter SHILLER, NEW FINANCIAL ORDER]; Robert J. Shiller & Allan N. Weiss, Home Equity Insurance, 19 J. REAL ESTATE FIN. & ECON. 21 (1999) [hereinafter Shiller & Weiss, Home Equity Insurance]; Karl E. Case, Jr., Robert J. Shiller & Allan N. Weiss, Index-Based Futures and Options in Real Estate, 19 J. PORTFOLIO MGMT. 83 (1993). For a recent discussion of the history of, and future prospects for, these derivatives markets, see Robert J. Shiller, Derivatives Markets for Home Prices (NBER Working Paper No. 13,962, April 2008), available at http://www.nber.org/ papers/wl3962.pdf [hereinafter Shiller, Derivatives Markets].
6. Although I describe it as a new tenure form, H2.0 would not require the creation of a new possessory estate. See infra Part II.D. Others working in housing policy have also employed the ubiquitous 2.0 suffix to reference new forms of homeownership. See Posting of National Housing Institute/Shelterforce, nhi_press@nhi.org, to colist@comm-org.wisc.edu (May 4, 2007), http://commorg.wisc.edu/pipermail/colist/2007-May/004667.html.
7. The optimal default value is an open question, and one that interacts with other design choices, such as the treatment of inflation. See infra notes 102-08 and accompanying text (discussing some of these issues). Assumptions about the likely future housing consumption plans of the household also bear on the default design. See infra Part VI.A.
8. For a simple example of how this might work, see infra text accompanying notes 100-03.
9. See sources cited supra notes 4-5.
10. See CAPLIN ET AL., supra note 4, at 89 ("Simple portfolio theory argues that there is scope for a Pareto improvement if the owner-occupant sells a proportion of their home's asset value to a large, well-diversified financial institution."). A Pareto improvement "makes at least one person better off and no one worse off." RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 12 (7th ed. 2007).
11. See WILLIAM A. FISCHEL, THE HOMEVOTER HYPOTHESIS: HOW HOME VALUES INFLUENCE LOCAL GOVERNMENT TAXATION, SCHOOL FINANCE, AND LAND-USE POLICIES 4 (2001); Brian K. Bucks, Arthur B. Kennickell & Kevin B. Moore, Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances, FED. RES. BULL., 2006, at Al, A22-23, available at http://www.federah- eserve.gov/pubs/oss/oss2/2004/bull0206.pdf ("[H]ousing wealth is typically the largest component of families' fungible wealth . . . ."); see also infra note 52 (discussing data from the 2004 Survey of Consumer Finances). Although human capital is typically a larger component of household wealth, it too is subject to significant volatility. See, e.g., JACOB S. HACKER, THE GREAT RISK SHIFT: THE ASSAULT ON AMERICAN JOBS, FAMILIES, HEALTH CARE AND RETIREMENT AND HOW YOU CAN FIGHT BACK 61-85 (2006) (discussing job insecurity); SHILLER, NEW FINANCIAL ORDER, supra note 5, at 107-10 (discussing risk in career-planning, using the example of a biotechnician pursuing an advanced degree). To the extent that local housing prices are correlated with the performance of the local labor market, the exposure of working homeowners is amplified. See CAPLIN ET AL., supra note 4, at 73-75 & figs.5.2-5.3 (discussing and illustrating the correlation between changes in wages and those in house prices).
12. See infra Part IV.A.2.
13. See Robert J. Shiller, A Time for Bold Thinking on Housing, N.Y. TIMES, Nov. 25, 2007, § 3, at 4 (arguing that the current housing price downturn indicates a need for innovation in housing, including better management of risk).
14. See, e.g., EDWARD M. GRAMLICH, SUBPRIME MORTGAGES: AMERICA'S LATEST BOOM AND BUST 17-18 (2007) (explaining that subprime mortgages are typically adjustable rate mortgages that feature an initially low interest rate that is fixed for only two or three years; the mortgage then becomes adjustable and can reset to much higher interest rates); id. at 6 (observing that subprime mortgage originations grew from $35 billion in 1994 to $625 billion in 2005, representing a shift from less than five percent of all mortgage originations to twenty percent of all mortgage originations); James R. Hagerty & Ken Gepfert, One Family's Journey into a Subprime Trap-Monteses May Lose House as Rate Resets, Credit Options Dry Up, WALL ST. J., Aug. 16, 2007, at Al (reporting that twenty percent of mortgages in 2006 were subprime loans, and discussing the impact of upcoming interest rate resets).
15. See, e.g., Mike Barris, Foreclosure Filings Surged 75% in '07 as Subprime Mess Grew, WALL ST. J., Jan. 29, 2008, at D3. Efforts to address the crisis are ongoing as of this writing. See, e.g., David M. Herszenhom, Approval Is Near for Bill to Help U.S. Homeowners, N.Y. TIMES, June 25, 2008, at Al; Fed. Reserve Bank of Phila., Foreclosure Prevention and Subprime Regulation, BANKING LEG. & POL'Y 5, Oct.-Dec. 2007, at 5, available at http://www.philadelphiafed.org/files/blp/blpq407.pdf (detailing mortgage-related regulatory and legislative measures pending or acted on during the last quarter of 2007). One idea that has received consideration would involve the use of "negative equity certificates" as a refinancing tool. See David D. Kirkpatrick, Plan to Help Homeowners Gains Steam, N.Y. TIMES, Mar. 30, 2008, at A20. These certificates, which would entitle the lender to a payout in the event the home sold for more than the amount originally owed, would amount to a transfer of some of the home's upside potential. See id.
16. See, e.g., sources cited supra notes 4-5.
17. See infra Part III. Some of the cognitive challenges associated with altering homeownership risk-bearing have received attention in existing work. See, e.g., SHILLER, MACRO MARKETS, supra note 4, at 17-30 (devoting a chapter to "psychological barriers" to products targeted at hedging major life risks, including loss of home value); Robert J. Shiller, Radical Financial Innovation, in ENTREPRENEURSHIP, INNOVATION, AND THE GROWTH MECHANISM OF THE FREE-ENTERPRISE ECONOMIES 306,313-17 (Eytan Sheshinski, Robert J. Strom & William Baumol eds., 2007) (discussing framing and other cognitive obstacles to adoption of home equity insurance). But other issues taken up here, such as the cognitive effects of moving homeownership to a new default position, have not, to my knowledge, received attention.
18. See infra Parts IV-V. My work builds in part on that of William Fischel, who has examined some aspects of these issues in the context of home equity insurance. See, e.g., FISCHEL, supra note 11, at 268-70.
19. See, e.g., Jan K. Brueckner, Consumption and Investment Motives and the Portfolio Choices of Homeowners, 15 J. REAL ESTATE FIN. & ECON. 159 (1997); Satyajit Chatterjee, Taxes, Homeownership, and the Allocation of Residential Real Estate Risks, BUS. REVIEW, FED. RES. BANK OF PHILA., Sept./Oct. 1996, at 3, 6, available at http://www.phil.frb.org/files/br/sobr96sc.html ("[A] home purchase really involves two distinct transactions bundled into one: the purchase of a house and the purchase of service benefits (comfort and shelter) that flow from the house."); J-V. Henderson & Y.M. Ioannides, A Model of Housing Tenure Choice, 73 AM. ECON. REV. 98, 102 (1983) ("Durables such as housing may serve dual purposes for many consumers-as a consumption good and as an investment holding in a portfolio.").
20. I refer to homeownership as a "bundle" because it includes a number of distinct elements that may be separately valued by consumers. See infra Part I. This usage is distinct from the theoretical conceptualization of property as a "bundle of rights." See, e.g., J.E. Penner, The "Bundle of Rights" Picture of Property, 43 UCLA L. REV. 711 (1996) (discussing and critiquing the "bundle of rights" view of property).
21. See Lu Han, The Effects of Price Uncertainty on Home Purchase Decisions Over the Life Cycle 31-34 (Dec. 2005) (unpublished manuscript), available at http://www.rotman.utoronto.ca/lu.han/life_cycle.pdf (discussing this hedging incentive); see also James Banks et al., House Price Volatility and Housing Ownership Over the Life Cycle 10 (Univ. Coll. London Discussion Paper in Econ. No. 04-09, 2004), available at http://www.econ.ucl.ac.uk/papers/working_paper_series/0409.pdf (discussing the "insurance" function of owner occupancy). I thank Michael Abramowicz for comments on this point.
22. See, e.g., CAPLIN ET AL., supra note 4, at 24-28; infra Part I.A.
23. CAPLIN ET AL., supra note 4, at 80.
24. In addition, as explored in infra Part I.B, the fact that a homeowner desires to invest at some level in the housing that she consumes does not establish that she wishes to take on the full quantum of investment associated with both onsite and offsite risks.
25. See Todd Sinai & Nicholas S. Souleles, Owner-Occupied Housing as a Hedge Against Rent Risk, 120 Q.J. ECON. 763 (2005).
26. See, e.g., Margaret Jane Radin, Residential Rent Control, 15 PHIL. & PUB. AFF. 350, 359-63, 368-70 (1986) (discussing the significance of continued residence from personhood and community perspectives); Greg Smithsimon, Rent Regulation: The Right Tool for the Right Job, PLANETIZEN, May 14, 2007, http://planetizen.com/ node/24451 (suggesting that rent regulation's purpose is to provide housing stability).
27. See, e.g., Sinai & Souleles, supra note 25, at 764 (discussing the home purchase as including "a hedge against rent risk").
28. See supra note 14 and accompanying text.
29. See, e.g., Joseph B. Treaster, Home Insurers Embrace the Heartland: Hurricane-Free Midwest Gets Discounts as Coast Is Shunned, N. Y. TIMES, May 20, 2006, at Cl (reporting on premium increases and coverage refusals in coastal areas); Jim Yardley, Texas Home Insurance Crisis Roils Residents and Top Race, N.Y. TIMES, Oct. 4, 2002, at Al (discussing rising premiums and termination of homeowners' insurance coverage in Texas, in part due to the cost of mold-related claims).
30. Often, this is a function of changes in the property's underlying value that could, in theory, be tapped to meet the larger tax bill. However, accessing the equity to meet rising tax bills may be costly for homeowners.
31. Although long-term maintenance contracts can shift some of these risks, the residual risk remains on the homeowner. A landlord's tenants may also ultimately bear the costs of repairs and maintenance, but they are likely to do so as a group so that the risks of particularly expensive repairs are pooled.
32. The concern in this context would be with uncorrelated price changes in the housing market from which the homeowner is departing and the one that she is entering; if both sets of housing prices moved in tandem, the gain (loss) from the current home would offset (be offset by) the higher (lower) prices in the new housing market. See Sinai & Souleles, supra note 25, at 764; infra Part VI.A.
33. See, e.g., Cara Solomon, Seniors Shoved Aside by Condo Conversions, SEATTLE TIMES, Aug. 13, 2007, at Al (discussing how landlords' decisions to convert properties to condominiums create hardships for displaced tenants). See generally Florence Wagman Roisman, The Right to Remain: Common Law Protections for Security of Tenure: An Essay in Honor of John Otis Calmore, 86 N.C. L. REV. 817 (2008) (discussing potential legal reforms for delivering greater security of tenure to tenants).
34. See Kelly Evans, Tenants Pay as Landlords Default-Foreclosures Void Leases, Bring Eviction Notices; Bigger-Building Benefit, WALL ST. J., Nov. 23, 2007, at A2 (reporting that the rise in foreclosures has led to thousands of evictions, and explaining that in many jurisdictions, a foreclosure voids the lease; the tenant may be forced to vacate on as little as thirty days' notice). Recently introduced bills would attempt to address this concern. See Protecting Tenants at Foreclosure Act of 2008, S. 3034, H.R. 5963,110th Cong., 2d Sess. (2008).
