26 August 2009

Zoning Theory

The theoretical basis of zoning laws are critically important for Denver right now as it considers adopting a major overhaul of its zoning laws that focus more on form than on use, an approach that is more restrictive (because form restrictions can be implemented on top of traditional zoning restricts).

The proposed Denver zoning code, in particular, places a premium on what might best be described as reducing "aesthetic harm" and visual deviance from established architectural norms in most of Denver's neighborhoods. Detractors argue that this isn't a right and shouldn't be protected, i.e. that the homeowner's expectations are unreasonable. Supporters argue that the economic impacts to them are as real as the impacts on property values created by limiting developer are to the property owner, and so their concerns ought to be addressed with regulation.

But, the laws also potentially represent a move towards an analysis more focused on what I believe the core inquiry of zoning involves, which is the externalities associated with particular land uses. My argument has long been that developers ought to have a right to "cure" externalities that they create, and should have a right to develop propert if they do.

A new book by Lee Anne Fennell, THE UNBOUNDED HOME: PROPERTY VALUES BEYOND PROPERTY LINES (excerpts available via SSRN) undertakes a sophisticated analysis of the key theoretical issues behind the question of when zoning restrictions are legitimate, a core values dispute in many, if not most, real life zoning disputes.

The Unbounded Home grapples with a core modern reality - that the value and meaning of a home extend beyond its property lines to schools, shops, parks, services, neighbors, neighborhood aesthetics, and market conditions. The resulting tension between the homeowner’s desire for personal autonomy at home and the impulse to control everything that could affect the home’s value fuels continual conflict among neighbors and communities. The home’s unbounded nature carries implications for nearly every facet of residential life, from the financial vulnerability of homeowners to the persistence of segregation by race and class. This book shows how innovations that increase the flexibility of property law can address critical issues of neighborhood control and community composition that have been simmering unresolved for decades - and how homeownership itself can be reinvented to better deliver on its promises.

As a footnote, an SSRN release of excerpts is also a very savvy way to publicize a new book from a university press, with a significant academic audience.

In a nutshell the argument is that homeowner concerns about their larger neighborhoods flow from very real economic impacts, but that different tools, similiar to carbon impact trading, and changes in the nature of home equity investment risks faced by homeowners that make these kinds of externalities less important, could help address the very limited array of tools provided by zoning codes and restrictive covenants.

The result has been confusion about what property ownership means, and equal measures of outrage against intrusions on one’s prerogatives as an owner and as an interested neighbor.

Second, even if individual communities can reach internal agreement about excluding particular land uses from their midst, the overall pattern of land use choices within a larger metropolitan area can create additional negative effects. Because excluding land uses (such as multifamily homes) often amounts to excluding households (those who cannot afford single-family homes), associational patterns in metropolitan areas are deeply impacted by the use of these property tools.

This book considers how society might design alternatives to existing property instruments that would address both localized extraparcel impacts and the larger-scale dilemmas produced by efforts to control those localized impacts.

In broad terms, these alternatives involve reconfiguring property so that it does a better job of aligning the homeowner’s returns with the homeowner’s choices. These reconfigurations require us to move beyond the binary choices that have dominated the metropolitan residential experience —banning or permitting uses, allowing or forbidding exclusion, renting or owning a home. Conceiving conflicts like those faced by the Middletons as resource dilemmas not entirely unlike those surrounding resources like clean air or a sustainable fishery allows us to expand the menu of policy options.

One reconfiguration approach involves developing new forms of alienable entitlements, rather than simply banning or allowing a particular activity. Drawing on innovations in environmental law, we can imagine devising tradable entitlements to engage in acts with aesthetic impacts, and even (in carefully delineated contexts) tradable entitlements relating to association with preferred neighbors and peers. These instruments would allow responsibility for inputs into common environments to be more precisely allocated and priced.

Another, quite different, approach would attenuate homeowners’ vulnerability to off-site impacts by scaling back their investment exposure so that it more closely aligns with their effective sphere of control. Here, building on an exciting line of work by Robert Shiller and his collaborators (among others), I examine the potential to reconfigure homeownership in a way that decouples the investment volatility associated with off-site factors from the homeowner’s bundle. . . .

Land use controls, as they exist today, operate mainly in a binary manner—either a use is banned, or it is allowed. There is almost never the openly acknowledged possibility that households could pay for the privilege of engaging in an unusual but especially valued use, such as adding a garage apartment, or that governing bodies could be required to pay for the privilege of banning a particular land use, such as multifamily dwellings. Moreover, few have thought creatively about the set of risks that the standard homeownership bundle should and should not contain as a default matter. For example, must homeowners be exposed to housing market risks that they have no power to control, or might these risks be more efficiently held by investors within diversified portfolios? By failing to probe such questions, property law has developed without a coherent understanding of the home as a resource.

