At our first house, I avoided lawn almost entirely and instead built winding paths and planted beds of interesting native plants and flowering shrubs. Once established, it was very low maintenance and required almost no fertilizing or pesticides. As soon as he could toddle, our son loved wandering through the paths and examining the plants and miniature wildlife.

The lack of lawn didn't seem to affect resale value, and the realtor played up the landscaping in her advertising. If anything, I think it helped to sell the house.

We recently moved to a new house that is oriented for passive solar heating. Since it is passive solar, there had to be a cleared area on the south side, but the builder preserved the trees on the other sides. I plan to avoid grass and build another flower garden at this site, too.

Building a house that is better integrated into its surroundings isn't particularly difficult, but it does require more time and individual care with each house. I suspect that's why builders prefer the bulldoze-to-the-clay approach. It's cheaper and quicker, particularly when building a multi-house subdivision.

One of the wonderful things about Tucson, Arizona, is that lawns are fairly scarce; most houses (and businesses) have natural vegetation around them. This isn't to say it just grows; often landscapers plant stuff, but it's usually stuff which normally grows in the desert. It makes it seem like much more of a real place. Phoenix, on the other hand, is full of transplanted Midwesterners who all tried to bring Iowa with them.

Slightly related, I think, is the study done by Nancy Wells and Kristi Lekies which found that children, under the age of 11, who are allowed to play in the "wild" subsequently grow up to have a very strong environmental ethic.

And tend to be more intelligent.

http://www.news.cornell.edu/stories/March06/wild.nature.play.ssl.html

Grass is a great surface for activity, that's why it's used for football, baseball, and soccer fields, golf courses, and Wimbledon.

At one point in time in America, grass covered yards were actually used by families -- they weren't merely decorative -- so it made sense to put down grass. Resulting, as Zach notes, in manicured lawns that have become the cultural norm, even if they are completely anachronistic, ecologically unsound, and as wahoofive notes in the case of Phoenix (and Scottsdale), completely ridiculous and extremely difficult/expensive to maintain.

For lots of different reasons, if left up to the individual homeowner, the front/back lawn will likely stay the cultural norm. At some point, maybe some enlightened condo association (I doubt any town council anywhere in America can get away with what condo associations can) will say "no more grass yards" and come up with a good looking and smart alternative, setting a new nation-wide trend. Or maybe Clinton and Stacy can host a new show, "What Not To Mow," and remake yards across America.