35. See John A. Lovett, Property and Radically Changed Circumstances, 74 TENN. L. REV. 463 (2007) (discussing property rights in the wake of Hurricane Katrina).
36. 545 U.S. 469 (2005) (holding that the "public use" requirement of the Fifth Amendment's Takings Clause was met where private residences were condemned to redevelop an economically distressed area); see, e.g., Daniel H. Cole, Why Kelo Is Not Good News for Local Planners and Developers, 22 GA. ST. U. L. REV. 803 (2006) (discussing the backlash against the Kelo decision).
37. The law places some limits on these restrictions. For example, the federal Fair Housing Act protects families with children against discrimination, and thus would typically protect the right of parents to add their own children, or children who are in their custody, to the household. See 42 U.S.C. §§ 3602(k), 3604 (2000).
38. See, e.g., Paula A. Franzese, Does It Take a Village? Privatization, Patterns of Restrictiveness and the Demise of Community, 47 VILL. L. REV. 553, 555-56 (2002) (giving examples of restrictions placed on property owners in common interest communities governing matters such as landscaping, exterior aesthetic choices, and even some aspects of dress and conduct); Zach Rawling, Reevaluating Leasing Restrictions in Common Interest Developments: Rejecting Reasonableness in Favor of Consent (2007) (unpublished manuscript), available at http://works.bepress.com/ zach_rawling/3 (discussing restrictions on leasing properties in common interest communities to tenants).
39. 2005 American Housing Survey data indicate that 88.15% of the nation's single-family detached homes occupied year-round are owner-occupied; the figure is 86.24% when all year-round occupied one-unit homes, both detached and attached, are included. See U.S. CENSUS BUREAU, U.S. DEP'T OF COMMERCE, AMERICAN HOUSING SURVEY FOR THE UNITED STATES: 2005, at 1 tbl. 1A-1 (2006), available at http://www.census.gov/prod/2006pubs/hl50-05.pdf (providing the figures from which the percentages above were calculated). At the time of the survey, most (96.67%) owner-occupied homes were reported as "not on the market." For those owner-occupied homes on the market for which detailed data existed indicating whether the home was on the market for sale only, for rent, or for sale or rent, the great majority (93.55%) were "for sale only." See id. (calculated from figures in the Occupied, Owner column in the section entitled "Homes Currently for Sale or Rent"). Those percentages do not cover vacant homes; a separate set of figures indicates that vacant single-family detached homes are about one and one-half times as likely to be on the market "for sale only" than to be offered for rent. See id. (calculated from figures in the Vacant-For-Rent and Vacant-For-Sale-Only columns in the section entitled "Units in Structure").
40. The tenant might be expected to neglect the owner's long-term interests in the property, while the owner might be expected to neglect aspects of the tenant's consumption stream that do not affect the property's value over the long run. The result is a "double moral hazard problem" in which both parties exert less than optimal effort on the property. See Derek K.Y. Chau, Michael Firth & Bin Srinidhi, Leases with Purchase Options and Double Moral Hazard, 33 J. BUS. FIN. & ACCT. 1390, 1391 (2006) (describing the "double moral hazard problem inherent in leases" and suggesting that a purchase option would resolve it); see also Henderson & Ioannides, supra note 19, at 99-102 (describing and modeling the "rental externality"). A "lemons" dynamic may amplify this phenomenon. See George A. Akerlof, The Market for "Lemons ": Quality, Uncertainty and the Market Mechanism, 84 Q.J. ECON. 488 (1970). Tenants who cannot tell ex ante whether a given rental is high-quality or low-quality will only be willing to pay for an average-quality rental. Because tenant price resistance makes it unprofitable for landlords to offer high-quality rentals, the average quality of rentals will drop. Likewise, if tenants have unobservable characteristics that determine how much care they will take of the home, landlords will gravitate toward price-amenity combinations that will be profitable when average-care tenants move in. Because these price-amenity combinations are not as attractive to high-care tenants, high-care tenants will have an incentive to become homeowners. See Robert D. Dietz & Donald R. Haurin, The Social and Micro-Level Consequences of Homeownership, 54 J. URB. ECON. 401, 422 (2003) (citing Henderson & Ioannides, supra note 19).
41. See supra note 40.
42. Imputed rent-the amount of rental income that the home would generate if it were rented out-is taxed in some other countries, such as Italy, Norway, and Denmark. See, e.g., William G. Gale et al., Encouraging Homeownership Through the Tax Code, 115 TAX NOTES 1171, 1172-73 & n.3 (June 18, 2007); see also Chatterjee, supra note 19, at 4-5 (discussing the significance of the nontaxation of imputed rent).
43. 26 U.S.C. §§ 163(h), 164 (2000) (providing for the deductibility of mortgage interest and property taxes). The fact that only those taxpayers who itemize can receive the mortgage interest deduction makes this feature of the tax code quite regressive in its operation, and also calls into question its presumed positive effect on increasing the rate of homeownership. See Gale et al., supra note 42, at 1178-81.
44. 26 U.S.C. § 121. This tax advantage can be claimed only once every two years, and certain conditions must be met regarding the ownership and use of the home. See id. Losses on the primary residence are not deductible. See id.
45. See Chatterjee, supra note 19, at 6-7 (suggesting that "[i]n the absence of a tax advantage to owner-occupants, the market would tend to 'unbundle'" housing services from the home purchase transaction so that "[t]he household that most values the services of a house will rent it from those best able to bear the financial risks of homeownership").
46. More limited reforms may well be imaginable, however. See, e.g., Gale et al., supra note 42. Eliminating the mortgage interest deduction, a common policy target, might not produce all of the desired effects on its own given the ability of some households (especially those with high incomes) to finance their home purchases through other means (say, by paying cash) while still enjoying the core tax advantage-nontaxation of imputed rent. See James R. Follain & Lisa Sturman Melamed, The False Messiah of Tax Policy: What Elimination of the Home Mortgage Interest Deduction Promises and a Careful Look at What it Delivers, 9 J. HOUSING RES. 179 (1998); Chatterjee, supra note 19, at 4-5 (pro-viding an example that illustrates this point).
47. See, e.g., Gale et al., supra note 42, at 1171 (observing that "[o]wning one's home is widely viewed as an integral part of the American Dream," and that "Americans are taught from an early age to aspire to homeownership").
48. See, e.g., CONSTANCE PEKIN, EVERYTHING IN ITS PLACE: SOCIAL ORDER AND LAND USE IN AMERICA 53 (1977) (describing renters as occupying a category that is "by definition one of transition in American axioms about the sequence of life"); Sheila Klebanow, How Much is Enough? A Psychological Overview of Money and the Middle Class, in MONEY AND MIND 3, 6-7 (Sheila Klebanow & Eugene L. Lowenkopf eds., 1991) ("For many, homeownership connotes solidity, stability, self-esteem, putting down roots, and making a commitment to oneself, or to marriage and family.").
49. See infra Part I.B.
50. William Fischel similarly observes, in arguing for home equity insurance as a response to exclusionary homeowner tendencies, that the alternative of "[r]educing home-ownership is an unlikely pol-icy." William A. Fischel, An Economic History of Zoning and a Cure for Its Exclusionary Effects, 41 URB. STUD. 317, 334 (2004).
51. See supra note 19.
52. See supra note 11. According to the 2004 Survey of Consumer Finances, the median net worth of a homeowning family in the United States was $184,400. Bucks, Kennickell & Moore, supra note 11, at A8 tbl.3. The value of the median primary residence was $160,000. Id. at A23 tbl.SB. The median amount of home equity for a homeowning family was $86,000 in 2004, id. at A28 n.36, making the ratio between median home equity and the median net worth of a homeowning family 467.
53. For homeowning families with mortgages, the median amount of debt secured by the primary residence was $95,000 in 2004. Id. at A29 tbl.11. That same year, roughly seventy percent of the debt of all families was for purposes of purchasing a primary residence. Id. at A32 tbl.12. This somewhat understates the significance of the home debt burden for homeowning families because that figure includes families that do not own a home at all. On the other hand, the attribution of all of this debt to the "purpose" of buying a home does not account for the fact that many families use debt financing of the home to free up money elsewhere, and hence avoid other forms of debt. Id. at A31-32.
54. See, e.g., CAPLIN ET AL., supra note 4, at 85 (observing that there is a "major indivisibility" in the market for homes that "forces owners to tie their housing consumption decision to their asset accumulation and portfolio decisions"); Brueckner, supra note 19, at 176 (modeling the constraint of homeownership on the investment choices of homeowners and concluding that "when the constraint is binding, the optimal portfolio of the homeowner is inefficient in a mean-variance sense, reflecting overinvestment in housing"); Stephen Day Cauley et al., Homeownership as a Constraint on Asset Allocation, 34 J. REAL ESTATE FIN. & ECON. 283, 309 (2007) (finding that, under reasonable assumptions, "homeowners would require a 6% increase in total net worth to achieve the same utility level as an individual not facing the asset allocation constraint," and suggesting that the figure could rise as high as 25% in some regions); Henderson & loannides, supra note 19, at 111 (examining the significance of the "dual role of housing as a consumption and investment good" in determining tenure choice, and the possibility that households will "'distort' their investment and consumption choices and owner-occupy rather than rent").
55. In the event of default, lenders may not be able to sell the home for enough money to cover the outstanding mortgage debt, especially in a falling market. See, e.g., James R. Hagerty, Mortgage Woes Force Banks to Take Hits to Sell Homes, WALL ST. J., May 14, 2007, at A2. Although the lender can attempt to recover any shortfall from the homeowner (unless the loan is nonrecourse), homeowners in such a position may declare bankruptcy. See Robert J. Shiller & Allan N. Weiss, Moral Hazard in Home Equity Conversion, 28 REAL ESTATE ECON. 1, 13-14 (2000).
56. See YORAM BARZEL, ECONOMIC ANALYSIS OF PROPERTY RIGHTS 78-80 (2d ed. 1997); see also WILLIAM MARKBY, ELEMENTS OF LAW 159 (6th ed. 1905) (explaining that even though specific rights may be removed from ownership, "[h]owever numerous and extensive may be the detached rights, however insignificant may be the residue, it is the holder of this residuary right whom we always consider as the owner"); Henry E. Smith, Property and Property Rules, 79 N.Y.U. L. REV. 1719, 1795-97 (2004) (applying and explaining the idea of a property owner as "the holder of the residual claim").
57. See Smith, supra note 56, at 1795-97.
58. Id. at 1796.
59. See id. at 1796-97.
60. See, e.g., JOHN EMMEUS DAVIS, NAT'L HOUS. INST., SHARED EQUITY HOMEOWNERSHIP: THE CHANGING LANDSCAPE OF RESALE-RESTRICTED, OWNER-OCCUPIED HOUSING 65 (2006), available at http://www.nhi.org/poIicy/SharedEquity.html ("[T]he bulk of [home appreciation] is usually caused by societal factors outside of the homeowner's control, including public investment in the city as a whole, private investment in the surrounding neighborhood, changes in the regional economy, and changes in the way that residential real estate is regulated, financed, and taxed.").
61. See Shiller & Weiss, supra note 55, at 5-11 (discussing moral hazard with respect to multiple decisions about the home, including maintenance, improvement, and marketing and sale of the home); infra Part II.B.
62. Of course, homeowners can and do enter into contracts with maintenance companies, landscapers, interior designers, and the like with respect to onsite factors, and these contracts may shift enumerated risks in various ways (say, through warranties). See, e.g., BARZEL, supra note 56, at 115-17 (discussing the example of a refrigerator warranty). But the owner is responsible for orchestrating these arrangements (or delegating their orchestration) and bears the outcomes that remain after the contractual dust settles.
