Lee Fennell on Homeownership 2.0

Housing market volatility and the subprime lending crisis have raised questions about the institution of homeownership. In a paper posted on SSRN, forthcoming in the Northwestern University Law Review, Lee Fennell argues that the full measure of home investment risk need not come bundled with homeownership as a default matter. Financial innovations, such as housing futures and options offered by the Chicago Mercantile Exchange based on S&P/Case-Shiller home price indexes, are now making it possible to configure homeownership risk in new ways. Fennell's paper explores how the benefits of such innovations might be delivered to ordinary homeowners and examines some of the theoretical, cognitive, and societal implications of offering a reduced-risk version of homeownership. Her abstract is below, and the full paper is here.

Homeownership 2.0
LEE ANNE FENNELL
University of Chicago Law School
Northwestern University Law Review, Vol. 102
U of Chicago Law & Economics, Olin Working Paper No. 266

Abstract: Current legal arrangements make homeowners high-stakes gamblers. Homebuyers routinely take on crushing debt loads to put huge sums of money into risky, undiversified ventures that are utterly out of their personal control -- local housing markets. That these markets typically post positive returns over time is of little comfort to those caught on the downside of housing market volatility. Moreover, because rights to these expected gains are priced into the home, many would-be buyers are priced out of the market. The shortcomings of the homeowner's standard investment package have not escaped notice, and for decades scholars and innovators have tried to devise better ways to manage the upside and downside risks of owning a home. Derivatives markets for such risk have recently begun to emerge, due in large part to the collaborative efforts of Karl Case, Robert Shiller, and Allan Weiss. As the technical capacity to slice, dice, and trade homeownership risk advances, this paper steps back to examine how a reduced-risk version of homeownership fits together with property theory, human cognition, and the social dynamics of neighborhoods and metropolitan areas. To explore these questions, I present a new tenure form -- Homeownership 2.0 -- that seeks to optimally unbundle certain investment components from the core homeownership package.