Put another way, bribery by developers, or those opposed to development, isn't corrupt, instead, it is fair and desirable as a middle ground solution to otherwise intractible problems. I am reminded of an example of how a Japanese developer handled the fact that his building interfered with the neighbor's television reception. He kept the building design the same and paid for them to have cable TV instead.

The role of homeowner's associations in maintain a commons is relevant, and so is the interesting idea that property valuations that reflect situations that could be involuntarily changed could be discounted for tax purposes.

Also interesting is a citation to Hansmann's article "Theory of Status Organizations" which explains that many organizations impart value largely through your fellow members and are often organized as non-profits to prevent the organizer from exploiting member status for their personal gain.

The analysis is also notable because it uses approaches that are applicable to regulation in general, building on broader views of takings clause jurisprudence (i.e. the duty of the government to compensate property holders for the fair market value of property it seizes involuntarily).

That current legal arrangements require homeowners to gamble on matters far beyond their sphere of influence and expertise is, on reflection, rather remarkable. Homeownership is widely viewed as one of the most important stabilizing forces in society, but it comes packaged with an enormous dose of investment risk that homeowners are almost entirely powerless to insure against or diversify away. Homeowners typically have no other asset, aside from their own human capital, that makes up a larger share of their portfolios. Thus, households routinely plow a hefty chunk of their wealth into what amounts to stock in a single, risky enterprise—the neighborhood housing market. Placing all of the household’s eggs in one basket not only runs counter to basic principles of portfolio diversification but also motivates basket- guarding behaviors that can have high social costs. . . .

Even with the best available spillover-management tools in place, households may not be the parties best positioned to bear the residual risks. Accordingly, I consider here the prospects for scaling back the homeowner’s exposure to off-site risks that she cannot efficiently bear.

The conclusions aren't all included, and the theory isn't completely spelled out in the excerpts, but the bits that are available are tantalizing as a new way of thinking about the issues. The ferment of a major new conceptualization of property rights in something as basic as a house also opens the door to the already boiling cauldron of rethinking the paradigm of intellectual property as property rights, instead of, for example, a right to prevent unjust enrichment by third parties from your works.


Dave Barnes said...

The NEW Denver zoning code is being handed down from on high by elitist bastards (not literal, but figurative) such as Peter Park.

Andrew Oh-Willeke said...

Policy making is inherently elitist, which is generally a good thing, and the zoning code has received more grass roots public input that a great many other government initiatives of similar importance, in part because Denver's neighborhood association system provides a systemic basis for generating input.

My beef is not with elitism, it is with bad policy.

Kevin Dickson said...

Social phenomena, like zoning and economics, don't follow any scientific laws, so cause and effect cannot be reliably tracked. Therefore, lawmaking is trial and error, and the old lessons learned don't always transfer to the future.

In the physical sciences, once we discover the laws, we can proceed with confidence that they won't change.

In human behavior, we just have to stay on our toes and be able to change course quicker, because the nature of cause and effect is unpredictable.

In Denver, we knew the zoning code needed a wholesale rewrite as far back as 1988. Twenty years to update laws is unacceptable, and today's theory is guaranteed to be wrong after another 20 years.

Andrew Oh-Willeke said...

We don't need to be perfect to do better. Good laws can remain stable and product little conflict for hundreds of years.

Steve said...

Andrew, re your comment:
“My argument has long been that developers ought to have a right to "cure" externalities that they create, and should have a right to develop property if they do.”

A modest proposal then for the ADU conflict:

1. ADUs shall be permitted in all residential zone districts.
2. Property owners applying for an ADU building permit shall post the subject property for 30 days.
3. At the time of posting, all property owners within 1000 feet shall be notified by first class mail of the application and posting.
4. At the end of the posting period, those adjacent/nearby property owners (within 1000 feet) shall submit within 15 days written claims for their estimated property value decrement if the permit is approved.
5. Upon payment of all claims by the applicant, the permits shall be approved.
6. “Voluntary” mediation, not to exceed 6 months, may be mandated by Zoning Administration.
7. Neither the claims nor the payments shall be subject to any form of binding arbitration, except as a consensual outcome of the “voluntary” mediation.

A model for the sort of bargaining and negotiation required by this generally market-based new type of zoning might be what happens during class action suit settlements. In those settlements, not only is there an overall settlement number to be arrived at via negotiation, but there are also typically a broad range of individual injury levels to be accounted for in the final search for equitable results.

All this is a lot of work. I imagine that most developers, despite the usual whining about intrusive government regulation, would prefer simply a binary zoning system that allows maximum square footage and maximum intensity of use.

But this is a great book recommendation and I look forward to reading it in its entirety. Thanks!