63. Whether disaggregation can be made sufficiently accurate and cheap to be worthwhile is a separate question. Although the development of local indexes has made such disaggregation more feasible, difficulties remain. See infra Part II.B. The point of the textual statement is simply that homeownership itself would not require acceptance of these offsite risks if mechanisms existed to parcel them out to investors.
64. See supra text accompanying note 21.
65. See Banks et al., supra note 21, at 9-11.
66. See, e.g., Chau, Firth & Srinidhi, supra note 40, at 1391 (describing moral hazards for both tenant and landlord).
67. Past treatments have suggested that the linkage of investment and consumption in housing produces an inefficiency only when consumption demand exceeds investment demand, and not in the opposite case. See, e.g., Henderson & Ioannides, supra note 19, at 104 & n.3 (describing the problem as amounting to a "one-directional indivisibility").
68. See, e.g., CAPLIN ET AL., supra note 4, at xiii ("If this is such a good idea, why has nobody done it already?"); Fischel, supra note 50, at 335 ("[I]f home equity insurance is the answer, why have the creative people who do real estate development and finance not come up with it on their own?").
69. See SHILLER, MACRO MARKETS, supra note 4, at 207-08. As Shiller explains, the innovator bears all of the cost and risk of developing a new financial market, while rivals can enter (and historically have entered) quickly thereafter to claim a share of the benefits. Id. at 207. This does not mean that financial innovations cannot occur-clearly, they can and do-but only that the benefits must be sufficiently large and the costs sufficiently low to make it worthwhile for an innovator to make an in-vestment in a market whose benefits will be shared by others. Id. at 208. Based on this analysis, Shiller argues for public subsidization of innovative new markets. Id.
70. Some additional arrangements implicitly accomplish a degree of decoupling. For example, rent control and other tenant protections can be viewed as attempts to provide a consumption experience that is closer to that of a homeowner without the accompanying investment. In addition, a portion of down-side investment risk is effectively decoupled from homeownership through bankruptcy protection and other devices or practices (such as legal prohibitions on recourse against the borrower's other assets, nonrecourse loans, or loan balance forgiveness upon foreclosure) that keep homeowners from bearing the full brunt of home value losses. See Shiller & Weiss, supra note 55, at 3. These protections have become quite significant in the current housing market downturn, as some homeowners who have invested little or no money in their homes exercise the option simply to walk away from the loss by de-faulting on the mortgage. See, e.g., John Leland, Facing Default, Some Abandon Homes to Banks, N.Y. TIMES, Feb. 29, 2008, at A1. Reverse mortgages are typically nonrecourse loans, and hence build in downside protection. See Shiller & Weiss, supra note 55, at 3.
71. See Shiller & Weiss, supra note 55, at 13-14.
72. The relationship between home value and the owner's equity in the home can therefore be depicted as a straight line with a slope of one. Id. at 12-13 & fig. 1.
73. These changes can be graphically depicted as changes in the slope of the line that represents tra-ditional homeownership. See id. at 13-15 & figs.2-4; supra note 72.
74. Maureen A. McNamara, The Legacy and Efficacy of Homeowner's Equity Assurance: A Study of OakPark, Illinois, 78 NW. U. L. REV. 1463,1467-68 (1984).
75. The Oak Park program would pay homeowners for eighty percent of any loss on resale after five years of enrollment in the plan if the house sold below the applicable appraised value and the drop in value was not attributable to metropolitan-area value changes or to damage or loss to the individual property. Id. at 1468-69; Shiller & Weiss, Home Equity Insurance, supra note 5, at 32-33. Oak Park has not experienced a significant home price decline since the program was implemented, and no claim has been made under the program. Id. at 33. It is impossible to know what role, if any, the equity assurance program played in Oak Park's home price patterns, especially given that the equity assurance pro-gram was only one part of a multi-prong effort to preserve stability in Oak Park. McNamara, supra note 74, at 1481.
76. See Marcus & Taussig, supra note 4, at 407 ("[T]he desired effect [of home equity insurance] is analogous to the success of FDIC in ending recurrent banking panics.").
77. See, e.g., Shiller & Weiss, Home Equity Insurance, supra note 5, at 32-33 (referencing a 1987 Chicago voter referendum that introduced a home equity assurance program that communities could opt into); Shiller, supra note 17, at 316 (noting that programs similar to the one established in Oak Park have been adopted in portions of Chicago and in the Chicago suburb of Aurora, Illinois, as well as in Patterson Park in Baltimore, Pittsburgh, and the cities of Ferguson and Florissant in Missouri); Home Equity Assurance Program, Florissant, Missouri, http://www.florissantmo.com/CD/ homeEquity.shtml (last visited Feb. 18, 2008) (providing a summary of Florissant, Missouri's program).
78. See, e.g., Fischel, supra note 50, at 335-36. Fischel's analysis proceeds from the observation that land use regulations such as zoning respond to a gap in the insurance market. See id. at 318 (citing Albert Breton, Neighborhood Selection and Zoning, in ISSUES IN URBAN PUBLIC ECONOMICS 241 (Harold Hochmaned., 1973)).
79. See Tim Kane, Cary Home-Value Guarantee on Table: Proposal a Carrot for Mine Expansion, CHI. TRIB., Nov. 12, 2007, § 2, at C3 (reporting on a gravel-mining "company's offer to guarantee nearby property values if it is allowed to expand a mining operation," in Gary, Illinois-the third time gravel-mining companies have made such offers in Illinois); see also Fischel, supra note 50, at 336 (analyzing and critiquing the possibility of home equity insurance provided by developers).
80. See infra Part I.C.4.
81. For details on the program, see Home Value Protection, supra note 4. See also Andrew Caplin et al., Home Equity Insurance: A Pilot Project (Yale Int'l Ctr. for Fin., Working Paper No. 03-12, May 3, 2003), available at http://ssrn.com/abstract_id=410141. Early reports indicated that the program had attracted few participants. Sarah Max, Selling LA., Buying Chicago, CNNMONEY.COM, Aug. 9, 2004, http://money.cnn.com/ 2004/08/06/real_estate/investment_prop/hedging/index.htm ("Since the [Syracuse] program was launched in August 2002, . . . only 76 homeowners have signed up, according to its director[,] Virginia Smith.").
82. See infra Part I.C.4.
83. See Home Value Protection: Frequently Asked Questions, http://www.syracusesni.org/equitysite/faqs/faqs.html (last visited Feb. 18, 2008) (explaining how payments are tied to the ZIP code index and describing the incentive structure this provides).
84. See, e.g., SHILLER, MACRO MARKETS, supra note 4, at 82; infra Part II.B (discussing indexes and other approaches to the problem of moral hazard).
85. See, e.g., DAVIS, supra note 60, at 2-3; J. Peter Byrne & Michael Diamond, Affordable Housing, Land Tenure, and Urban Policy: The Matrix Revealed, 34 FORDHAM URB. L.J. 527, 541-51 (2007); Duncan Kennedy, The Limited Equity Coop as a Vehicle for Affordable Housing in a Race and Class Divided Society, 46 HOW. L.J. 85 (2002).
86. See, e.g., Byrne & Diamond, supra note 85, at 545-48.
87. See, e.g., DAVIS, supra note 60, at 3 (describing as a "distinguishing feature" of the shared equity programs under discussion "the emphasis they place on what is shared between individual homeowners and a larger community"); JACOBUS & LUBELL, supra note 4, at 5-6; Byrne & Diamond, supra note 85, at 546-47.
88. See, e.g., Andrew Caplin et al., Shared-Equity Mortgages, Housing Affordability, and Homeownership, 18 HOUSING POL'Y DEBATE 209, 217-19 (2007).
89. The product line has since been discontinued, apparently because it was not sufficiently attractive to investors. See Caplin et al., supra note 88, at 219 (discussing the Bank of Scotland mortgages and observing that "[t]he long and unpredictable nature of the payoff period appears to have been the chief reason that the Bank of Scotland withdrew its shared-equity mortgages from the market"). There have also been news reports of dissatisfaction among homeowners who used the product. See infra notes 191-92 and accompanying text.
90. This mortgage product, which involves the sharing of both appreciation and downside risk, is offered by Rismark International and Adelaide Bank. See Equity Finance Mortgage, http://www.efin.info/index.php?v=what (last visited June 23,2008).
91. See James R. Hagerty, Product Taps Home Equity Without Taking Out Loan, WALL ST. J., May 8, 2007, at D3; see also REX & Co., supra note 4.
92. See Shiller & Weiss, supra note 55, at 14-15 & fig.3 (describing and depicting the shared appreciation mortgage's treatment of risk); Caplin et al., supra note 88, at 218-19 (describing this mortgage arrangement).
93. CAPLIN ET AL., supra note 4.
94. See generally id.
95. See supra text accompanying notes 82-84.
96. See, e.g., Noam Scheiber, The Pork-Bellies Approach to Housing, N.Y. TIMES MAG., Sept. 10, 2006, at 90, 92.
97. See, e.g., CME GROUP, S&P/CASE- SHILLER HOME PRICE INDICES FUTURES AND OPTIONS: INTRODUCTORY GUIDE (2007), http://www.cme.com/files/cmehousing_brochure.pdf; Les Christie, New Way to Bet on Real Estate, CNNMONEY.COM, Mar. 22, 2006, http://money.cnn.com/2006/03/22/real_estate/playing_the_home_price_market/index. htm; Chicago Mercantile Exchange, CME Housing Futures and Options: Frequently Asked Questions, http://www.cme.com/files/housing_faq.pdf (last visited Feb. 18, 2008); Macro Markets, S&P/Case-Schiller Home Price Indices, http://www.macromarkets.com/csi_housing/sp_caseshiller.asp (last visited Feb. 18, 2008). Shiller and Weiss had previously designed and patented tradable instruments called "macro securities" to facilitate hedging. See SHILLER, NEW FINANCIAL ORDER, supra note 5, at 126-29. These securities, issued and redeemed in pairs consisting of an "up macro" and a "down macro," represent offsetting bets on the movement of the index. Id. The up macro gains value (and the down macro loses value) as the index rises; the opposite occurs when the index falls. Id. at 127 (presenting an example using a GDP index); see also Michael Pereira, Risk Management for the Age of Information, 9 FORDHAM J. CORP. & FIN. L. 715, 729 (2004) (reviewing SHILLER, NEW FINANCIAL ORDER, supra note 5) (discussing this example).
98. See CME GROUP, supra note 97, at 3. The cities are Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington, D.C. Futures and options settled to a "weighted composite index of U.S. real estate prices" are also available. Id.
99. See Peter Englund et al., Hedging Housing Risk, 24 J. REAL ESTATE FIN. & ECON. 167 (2002) (estimating the potential gains from hedging, using data on housing prices from Stockholm).
100. For discussion of the advantages of basing payouts on housing indexes rather than the appraisal value or sale price of each insured house, see, for example, SHILLER, MACRO MARKETS, supra note 4, at 82. I assume here that Agatha's actions cannot much affect the overall housing market in Doldrums. This simple example also assumes that Doldrums is a single housing market for indexing purposes, al-though indexing can instead break up a town into smaller units, such as ZIP codes.
101. See infra Part II.B for a discussion of the risk that, for reasons out of a homeowner's control, the home's price will not track the local housing index.
102. This simple example ignores the impact of inflation. For a discussion of the interaction between inflation and hedging, see, for example, SHILLER, MACRO MARKETS, supra note 4, at 96-98; Shiller & Weiss, Home Equity Insurance, supra note 5, at 31-32.
