I think, if they do large landmasses, they'd do it as separate worldspaces, sidestepping the issue. They wouldn't sidestep it because of the issue but for the same reason they put cities separate from the main world.
I was about to say the exact same thing, I'm currently messing on with a worldspace for a 4th era Vvardenfel/Solstheim (yeah, well original I know) and my first reaction to this bug was to house them in a seperate worldspace. You're forgetting older official expansions like Tribunal were created entirely using interior cells, and the fact there's http://bulk2.destructoid.com/ul/216324-explore-morrowind-and-cyrodiil-in-skyrim/morrowind%20gate-620x.jpg right where one would enter into the lands of Morrowind in the current map seems to support that any potential world expansion would exist in a seperate area. Not to mention the fact that DLC would likely have to update the main .esm in order to achieve genuinely extended regions.
Playing devil's advocate, from a gamer's perspective a loading screen between two gigantic exteriors isn't exactly the worst thing to happen to them. Anyone can see that many people on here are a bit more ambitious and want a huge worldspace, but personally I'm torn between the concepts of a fix and a workaround. The original game clearly allows LOD to function outside of the game's playable boundaries, as seen from the rather rudimentary view of Red Mountain while standing by Stendarr's Beacon. Rather than wait for a solution to something that likely will take an age for the devs to fix, I do wonder whether it would be more productive to create large worldspaces within several smaller worldspaces with clear boundaries; then load between them while keeping the LOD itself on a larger scale. This would mean you can still see miles into the distance and get the same sense of scale, but whether characters bob up and down while several miles away becomes an irrellevance.
We've seen this on a smaller scale while in the towns already and this appears to be the tactic that Bethesda use - Ever tried to jump out of Whiterun? Of course you have - we all have - and despite screaming "OH DEAR GOD IT'S NEW VEGAS ALL OVER AGAIN! SCREW YOU INVISIBLE WALLS!!1" you have to admit - waist-heigh outer walls aside - it's an effective design tactic and could be effectively implemented.
I know this will annoy some people and I hate a major bug as much as the next guy, but as a realist I have to think - how much effort is it going to take to populate, design and script an immersive worldspace even a fraction of the size of Skyrim or Morrowind? I mean taking Middle Earth as an example, how many impassable barriers are there between the heroes in any of Tolkien's main novels and their ultimate goal? I couldn't imagine Mirkwood as even being an exterior in many ways; the place struck me as a child as being a frightening, claustrophobic place with no easy way out. The Misty Mountains in Lord Of The Rings were as impassable as the entrance to the peak of High Hrothgar is initially in Skyrim; albeit on a far greater scale. These are the kind of images that brought me into RPGs in the first place! It just seems a bit silly to worry about whether you can walk on the exact mountain you can see 8 miles away when we could be concentrating on what is right in front of us. OK maybe it means a compromise, maybe it means creating maps that don't 100% match the extensive lore than at least another dozen people than you have read in it's entirety. The fundamental question is "does it compromise the game?"
In a more brief format - create worldspaces on a grand scale, add the LOD, copy the playable areas into several smaller worldspaces centered on 0, 0, and create clear boundaries between them. Far from ideal, but it makes your mod playable and allows you to concentrate on more important issues like plot and gameplay without significantly compromising or waiting for an update that based on my experience of games programmers may never come.
Now I've finished my brief dissertaion haha, I just remembered -
The problem with the theory that it is purely Havok and its new systems is that npcs aren't constantly effected. They are fine so long as they are at least 1 cell's distance from the player character. This would indicate that there are other factors in play, factors related to Skyrim and not Havok. Speaking of which, this should be added to the bug's description. It could be of great importance to note this particular fact.
You're right, that is of importance. But I would be tempted to ask whether this simply means that Havok's behaviour engine becomes inactive once more than 1 cell distant to the player. Yeah it would indeed be a Skyrim-based issue, but if the solution was turning on Havok constantly for an entire worldspace then surely that would affect performance. Admittedly since it works for the Y axis there must be a solution but once again whether this is a limitation of Havok or Skyrim itself is something only the devs can give a quick answer to without an answer from the devs themselves. EDIT - that last sentence makes no grammatical sense, I blame Jagermeister.