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May 05, 2008


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Michael Martin


First, leaseholds still bundle on-site and off-site risks, just over a shorter period of time, and with residual risk held by another.

Second, you say: "the on-site amenities and maintenance mean almost zero if the house is located on the North Pole."

I think you're thinking of Manhattan rather than the North Pole here. The on-site amenities are pretty key on the North Pole. But I get your point.

The answer is that it's not so important to bifurcate when either on-site or off-site factors dominate. It's important to bifurcate risk when the two are pretty close to equal but uncorrelated. So houses located around factories in rural areas would be the best candidates for this type of insurance.

Third, you say: "Most investors will want a say in community governance, which introduces a lot of complications."

Actually, the complications are even worse for the individual homeowners who have to get organized locally in order to fight the zoning board, &c. Unlike investors, they're generally busy with other things during the day.

Last, the subprime debacle would very likely have been avoided had there been some large insurance companies bearing off-site risks to push back at the assessors who had incentives to continue inflating prices to meet the explosive demand generated by CDOs and CDO^2s. The sytematic failure that led to the subprime bubble was the lack of a flow of negative feedback to these assessors and the home buyers who agreed to the inflated prices. Had off-site insurance providers been raising their prices at the same time, we would at least have had a more stable system, if not avoiding a resonance (i.e., bubble) entirely.

Michael F. Martin

I used too much jargon in the comment above. Here's another attempt at explaining the insight that Lee Fennell gives into designing a more stable housing market:


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