103. Agatha might transact with the same investor (say, Blake) as to both the call and the put option. Such an arrangement would be identical to Blake buying futures in the local housing market from Agatha. See Shiller & Weiss, Home Equity Insurance, supra note 5 (discussing the use of puts to protect against downside risk and contrasting them with futures that would involve transacting as to both the upside and the downside). At the end of the five years, Blake receives (owes) the amount that the index indicates a $200,000 home would have gained (lost) in value based on price movements within the local area.
104. See id. at 39-44. Shiller and Weiss make detailed estimates of annual premiums for life-event triggered home equity insurance under a variety of assumptions, finding that in some cases a few hundred dollars annually would be sufficient to provide complete downside protection for a $100,000 house (assuming no indexing for inflation). Id. at 43-44 & tbls.4-5. They also calculate the cost of fixed-term put options of one or two years, which are more costly. Id. at 36-37 & tbls.1-2. In all cases, the price would depend on the extent of protection and on the past behavior of the local housing market.
105. See infra Part II.B.
106. See sources cited supra note 102.
107. These timing decisions would include the minimum holding period before a homeowner could cash in on changes in the home's value, the length of the option period, and whether the homeowner could exercise the option independent of specified events, such as moving out or selling the home.
108. The investor's initial payment to the homeowner for the purchase of upside potential could be made in a lump sum, paid out over time, or could constitute savings built into the mortgage itself. See infra Part II.C.2. Likewise, payment for coverage against downside loss might be made either in a lump sum for the duration of the homeowners' time in the home, or in the form of annual premiums. Compare Shiller & Weiss, Home Equity Insurance, supra note 5, at 43-44 (calculating likely annual premiums to explore the potential for home equity insurance), with Caplin et al., supra note 81, at 21-23 (describing the use of a one-time payment for thirty years of coverage in the Syracuse pilot project). The one-time payment precludes strategic policy cancellation, a problem discussed in Shiller & Weiss, Home Equity Insurance, supra note 5, at 27-28. Caplin et al., supra note 81, at 21.
109. Shiller & Weiss, Home Equity Insurance, supra note 5, at 33-34 (discussing "pass-through futures and options").
110. See Juerg Syz, Paolo Vanini & Marco Salvi, Property Derivatives and Index-Linked Mortgages, 36 J. REAL ESTATE FIN. & ECON. 23 (2008).
111. See infra text accompanying notes 163-64.
112. SHILLER, MACRO MARKETS, supra note 4, at 201.
113. See Gail Liberman, Hedging Real Estate: The Derivatives Are Here; Are They The Answer?, FIN. ADVISOR MAG., Nov. 2006, available at http://www.fa-mag.com/past_issues.php?id_content= 3&idArticle=1365&idPastIssue=115 (discussing reasons for low trade volume during the first several months that housing derivatives were available).
114. See id (describing the view that the one-year term limit for hedges represented a significant drawback for investors); News Release, CME Group, CME Group Extends Offerings of S&P/Case-Shiller Housing Contracts (Aug. 7, 2007), http://cmegroup.mediaroom.com/index.php?s=43&item=603 (reporting on the extension of housing future and option terms to periods up to five years).
115. Such a user-friendly interface could also help to create positive publicity for the development of the economic instruments, which might be viewed in isolation as speculative bets against local housing markets. See Pereira, supra note 97, at 732-33 (noting negative reactions to predictions markets introduced by the Pentagon's Defense Advance Research Projects Agency in 2003 and observing that "public relations could be as important as economics in selling macro markets to the investing public").
116. See supra note 19 and accompanying text.
117. Durable goods are commonly understood to contain such a savings component. See ALAN E.H. SPEIGHT, CONSUMPTION, RATIONAL EXPECTATIONS AND LIQUIDITY: THEORY AND EVIDENCE 10 (1989).
118. The same might be said of a tenant during a given lease term, though the tenant may be able to appeal to the landlord for corrections to any downward trend in consumption value.
119. See supra Part I.A (discussing these differences).
120. See supra Part I.B.
121. See supra notes 56-62 and accompanying text.
122. For example, homeowners may work through the local political process to enact or sustain exclusionary zoning measures, which have been associated with a variety of societal harms. See, e.g., Lee Anne Fennell, Homes Rule, 112 YALE L.J. 617, 649-54 (2002) (book review of FISCHEL, supra note 11) (discussing the harms of exclusionary zoning measures from the perspectives of both social justice and economic efficiency); Henry A. Span, How Courts Should Fight Exclusionary Zoning, 32 SETON HALL L. REV. 1, 15-22 (2001) (noting and evaluating several possible costs of exclusionary zoning measures).
123. See infra Part IV.A (distinguishing between "value-enhancing collective control" and "value-reducing collective control").
124. See, e.g., Shiller & Weiss, supra note 55, at 6-11. An adverse selection problem may also be implicated if the payoff structure tends to attract those who are especially likely to experience subpar market outcomes. See, e.g., Shiller & Weiss, Home Equity Insurance, supra note 5, at 25-26 (referencing this "selection-bias problem").
125. See, e.g., SHILLER, MACRO MARKETS, supra note 4, at 24-27 (discussing the potential for distortion of indexes through speculative trading). See generally id. at 116-200 (discussing a variety of issues relating to the construction, use, and updating of indexes).
126. This issue affects the design of markets in many areas. See, e.g., Michael Abramowicz & M. Todd Henderson, Prediction Markets for Corporate Governance, 82 NOTRE DAME L. REV. 1343, 1352 (2007) (noting the concern that some prediction markets will have too few participants, "resulting in low liquidity and therefore lower reliability," and discussing how to address that concern); James Salzman & J.B. Ruhl, Currencies and the Commodification of Environmental Law, 53 STAN. L. REV. 607, 645-48 (2000) (exploring the tradeoff between making tradable environmental currencies "fat and sloppy" and "thin and bland").
127. See SHILLER, MACRO MARKETS, supra note 4, at 166-68 (discussing the concern that home improvements could affect the housing index, but concluding that this factor would not be very significant given the dollar value of home improvements relative to home values generally). It is possible, however, that the shift to H2.0 ownership might itself influence household investments in improvements.
128. See Christian A.L. Hilber, Neighborhood Externality Risk and the Homeownership Status of Properties, 57 J. URB. ECON. 213, 238 (2005) (suggesting, given the role of neighborhood externality risk, that a real estate price index of the sort advocated by Shiller and Weiss "ought to be neighborhood specific if it is to be successful").
129. Shiller & Weiss, supra note 55, at 2. Basis risk might also work against the investor. A marked relaxation in maintenance norms in a given area, for example, might cause the index to drop, even though the individual households who lowered their maintenance standards would be responsible for the value change.
130. See infra text accompanying notes 137-38.
131. This seems to be the approach taken by REX & Company in the REX Agreement. REX & Co., FAQs, http://www.rexagreement.com/index.php/rex/ who_we_serve_homeowners_faqs/ (last visited Feb. 18,2008) (explaining that homeowners would be credited for improvements, based on an appraisal, before calculating the company's share).
132. See infra text accompanying notes 137-38.
133. There remains the possibility, noted above, that onsite inputs (e.g., a remodeling trend) will show up in the index itself. See supra note 127 and accompanying text. Increasing the area upon which the index is based could help to combat this concern, although at the cost of potentially making the in-dex less sensitive to localized offsite factors. Nonetheless, it may be cheaper to identify and correct for omitted offsite impacts (which will involve factors in the community) than to learn about and account for factors like remodeling trends.
134. Equity sharing arrangements designed to provide affordable housing seem to have made use of this approach. See DAVIS, supra note 60, at 96-99.
135. One concern is that prohibitions ostensibly directed at particular land uses might have the inten-tion or effect of excluding categories of people. For discussion of the negative effects of exclusionary land use controls, see, for example, Fennell, supra note 122, at 649-54; Span, supra note 122, at 15-22. A separate concern is that land use restrictions will cut too deeply into a property owner's prerogatives, and may do so in ways that the owner might not fully appreciate when purchasing the property. See, e.g., Lee Anne Fennell, Contracting Communities, 2004 U. ILL. L. REV. 829, 876-82 (examining this point and citing literature elaborating on it).
136. Larger or more unique proposed improvements might be handled through a preapproval process.
137. Shiller & Weiss, Home Equity Insurance, supra note 5, at 26 ("[T]here could be complete insurance of the price change that is due to aggregate market conditions and coinsurance for the deviation of the home price from the price change inferred by the index.").
138. See CAPLIN ET AL., supra note 4, at 137 (incorporating a right of first refusal with a premium and a time limit into the housing partnership model). The reason for the premium and the short time window is to avoid discouraging buyers from writing a contract on an H2.0 home. See id. at 137-38.
139. Two less obvious points relating to risk reduction grow out of the discussion. First, the fact that risk is reduced not only for the homeowner but also for the lender helps to increase the affordability of debt financing. See infra text accompanying notes 147-49. Second, to the extent that H2.0 leads to greater diversification of holdings, it can help to guard not only against the risk of loss but also against the risk of below market returns. See infra Part II.C.3.
140. See, e.g., Marcus & Taussig, supra note 4, at 405 (suggesting that protection against downward price movements "would increase the demand for, and hence broaden the ownership of, single-family, owner-occupied dwellings"); Ayres & Nalebuff, supra note 4, at 101 (explaining that when home prices are in decline, demand may fall rather than rise because would-be buyers "get worried that [they] might be about to catch a falling knife").
141. See supra note 21 and accompanying text.
142. See Han, supra note 21, at 4-5.
143. See Banks et al., supra note 21, at 9-11; infra notes 254-57 and accompanying text. Households' use of home purchases as risk hedges can be understood as a response to incomplete markets-with fully developed housing risk markets, the purchase of risk hedges and homes could be made independently. See Banks et al., supra note 21, at 10; Han, supra note 21, at 5.
144. I thank Amitai Aviram for drawing my attention to this possibility. The potential for such compensatory risk-taking has been noted in other settings. See, e.g., JOHN ADAMS, RISK 59 (1995) ("Because people compensate for externally imposed safety measures, the risk regulators and safety engineers are chronically disappointed in the impact that they make on the accident toll."). For example, drivers required to wear seatbelts may drive more aggressively than they would if unbelted. See id at 113-28.
145. See Caplin et al., supra note 88, at 217 (explaining that shared-equity mortgages would add equity financing alternatives to the "pure debt instruments" currently available to homeowners).
146. If houses generally appreciate over time, however, the sale of the upside should exceed the premiums required to insure against the downside, producing net increases in affordability.
147. See generally Syz, Vanini & Salvi, supra note 110.
148. See, e.g., Karl E. Case & Robert J. Shiller, Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate, 7 J. HOUSING RES. 243, 245 (1996) (observing that the default probability and the cost of default to lenders both increase when home prices fall).
149. See Syz, Vanini & Salvi, supra note 110, at 25 (observing that "the expected loss on the mortgage is reduced because of the housing hedge"). See generally Case & Shiller, supra note 148 (discussing potential for lenders themselves to purchase home equity insurance products).
150. See Syz, Vanini & Salvi, supra note 110, at 33-34 (explaining, in the context of a proposal to link mortgages to housing price indexes, that the protection provided by such a plan would be more valuable for borrowers who have lower creditworthiness). Because the Syz, Vanini, and Salvi plan builds downside protection into the mortgage itself, this added value takes the form of a smaller price increase for less creditworthy borrowers. See id.
151. See, e.g., Damian Paletta, Regulators Tighten Subprime-Lending Rules, WALL ST. J., June 30, 2007, at B1 (discussing tension between consumer protection and limiting of consumer choices); James Surowiecki, Subprime Homesick Blues, NEW YORKER, Apr. 9, 2007, at 27 ("We do need more regulatory vigilance, but banning subprime loans will protect the interests of some at the expense of limiting credit for subprime borrowers in general.").
152. I take no position here on the merits of increased regulation of subprime lending. In any case, steps in that direction are already underway. Stephen Labaton, Lenders Fight Stricter Rules on Mortgages, N.Y. TIMES, Apr. 28, 2008, at Al.
153. See, e.g., CAPLIN ET AL., supra note 4, at 86-98 (describing these advantages in the context of the "housing partnerships" model).
154. If a household with funds invested elsewhere uses some of those funds to pay down a mortgage, its holdings actually become less diversified. See Chatterjee, supra note 19, at 8-9. In the scenario in the text, the extra money put into the mortgage is not coming from otherwise invested funds but rather is raised by selling off some of the home's upside potential.
155. See Ian Ayres & Barry Nalebuff, Mortgage Your Retirement, FORBES, Nov. 14, 2005, at 150.
156. Leverage ratios of 20-1 (or higher) are not uncommon for housing investments, while leverage in other investments is usually much more limited (typically 2-1 for stocks, for example). See id. For further discussion of the home investment from a life cycle perspective, see Marjorie Flavin & Takashi Yamashita, Owner-Occupied Housing and the Composition of the Household Portfolio, 92 AM. ECON. REV. 345 (2002).
157. I thank Michael Abramowicz for this point.
158. Ayres & Nalebuff, supra note 155, at 150.
159. See supra notes 102-08 and accompanying text (referencing a variety of design details for housing futures and options); supra Part II.B (discussing disaggregation challenges).
160. Property forms, which are limited in number, are often described as being standardized or "off the rack." See, e.g., Francesco Parisi, Entropy in Property, 50 AM. J. COMP. L. 595, 621-22 (2002); Carol M. Rose, What Government Can Do for Property (and Vice Versa), in THE FUNDAMENTAL INTERRELATIONSHIPS BETWEEN GOVERNMENT AND PROPERTY 209, 213-14 (Nicholas Mercuro & Warren J. Samuels eds., 1999) (discussing "off-the-rack property packages" developed by courts and legislatures); infra notes 167-72 and accompanying text. However, arrangements capable of reducing information or transaction costs may also be created through standardized contract language or statutes. See, e.g., Frank Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395, 401 (1983) (describing corporate law's "off-the-rack principles" as a kind of standard form contract). See generally Henry E. Smith, Modularity in Contracts: Boilerplate and Information Flow, 104 MICH. L. REV. 1175(2006).
161. I am grateful to Noah Zatz for discussions on this point. The idea that law itself can offer a focal point capable of solving private coordination problems has been explored in, for example, Richard H. McAdams, A Focal Point Theory of Expressive Law, 86 VA. L. REV. 1649 (2000). My concern here is with establishing a focal point for addressing the coordination games inherent in the development of the law and in the production of shared social understandings. See id. at 1658-72 (discussing and comparing focal points provided by third parties and by the law).
162. See supra Part I.C (discussing a variety of models for altering homeownership risk arrangements).
163. It is also relevant that mortgage and insurance products are subject to complex regulatory regimes that have not been designed with the goals of this sort of risk-offloading in mind. See Caplin et al., supra note 81, at 24-28. Regulators could address a stand-alone product on its own terms rather than through regulations that were designed for dissimilar products.
164. Because H2.0 can reduce mortgage costs, the entity might also play a coordinating role in connecting consumers to lenders and negotiating discount packages.
165. Blanche could, in theory, buy an H2.0 estate subject to Ivor's claims against Henrietta (or Henrietta's claims against Ivor). But if the interests could remain splintered as resales proceed, it is not clear when accounts would ever be settled. If numerous resales were to occur between settlement points between investors and H2.0 owners, the difficulties of disaggregating onsite and offsite impacts and determining who is to be paid what amount presumably would become increasingly intractable.
166. Many additional questions remain, including whether the arrangement would grant the investor who is entitled to upside appreciation an interest secured by the home itself (that is, a property interest that would be good against successors) or whether instead the investor's claim would be purely contractual in nature. See, e.g., Bernard Rudden, Economic Theory v. Property Law: The Numerus Clausus Problem, in OXFORD ESSAYS IN JURISPRUDENCE, 3D SERIES 237, 240-41 (John Eekelaar & John Bell eds., 1987) (distinguishing "a pure contract debt" from a "security" such as a mortgage). One possibility, which I take no position on here, would be an analogue to the "anti-lien"-a negative covenant that would prohibit the homeowner from alienating the property or granting additional security interests in it without first fulfilling the obligations due the investor. See Uriel Reichman, The Anti-Lien, Another Security Interest in Land, 41 U. CHI. L. REV. 685, 701-07 (1974) (discussing the ways in which an antilien resembles and differs from a traditional security interest); see also Lynn M. LoPucki, The Unsecured Creditor's Bargain, 80 VA. L. REV. 1887, 1924-31 (1994) (discussing "asset-based unsecured lending" that relies on negative covenants).
167. See, e.g., Henry Hansmann & Reinier Kraakman, Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights, 31 J. LEGAL STUD. 373 (2002); Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 YALE L.J. 1 (2000); see also Rudden, supra note 166, at 245-63 (considering a number of rationales for the numerus clausus principle, but finding them less than fully convincing); Nestor Davidson, Standardization and Pluralism in Property Law, 61 VAND. L. REV. (forthcoming 2008) (May 2008 draft on file with author) (reviewing scholarly accounts of the numerus clausus and offering a different take on the purposes of standardization).
168. See, e.g., Hansmann & Kraakman, supra note 167, at 383-84 (arguing that the limited number of forms helps to provide adequate notice when property rights are divided); Merrill & Smith, supra note 167, at 26-34 (discussing how standardization of in rem rights reduces externalities from measurement costs). But see, e.g., Glen O. Robinson, Personal Property Servitudes, 71 U. CHI. L. REV. 1449, 1482-88 (2004) (challenging Merrill and Smith's account based on the capacity of notice to overcome the lack of standardization, and noting analogous problems, such as »inobservable measures of quality, that are not resolved through property form standardization); Rudden, supra note 166, at 253-54 (questioning whether the advantages of standardization will be realized given the ability of parties to contractually modify property arrangements).
169. See, e.g., Fennell, supra note 135, at 830-31, 838; Uriel Reichman, Residential Private Governments: An Introductory Survey, 43 U. CHI. L. REV. 253, 268-75 (1976).
170. See, e.g., Merrill & Smith, supra note 167, at 12-17, 35-38 (detailing the standard real property menu, which includes, among other things, possessory estates and servitudes, and noting the many ways in which these elements can be combined); Davidson, supra note 167 (manuscript at 6-10) (listing standard property forms, which include possessory estates, security interests, and servitudes). To be sure, Merrill and Smith characterize equitable servitudes, first endorsed in Tulk v. Moxhay, 41 Eng. Rep. 1143 (Ch. 1848), as a "significant breach of the numerus clausus," albeit one that was rapidly cabined by subsequent judicial opinions. Merrill & Smith, supra note 167, at 17. Nonetheless, this property form was well entrenched by the time that modern common interest communities began to proliferate. See, e.g., ROBERT H. NELSON, PRIVATE NEIGHBORHOODS AND THE TRANSFORMATION OF LOCAL GOVERNMENT xiii-xiv (2005) (discussing the dramatic increase in private community associations over the last forty years); Fennell, supra note 135, at 834-35 (summarizing the history of common interest communities).
171. See, e.g., NELSON, supra note 170, at xiii (observing that the growing prevalence of private communities "represents a radical new development in the history of American local government" and one that is "significantly altering the way tens of millions of Americans obtain housing"). Covenants in common interest communities run with the land; hence, they are not merely contractual in nature, but are instead classed as servitudes-property interests good against third parties. See, e.g., Reichman, supra note 169, at 279-80. Because H2.0 investments would settle up at each sales point, contractual instruments would appear sufficient to modify the fee simple estate. It is possible, however, that these contracts would need to be buttressed with some form of security instrument that would either restrict the property's alienation until accounts were settled or that would give investors a claim against successors. See supra note 166. Regardless, it is clear that changes in property holdings can be attained by combining the existing fee simple estate with other legal instruments; it is not necessary to invent a new possessory estate.
172. See Rose, supra note 160, at 213 (suggesting that one of the roles that government performs with respect to property involves "defining off-the-rack versions of entitlements that individuals (or at least their lawyers) can understand"); Davidson, supra note 167 (manuscript at 38-42) (explaining that limited, standardized property forms can serve as "regulatory platforms").
173. People dislike experiencing a loss much more than a failure to achieve an equivalent gain. See, e.g., Daniel Kahneman et al., Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, 5 J. ECON. PERSP. 193, 199-203 (1991). Of course, what constitutes a loss and a gain depends on the implicit baseline in use, which is a function of how the problem is framed. See, e.g., Amos Tversky & Daniel Kahneman, The Framing of Decisions and the Psychology of Choice, 211 SCIENCE 453, 453 (1981); see also SHILLER, NEW FINANCIAL ORDER, supra note 5, at 86-87 (noting the relevance of the framing literature to the design of mechanisms for managing risk); Patricia A. McCoy, A Behavioral Analysis of Predatory Lending, 38 AKRON L. REV. 725, 727-32 (2005) (discussing the interaction of loss aversion and lending practices in the homeownership setting).
174. See, e.g., SHILLER, MACRO MARKETS, supra note 4, at 17-30 (discussing psychological barriers to the acceptance of new risk management tools); SHILLER, NEW FINANCIAL ORDER, supra note 5, at 82-98 (discussing how psychological insights apply to risk management).
175. I focus here only on the decisions of homeowners, not the choices of the investors who would be necessary to the successful operation of a program for reassigning homeownership risk. Although investors as a group may have more sophisticated views of money and risk and may be relatively less burdened by cognitive biases, it is possible that resistance to novel financial arrangements would not come exclusively from the consumer side.
176. See, e.g., SHELLY E. TAYLOR, POSITIVE ILLUSIONS: CREATIVE SELF-DECEPTION AND THE HEALTHY MIND 32-34 (1989); Christine Jolis, Behavioral Economic Analysis of Redistributive Legal Rules, 51 VAND. L. REV. 1653, 1659-62 (1998); Neu D. Weinstein, Unrealistic Optimism About Future Life Events, 39 J. PERSONALITY & SOC. PSYCHOL. 806, 810 tbl. 1 (1980).
177. A recent poll that reflected "widespread unease about the U.S. economy" nonetheless found that only sixteen percent of respondents predicted a decline in the value of the household's home during the next six months, notwithstanding significant slowdowns in sales and mounting inventories. David Streitfeld, Economic Fears Exclude Home Values, CHI. TRIB., Apr. 12, 2007, § 3, at 1 (reporting on the results of a Los Angeles Times/Bloomberg poll). In addition to optimistic projections about future price movements, homeowners may hold inaccurate perceptions of the home's current value. See Sumit Agarwal, The Impact of Homeowners ' Housing Wealth Misestimation on Consumption and Saving Decisions, 35 REAL ESTATE ECON. 135, 141 tbl. 2 (2007) (finding, in an empirical analysis of 81,943 home value estimates by homeowners and their financial institutions, that homeowners overestimate the home's value by 3.1% on average). Homeowners may also experience "overconfidence"-a distinct but related bias that involves an underestimation of the likelihood of error in one's assessment. See, e.g., David Dunning et al., The Overconfidence Effect in Social Prediction, 58 J. PERSONALITY & SOC. PSYCHOL. 568, 569 (1990) (reviewing literature on "miscalibrated judgmental confidence"); Daniel Kahneman & Dan Lovallo, Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking, 39 MGMT. SCI. 17, 26 (1993) ("There is massive evidence for the conclusion that people are generally overconfident in their assignments of probability to their beliefs.").
178. See, e.g., Fischel, supra note 2, at 144-45 (relating an incident at a zoning board meeting in which homeowner opposition to a development plan was apparently based on risk aversion, rather than negative expected value).
179. This optimism translates into a greater willingness to take gambles that are viewed as under one's control. See SHILLER, MACRO MARKETS, supra note 4, at 24 ("Research on gambling behavior has stressed that most gamblers have preferences for activities that offer them some sense of control and mastery ...."). However, there is often an "illusion of control" over events that actually contain a large luck component. See, e.g., Kahneman & Lovallo, supra note 177, at 27-29; Ellen J. Langer, The Illusion of Control, 32 J. PERSONALITY & Soc. PSYCHOL. 311 (1975).
180. See, e.g., Graham Loomes & Robert Sugden, Regret Theory: An Alternative Theory of Rational Choice Under Uncertainty, 92 ECON. J. 805, 820 (1982) ("Regret theory rests on two fundamental assumptions: first, that many people experience the sensations we call regret and rejoicing; and second, that in making decisions under uncertainty, they try to anticipate and take account of those sensations."). See generally David E. Bell, Regret in Decision Making Under Uncertainty, 30 OPERATIONS RES. 961 (1982). For a discussion of the role of regret in impeding
181. See Daniel Kahneman & Amos Tversky, The Psychology of Preferences, 246 SCI. AM. 160, 173 (1982) (presenting an example comparing the regret attributed to an actor (George), who sells stock in one company to purchase stock in another company and is worse off as a result, to that attributed to another actor (Paul), who is worse off by the same dollar amount because he stuck with the stock he owned and did not switch to a different company's stock). Kahneman and Tversky suggest that the action (switching stocks) is easier to imagine having been otherwise: "Apparently it is easier for George to imagine not taking an action (and therefore retaining the more advantageous stock) than it would be for Paul to imagine taking the action." Id.; see also RICHARD H. THALER, THE WINNER'S CURSE: PARADOXES AND ANOMALIES OF ECONOMIC LIFE 73 (1992) (noting an "asymmetry between omission and commission" in experiencing and anticipating regret over an unfavorable outcome); Daniel Kahneman, Varieties of Counterfactual Thinking, in WHAT MIGHT HAVE BEEN: THE SOCIAL PSYCHOLOGY OF COUNTERFACTUAL THINKING 375,388-92 (Neal J. Roese & James M. Olson eds., 1995) (examining the amount of regret associated with omission and commission, respectively).
182. See, e.g., Robert E. Scott, Error and Rationality in Individual Decisionmaking: An Essay on the Relationship Between Cognitive Illusions and the Management of Choices, 59 S. CAL. L. REV. 329, 340 (1986) (suggesting that because "individuals weight the anticipated cost of regret more heavily than the corresponding benefit of pride," they may be inclined not to make a given choice if they are otherwise in equipoise about it).
183. For studies demonstrating this result, see, for example, liana Ritov, Probability of Regret: Anticipation of Uncertainty Resolution in Choice, 66 ORG. BEHAV. & HUM. DECISION PROCESSES 228 (1996); liana Ritov & Jonathan Baron, Outcome Knowledge, Regret, and Omission Bias, 64 ORG. BEHAV. & HUM. DECISION PROCESSES 119 (1995); Eric van Dijk & Marcel Zeelenberg, On the Psychology of 'If Only': Regret and the Comparison Between Factual and Counterfactual Outcomes, 97 ORG. BEHAV. & HUM. DECISION PROCESSES 152 (2005).
184. See, e.g., van Dijk & Zeelenberg, supra note 183, at 156 ("[Vulnerability to regret is moderated by the uncertainty people may experience regarding counterfactual outcomes, and the comparability of counterfactual outcomes with factual outcomes."). Even when it is possible to determine the value of an unchosen alternative, such as a stock that one did not buy, people have limited attention to devote to tracking the progress of every alternative that was not selected over an extended period of time. This observation is consistent with findings that unfavorable results from acts of commission tend to be "more available in memory," and hence their frequency may be overestimated. See Dale T. Miller & Brian R. Taylor, Counterfactual Thought, Regret, and Superstition: How to Avoid Kicking Yourself, in WHAT MIGHT HAVE BEEN: THE SOCIAL PSYCHOLOGY OF COUNTERFACTUAL THINKING, supra note 181, at 305, 307-14.
185. As Shiller has discussed, the name "insurance" itself may carry positive connotations that produce a particular framing effect. See SHILLER, NEW FINANCIAL ORDER, supra note 5, at 83-84.
186. See, e.g., Amy H. Mezulis et al., Is There a Universal Posilivity Bias in Attributions? A Meta-Analytic Review of Individual, Developmental, and Cultural Differences in the Self-Serving Attributional Bias, 130 PSYCHOL. BULL. 711, 712 (2004) ("The self-serving attributional bias is defined as the tendency of individuals to make attributions for positive events that are more internal, stable, and global than their attributions for negative events.").
187. Eric Van den Steen, Skill or Luck? Biases of Rational Agents 1-2 (MIT Sloan Sch. of Mgmt., Working Paper No. 4255-02, 2002), available at http://www.ssm.com/abstract_id=319972 ("People tend to attribute success to their own skills and failures to bad luck." (citation omitted)). See generally NASSIM NICHOLAS TALEB, FOOLED BY RANDOMNESS: THE HIDDEN ROLE OF CHANCE IN LIFE AND IN THE MARKETS (2d ed. 2004) (contending that luck is often mistaken for skill).
188. See supra note 183 and accompanying text.
189. See van Dijk & Zeelenberg, supra note 183, at 154 ("If comparability lies at the heart of regret, the (in)comparability of factual and counterfactual outcomes may be another feature explaining why we do not constantly go about kicking ourselves over forgone outcomes.")• Van Dijk and Zeelenberg studied this effect by asking subjects to imagine choosing between two "scratch cards" and finding, on the one they selected, either a €15 coupon for liquor or (in a different condition) a €15 coupon for books. Id. at 155. They were then told that the unchosen scratch card would have yielded a €50 prize-in different conditions, either a €50 book coupon or a €50 liquor coupon. When the forgone €50 card was for a different product category than the €15 prize given to the subject (e.g., where the subject received a €15 book certificate and the forgone prize was a €50 liquor certificate), reported regret was lower than when the actual prize and the forgone prize were from the same product category. See id. & tbl.2.
190. See Caplin et al., supra note 88, at 218.
191. See, e.g., Jeff Prestidge, Trapped by 367% Interest Loan, THISISMONEY.CO.UK, Jan. 8, 2006, http://www. thisismoney.co.uk/mortgages/mortgages/article.html?in_article_id= 406104&in_page_id=58 (reporting that due to "[r]ampant house price inflation," an elderly couple with a SAM found that "the amount now due to the bank has swollen grotesquely").
192. See id
193. See, e.g., Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 ECONOMETRICA 263, 274, 286-88 (1979) (noting the significance and potential movement of the "reference point" from which gains and losses are measured).
194. See, e.g., James J. Choi et al., Passive Decisions and Potent Defaults (Nat'1 Bureau Econ. Res., Working Paper No. 9917, 2003), available at http://www.nber.org/papers/w9917. Some of the reasons that defaults make a difference in the context Choi et al. studied-401(k) plan choices-would not be applicable to the present discussion. For example, when given an open-ended time window in which to move away from a default, people may procrastinate on making an intended change. Id. at 3. Because the H2.0 interface would require making a decision of some kind at the time of home purchase, the alternative of procrastination would not be available. Nonetheless, the idea that movement away from a default requires action could be significant here, as could the consumer's view of the default as providing "implicit advice." See id. at 3, 18-19. However, Choi et al.'s suggestion that "[e]mployees may treat a zero default as weaker implicit advice than a non-zero default" might also translate over to H2.0, if zero defaults were put in place for offsite factors. See id. at 19 n.9.
195. See REX & Co., Why REX & Co., http://www.rexagreement.com/ index.php/rex/who_we_serve_realtors_why_rex/ (last visited Feb. 18, 2008) (suggesting that realtors view the equity agreement as their "secret weapon to sell more homes, more quickly").
196. See, e.g., JONATHAN BARON, THINKING AND DECIDING 474-75,479 (3d ed. 2000).
197. See David Laibson, Golden Eggs and Hyperbolic Discounting, 112 Q.J. ECON. 443, 444-45 (1997) (discussing purchases of illiquid assets, such as homes, as precommitment strategies). Laibson notes, however, that the ability to easily and quickly borrow against such assets undermines their capacity to serve as precommitment devices. See id at 465-66. Older people may use the home as a form of self-insurance against long-term care needs. See Thomas Davidoff, Illiquid Housing as Self-Insurance: The Case of Long Term Care (Aug. 24, 2007) (unpublished manuscript), available at http://ssrn.com/abstract=1009738. But a volatile asset is less than ideal for these purposes. See James Banks et al., Housing Price Volatility and Downsizing in Later Life 11 (Nat'1 Bureau Econ. Res., Working Paper No. 13,496, 2007), available at http://www.nber.org/papers/wl3496 ("Holding a risky asset such as housing when prices are highly volatile may be a dubious strategy when one faces additional health risk.").
198. See MILTON FRIEDMAN, A THEORY OF THE CONSUMPTION FUNCTION 25-31 (1957) (presenting the permanent income hypothesis); Franco Modigliani & Richard Brumberg, Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data, in POST-KEYNESIAN ECONOMICS 388 (Kenneth K. Kurihara ed., 1954) (presenting the life-cycle hypothesis).
199. See, e.g., Lee Anne Fennell & Kirk J. Stark, Taxation over Time, 59 TAX L. REV. 1, 16-21 (2005), and sources cited therein.
200. See FRIEDMAN, supra note 198, at 16 ("It is in general far easier to borrow on the basis of a tangible physical asset, or a claim to one, than on the basis of future earning power.").
201. The marginal utility of consumption might vary over time. In addition, considerations like the interest rate, uncertainty about future events, and differing degrees of connectedness to other selves might rationally influence one's temporal preferences. See, e.g., BARON, supra note 196, at 479-80 (noting these considerations and discussing Derek Parfit's work).
202. See, e.g., id. at 475-78 (discussing dynamic inconsistency).
203. See, e.g., JON ELSTER, ULYSSES UNBOUND 29-34 (2000) (explaining how precommitment responds to inconsistent time preferences).
204. See, e.g., Louis Uchitelle, A False Sense of Security? You Must Own a Home, N.Y. TIMES, July 1, 2007, at BU4 (reporting the increasing prevalence of homeowners removing equity from their homes via home equity loans).
205. Gretchen Morgenson & Vikas Bajaj, New Scheme Preys on Desperate Homeowners, N.Y. TIMES, July 3, 2007, at Al.
206. Requiring disclosures as part of the home purchase transaction is nothing new. A variety of disclosures are required for a mortgage transaction, including those mandated by the Truth-in-Lending Act (TILA), 15 U.S.C. §§ 1601-1667f (2000), and the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601-2617 (2000). New mortgage disclosures may soon be in the offing, as part of the response to the subprime lending crisis. See, e.g., Labaton, supra note 152. Significant questions have been raised about the content, timing, and cognitive processing of mortgage disclosures, and these considerations would be important in developing disclosure requirements for H2.0. See generally Matthew A. Edwards, Empirical and Behavioral Critiques of Mandatory Disclosure: Socio-Economies and the Quest for Truth in Lending, 14 CORNELL J.L. & PUB. POL'Y 199 (2005); William N. Eskridge, Jr., One Hundred Years of Ineptitude: The Need for Mortgage Rules Consonant with the Economic and Psychological Dynamics of the Home Sale and Loan Transaction, 70 VA. L. REV. 1083 (1984).
207. In the mortgage context, standardization of alternatives has been proposed as a means of countering "information overload" and reducing consumer confusion. See Eskridge, supra note 207, at 1178-86.
208. There is strong theoretical and anecdotal support for homeowners' large role in local governance, but questions remain about the strength of the empirical connection between homeownership and specific social and political behaviors. A recent view of the empirical literature concluded that "[a]s a whole, the existing literature suggests that homeownership has a modest impact on social and political behavior." Dietz & Haurin, supra note 40, at 430. Apart from higher voting rates for homeowners, which have been consistently established, empirical results are sufficiently mixed that "no strong conclusions can be drawn at this time." Id. The discussion in this Part assumes a significant level of homeowner influence arising from the fact of homeownership; the weaker the connection between tenure form and political and social behaviors, the less a shift to H2.0 ownership would change matters.
209. See generally FISCHEL, supra note 11. However, Fischel has also argued that homeowners can be overzealous in defending their property values, and has suggested a form of home equity insurance as a countermeasure. See, e.g., id. at 268-70; Fischel, supra note 50, at 335-36.
210. FISCHEL, supra note 11, at 5, 149-52.
211. See infra note 262 and accompanying text.
212. A variety of positive social effects have been associated with homeownership in the theoretical and empirical literature. See, e.g., Denise DiPasquale & Edward L. Glaeser, Incentives and Social Capital: Are Homeowners Better Citizens?, 45 J. URB. ECON. 354 (1999); Donald R. Haurin et al., The Impact of Neighborhood Homeownership Rates: A Review of the Theoretical and Empirical Literature, 13 J. HOUSING RES. 119 (2003). Selection bias presents a difficulty in interpreting empirical results, however-do people with good-neighbor characteristics just happen to become homeowners, or is there something about homeownership that improves their neighborliness? See, e.g., Gale et al., supra note 42, at 1177; Haurin et al., supra, at 132-33. Studies examining the effects of homeownership control for observable characteristics like age, marital status, and income, but it is still possible that unobservable characteristics influence both the tenure choice and the neighborly behavior. See Gale et al., supra note 42, at 1177. Similar econometric challenges are implicated in attempts to determine the impacts of homeownership on a raft of other variables, including wealth, health, child outcomes, self-esteem, mobility, employment, and family composition. See generally Dietz & Haurin, supra note 40 (reviewing literature addressing these impacts and discussing associated methodological issues).
213. See Mark Dynarski, Residential Attachment and Housing Demand, 23 URB. STUD. 11, 19(1986) ("A renter household might not form many social attachments or have children partly to avoid future adjustment costs if it plans on eventually becoming an owner-occupant.").
214. For example, Michael Pereira has argued that a company insuring all of a community's residences against home equity declines would be able to overcome collective action problems that the resi-dents themselves might face. Pereira, supra note 97, at 752-53 (giving an example in which the insurer could more effectively sue or bargain with a neighboring factory that was generating a nuisance). Depending on the structure of markets for home equity investments, a single entity might not have such a large stake in a single community. Nonetheless, the possibility that some actors might be better positioned than others to vindicate homeowners' interests is worth noting.
215. We might generally imagine that investors select investments based on their risk tolerance-the faint-hearted choose T-notes, while the daredevils choose junk bonds. If such sorting were perfect, investors would not typically suffer bouts of white-knuckled terror over normal market movements; their investments would be suited to their comfort level. However, because homeowners sort into homeownership for many reasons other than risk tolerance, we might expect many of them to be out of their comfort zone with regard to the home's investment risk.
216. See, e.g., Marcus & Taussig, supra note 4, at 406 (explaining that "avoidance of locational risks to home values encourages the well-documented attempts by relatively affluent communities in this country to export (or refuse to import) social problems to (from) older, poorer urban communities" and suggesting that removal of downside risk to home values would ameliorate this problem).
217. See supra notes 74-75 and accompanying text (discussing Oak Park's program).
218. Fischel, supra note 2, at 148-50. NIMBY is an acronym for "not in my back yard." Id. at 144.
219. See, e.g., Fischel, supra note 50. These costly actions might include opposing development that is expected to generate benefits for the jurisdiction (although with some risk attached), as well as actions to offload costs onto other jurisdictions by excluding people or land uses.
220. See, e.g., Fennell, supra note 122, at 645-59.
221. These price signals could reintroduce the phenomenon of homeowners distancing themselves rhetorically from the positions that they take on local matters. Instead of referring to a risk to property values, H2.0 homeowners might refer to pricing risks in their dealings with investors. If, however, payment obligations are fixed at the time the home is purchased (or even handled in lump sums at that time, as in the Syracuse pilot project, see supra note 108), current H2.0 homeowners would not be exposed to such pricing risks. I thank Eduardo Peñalver for discussions on this point.
222. See infra notes 238-41 and accompanying text.
223. See FISCHEL, supra note 11, at 9-11.
224. See Henry E. Smith, Semicommon Property Rights and Scattering in the Open Fields, 29 J. LEGAL STUD. 131,132 (2000).
225. See Robert C. Ellickson, Property in Land, 102 YALE L.J. 1315,1389 (1993) (providing an illustration of an open field village, adapted from maps dated 1719 appearing in GEORGE C. HOMANS, ENGLISH VILLAGERS OF THE THIRTEENTH CENTURY 88-89 (1941)).
226. Smith, supra note 225, at 146-54.
227. See id.
228. See, e.g., Vicki Been, What's Fairness Got to Do With It? Environmental Justice and the Siting of Locally Undesirable Land Uses, 78 CORNELL L. REV. 1001 (1993) (discussing and critiquing literature on disparities in the siting of locally undesirable land uses, and evaluating fairness considerations).
229. See, e.g., CHARLES H. HAAR & DANIEL WM. FESSLER, THE WRONG SIDE OF THE TRACKS: A REVOLUTIONARY REDISCOVERY OF THE COMMON LAW TRADITION OF FAIRNESS IN THE STRUGGLE AGAINST INEQUALITY (1986) (analyzing legal responses to geographic disparities in the provision of public services); Clayton P. Gillette, Equality and Variety in the Delivery of Municipal Services, 100 HARV. L. REV. 946 (1987) (reviewing HAAR & FESSLER, supra). Although the issues surrounding the provision and financing of public education are too complex and contested to delve into here, the continued existence of striking disparities among school districts bears separate mention. See, e.g., James E. Ryan & Thomas Saunders, Foreword to Symposium on School Finance Litigation: Emerging Trends or New Dead Ends?, 22 YALE L. & POL'Y REV. 463,463-64 (2004).
230. See, e.g., Kelo v. City of New London, 545 U.S. 469, 521-22 (Thomas, J., dissenting) (contending that exercises of eminent domain for economic development purposes will disproportionately burden poor communities); Wendell E. Pritchett, The "Public Menace " of Blight: Urban Renewal and the Private Uses of Eminent Domain, 21 YALE L. & POL'Y REV. 1 (2003) (examining the use of "blight" rhetoric to justify urban renewal efforts targeting low-income minority neighborhoods).
231. Investors could be residents of the community who choose to take on the risk of their neighbors, but it is likely that most investors in the H2.0 regime would live and vote outside of the jurisdiction in which the property is located.
232. For an analysis of the implications of the one-person-one-vote rule as well as discussion of alternatives that have been employed in private common interest communities, see Robert C. Ellickson, Cities and Homeowners Associations, 130 U. PA. L. REV. 1519, 1539-63 (1982).
233. NEIL K. KOMESAR, LAW'S LIMITS: THE RULE OF LAW AND THE SUPPLY AND DEMAND OF RIGHTS 60-70 (2001).
234. See, e.g., id. at 56-60 (discussing these concerns in the land use arena).
235. See supra Part IV.A.2.
236. See, e.g., FISCHEL, supra note 11, at 87-97; KOMESAR, supra note 234, at 68. Heterogeneity among local governments makes generalizations impossible, however, and the political balance may vary among jurisdictions. See, e.g., FISCHEL, supra note 11, at 90-93; KOMESAR, supra note 234, at 70; William A. Fischel, Political Structure and Exclusionary Zoning: Are Small Suburbs the Big Problem?, in FISCAL DECENTRALIZATION AND LAND POLICIES 111 (Gregory K. Ingram & Yu-Hung Hong eds., 2008) (examining how differences in jurisdiction size and metropolitan structure relate to local restrictions on housing development).
237. I am indebted to Lior Strahilevitz for raising this point and for very helpful discussions about it.
238. Cf. Richard M. Brunell, The Social Costs of Mergers: Restoring "Local Control" as a Factor in Merger Policy, 85 N.C. L. REV. 149 (2006) (raising analogous concerns about outside control of private businesses).
239. See supra Part IV.A.2.
240. One might think that investors holding concentrated interests in a particular locality would be better able to orchestrate a political response than could a large group of homeowners holding more diffuse interests. However, even investors who have significant holdings in a particular area will not likely have as much of their net worth at stake in that area as does the typical homeowner today, for whom the home is the single largest entry in her portfolio. Another factor that assists homeowners in organizing politically inheres in their geographic and social proximity to each other-they live near each other, may have children in school together, and are likely to encounter each other in a variety of local contexts. Fischel has noted these features conducive to homeowners' political efficacy in explaining why developers do not wield greater political clout in local land use decisions. See Fischel, supra note 237, at 118.
241. See supra Part IV.A.l (discussing value-enhancing collective control).
242. Factors that affect quality of life in observable and salient ways will presumably feed directly back uito housing prices, at least roughly aligning the interests of investors with residents. But some features of community life that local residents in fact care about-such as the hours of the local public library or the speed with which snow is plowed from side streets-might remain too obscure to home-buyers to factor into purchase prices.
243. As discussed above, housing market indexes used to disaggregate onsite and offsite influences might be constructed at a relatively small scale so that a given municipality could contain several separately defined local housing markets. An investor might concentrate her investments in one or a few of these and then attempt to enact policies that disadvantage the others.
244. See generally HAAR & FESSLER, supra note 230 (discussing the unequal provision of municipal services).
245. Placing restrictions on the concentration of ownership stakes in a particular locality is one of many possible ways that government might be involved in refining the H2.0 property form. See infra Part VI.B.
246. In this respect, the risks are very different than those involving majoritarian control that neglects the interests of a minority within the jurisdiction, or the interests of a group that wishes to enter the jurisdiction.
247. The contrary possibility is discussed in supra Part IV.B.I. 249 See infra Part V.C.
248. See, e.g., RICHARD BRIFFAULT & LAURIE REYNOLDS, CASES AND MATERIALS ON STATE AND LOCAL GOVERNMENT LAW 548-49 (6th ed. 2004) (noting that the property tax "provides about 30% of all local revenues, and nearly half of all locally provided-or 'own-source'-local revenues," making it "the key local government revenue source that is under local government control"); id. at 549 ("The property tax obligation of a particular taxpayer is measured by the value of the property subject to tax.").
249. See DAVIS, supra note 60, at 85-87 (discussing this issue).
250. Homestead exemptions and various forms of "circuit-breakers" offered by local governments can help to address the liquidity problem. See, e.g., LYNN A. BAKER & CLAYTON P. GILLETTE, LOCAL GOVERNMENT LAW CASES AND MATERIALS 470-71 (3d ed. 2004) (discussing homestead exemptions as well as "refunds, tax credits, or exemptions to low-income, disabled, or elderly individuals, or to other groups of special need or desert").
251. See Prowitz v. Ridgefield Park Vill., 568 A.2d 114, 118-19 (N.J. Super. Ct. App. Div. 1989) (upholding a reduced tax assessment for a home that was subject to a resale cap as part of an affordable housing program, finding the resale restriction "analogous to value-depreciating government regulation"); DAVIS, supra note 60, at 86-87 (citing and discussing Prowitz).
252. See, e.g., SHILLER, MACRO MARKETS, supra note 4, at 171.
253. Recent experience attests to this effect. See, e.g., Sudeep Reddy & Michael Corkery, Housing Chill Grows Worse, Biles Consumers, WALL ST. J., Sept. 26, 2007, at Al (reporting based on newly released data that "home inventories by one measure soared to an 18-year high").
254. Tammy Joyner, Relocation Reluctance Hitting Job Market, CHI. TRIB., July 1,2007,§ 14,at41. Some research has even explored a possible link between homeownership rates and longer bouts of un-employment, perhaps stemming from homeowners' limited mobility. See Steven E. Landsburg, Everyday Economics: Buy a House, Lose Your Job?, SLATE, Nov. 7, 1997, http://www.slate.com/id/2044/ (discussing data indicating a correlation between homeownership rates and unemployment rates and the hypothesis for that relationship put forward by Andrew Oswald, as well as some alternative explanations for the data); Dietz & Haurin, supra note 40, at 419-21 (reviewing literature on this point).
255. For example, an empirical study of condominium sales in Boston between 1990 and 1997 showed that sellers facing a loss from the benchmark of the nominal price paid for the home chose higher asking prices and took longer to sell their homes than other sellers-a result consistent with loss aversion. See David Genesove & Christopher Mayer, Loss Aversion and Seller Behavior: Evidence from the Housing Market, 116 Q.J. ECON. 1233 (2001). Turning down offers below the purchase-price benchmark may be understood as risk-seeking behavior consistent with the "trying to break even" phe-nomenon. See Richard H. Thaler & Eric J. Johnson, Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice, 36 MGMT. SCI. 643, 657-58 (1990). It is not clear, however, that holding out for a better price is always irrational. See Stephen Day Cauley & Andrey D. Pavlov, Rational Delays: The Case of Real Estate, 24 J. REAL ESTATE FIN. & ECON. 143 (2002) (suggesting that holding out during down markets can be rational, if the option value of doing so exceeds the carrying costs of the home).
256. Indeed, there is the opposite concern that sellers will care too little about the sales price if they will not bear the loss. See, e.g., SHILLER, MACRO MARKETS, supra note 4, at 82. The disaggregation approaches discussed above would attempt to control for this risk. See supra Part II.B. One specific safeguard would be a right of first refusal granted to the investor. See supra note 138 and accompanying text
257. Cf. Caplin et al., supra note 81, at 28-29 (discussing the potential social benefits of Syracuse's home equity insurance pilot program for those not enrolled in it).
258. See SHILLER, MACRO MARKETS, supra note 4, at 207-08 (discussing financial innovations as public goods); Caplin et al., supra note 81, at 28-29.
259. See, e.g., FISCHEL, supra note 11, at 74-75 (noting the pain that homeowners would experience in selling at a loss, and suggesting that this constraint on "exit" functions to encourage "voice" in the local political process).
260. See, e.g., Thomas C. Schelling, A Process of Residential Segregation: Neighborhood Tipping, in RACIAL DISCRIMINATION IN ECONOMIC LIFE 157, 174 (Anthony H. Pascal ed., 1972) (exploring how speculation about future neighborhood changes might affect a homeowner's decision whether to stay or leave, and observing that "[i]f capital losses are involved, the whole process can be aggravated by the attempt to get rid of one's house a little sooner than everyone else"); Caplin et al., supra note 81, at 28 (suggesting that home equity protection programs might have "confidence-building effects," even if not many households purchase the protection).
261. See Caplin et al., supra note 88, at 237-38 (presenting rough calculations that suggest shared equity mortgages could increase homeownership by more than one percent).
262. Census data show that one-third of renter households changed residences between 2002 and 2003, compared with one in fourteen households living in owner-occupied housing at the time of the survey. JASON P. SCHACHTER, U.S. CENSUS BUREAU, GEOGRAPHIC MOBILITY: 2002 TO 2003, CURRENT POPULATION REPORTS 5 (2004), available at http://www.census.gov/prod/ 2004pubs/p20549.pdf. Data for 2004 to 2005 reflect moves by 29% of renter households and 6.34% of owner-occupant households. See U.S. CENSUS BUREAU, GEOGRAPHIC MOBILITY: 2004 TO 2005, tbl.17-2, available at http://www.census.gov/population/socdemo/ migration/cps2005/tabl7-2.xls (providing data on householders in owner-occupied units); id. at tbl.17-3, available at http://www.census.gov/ population/socdemo/migration/cps2005/tab 17-3.xls (providing data on householders in renter-occupied units); see also Dietz & Haurin, supra note 40, at 416-18.
263. See Dietz & Haurin, supra note 40, at 416-18.
264. See CAPLIN ET AL., supra note 4, at 219-20 (predicting that housing partnerships would create short-run price increases, which could be "quite significant").
265. See id at 219. Land use policies restricting development could dampen this response, although the policies themselves might undergo change as a result of the shift in interests brought about by H2.0. I thank Ezra Rosser for raising this issue.
266. See, e.g., ROBERT FRANK, LUXURY FEVER 159-60(1999).
267. See id at 159.
268. Andrew Caplin and his coauthors suggest that the increased affordability associated with equity financing would not have uniform effects throughout the income distribution because "at some point, borrowers achieve an income level that makes it possible to pay regular mortgage interest on the most valuable house that their assets will permit them to purchase." Caplin et al., supra note 88, at 226-27 & tbl.6.
269. A legislative backlash against larger homes seems to be brewing, however, perhaps reflecting shifting norms about housing consumption. See, e.g., Nicholas Riccardi, Leveling Restrictions on Houses' Big Growth, L.A. TIMES, July 23, 2007, at A12 (discussing proposed or implemented restrictions on oversized homes in several metropolitan areas).
270. See, e.g., FRANK, supra note 268, at 79-81 (discussing adaptation effects in the context of housing); Daniel Kahneman & Carol Varey, Notes on the Psychology of Utility, in I NTERPERSONAL COMPARISONS OF WELL-BEING 127, 136-47 (Jon Elster & John E. Roemer eds., 1991) (analyzing the impact of adaptation and comparison on subjective well-being).
271. H2.0's downside protection would reduce the risk associated with a lack of diversification, however. See supra Part II.C.
272. Of course, we would expect the two to be closely related. The resale price should reflect what homeowners find valuable about the home, and if restrictions on autonomy are aversive, then the price homeowners are willing to pay should drop accordingly. This might not happen, however, if homeowners misgauge how much the lost autonomy would mean to them or if competitive pressures to attain the highest possible relative standing in the housing market overwhelm considerations relating to the day-to-day consumption experience.
273. Cf. Thomas W. Merrill, Dolan v. City of Tigard: Constitutional Rights as Public Goods, 72 DENV. U. L. REV. 859, 870-72 (1995) (observing that where constitutional rights produce positive externalities, the interests of more than just the rights-holder are implicated in bargains to cede them).
274. See, e.g., Fennell, supra note 135, at 849-90 (discussing a variety of reasons that the restrictions in private communities may not well serve the interests of the residents of those communities).
275. See text accompanying notes 141-43.
276. To be clear, such a product would not enable our protagonist living in Doldrums to purchase a comparable home in Bright Lights, where homes cost several times as much. Rather, if Agatha origi-nally bought her home in Doldrums for $200,000, she would receive enough money to purchase the sort of home in Bright Lights that she could have purchased for $200,000 at the time of her initial home investment in Doldrums.
277. See supra Part I.E.
278. See Marcus & Taussig, supra note 4 (proposing the establishment of a governmental program, the Home Owners' Insurance Corporation,
279. See, e.g., Amy E. Hillier, Redlining and the Home Owners ' Loan Corporation, 29 J. URB. HIST. 394,395 (2003) ("Redlining refers to lending (or insurance) discrimination that bases credit decisions on the location of a property to the exclusion of characteristics of the borrower or property."). Redlining has historically been used to deny credit or other services, or to make these services available on less favorable terms, in neighborhoods that are racially mixed or that are identified as minority neighbor-hoods. A number of federal statutes, including the Fair Housing Act, 42 U.S.C. §§ 3601-3631 (2000), the Equal Credit Opportunity Act, 15 U.S.C. §§ 1691-169If (2000), the Home Mortgage Disclosure Act 12 U.S.C. § 2801-2810 (2000), and the Community Reinvestment Act, id. §§ 2901-2908 bear on redlining practices. See, e.g., Stephen M. Dane, Eliminating the Labyrinth: A Proposal to Simplify Federal Mortgage Lending Discrimination Laws, 26 U. MICH. J.L. REFORM 527, 540-57 (1993) (reviewing and critiquing legislation addressing mortgage discrimination, including redlining). I do not mean to suggest that avoiding discrimination in the H2.0 context would be a simple matter. Legislative protections tai-lored for the mortgage lending context would have to be adapted and extended to the H2.0 investment context, and to the extent existing protections are ineffective, broader reforms would be necessary.
280. See supra notes 42-46 and accompanying text.
281. It is perhaps significant that the tax code offers the same capital gains advantages granted to homeowners to "tenant-stockholders" living in housing cooperatives. See 26 U.S.C. § 121(d)(4) (2000). Although the situation of these tenant-stockholders is not analogous to that of outside investors (they live in the home and hold shares in the cooperative corresponding to the value of their residence), the inclusion of this provision shows a willingness to look beyond the formal correspondence of ownership and occupancy in granting tax advantages.
282. See SHILLER, NEW FINANCIAL ORDER, supra note 5, at 107-18 (explaining how "livelihood insurance" might work). Shiller offers the example of a young person who wants to specialize in "recombinant DNA technology," but fears a downturn in the returns to that field over time. Id. at 107-10. "Livelihood insurance" would protect the young biochemist against the possibility of such a decline through payoffs keyed, in part, to incomes within that area of specialization. Id. at 109-10, 113.
283. For a recent overview of predictions markets, see Abramowicz & Henderson, supra note 126, at 1349-60. Twenty-five scholars recently drafted a statement urging that regulatory barriers to the development of such predictions markets be lowered. See Kenneth J. Arrow et al., Statement on Prediction Markets (AEI-Brookings Joint Ctr. for Reg. Stud., Related Publication 07-11, May 2007), available at http://ssrn.com/abstract= 984584.
284. See, e.g., Come Rain or Come Shine, ECONOMIST, Feb. 10, 2007, at 78, 78-79; CME Weather Products, http://www.cme.com/trading/prd/ weather/ (last visited Feb. 18, 2008); see also Michael Lewis, In Nature's Casino, N.Y. TIMES MAG., Aug. 26, 2007, at 26 (discussing "catastrophe bonds" used to hedge against natural disasters).
285. For background on the history and regulation of derivatives, see, for example, Roberta Romano, A Thumbnail Sketch of Derivative Securities and Their Regulation, 55 MD. L. REV. 1 (1996).
286. See Caplin et al., supra note 88, at 211 (observing that shared equity mortgages "are not a panacea for housing affordability problems and the associated contraints on building wealth").See Shiller and Weiss, Home Equity Insurance, supra note 5, at 29 (suggesting limiting the purchase of hedging instruments to the time of home purchase, sale, or refinancing, noting that "[a]t these times, the homeowner has legal counsel and advice of others that would naturally be used to help make an informed decision about risk-management contracts as well").