Insurance for Falling Home Prices

The myth that homes values always increase was thoroughly debunked over the past few years as the real estate boom went bust and we fell into recession.  This cycle will likely repeat itself in the coming years more than once. Unfortunately, there’s no predicting when the market will go up and when it will crash. Even the savviest investors win some and lose some. Sometimes the rollercoaster of the housing market keeps going up. Even if you’re somewhere in the middle when you buy, you can still make a lot of money.

Home value insurance is not really the first of its kind. Investors have been purchasing similar coverage on stocks for years. Under the right circumstances, this type of insurance can mitigate losses. But buyers have to balance the costs with the amount of risk they’re taking on just as insurers do.

Who Is Home Value Protection?

Home Value Insurance Co. is a California based company, with offices in Ohio, the first state to approve their product, and Austin, TX, where their marketing headquarters is located.

They expect to receive state approval in an additional 15-20 states and roll out the product by the end of 2012.

Back when they first opened their doors, they weren’t offering the same product. It wasn’t actually an “insurance” product, but rather a “financial guarantee” product.

An “insurance” product is heavily REGULATED and GUARANTEED by each State Department of Insurance in every state the product is sold. “Financial guarantee,” or “value warranty” products, are not regulated and/or guaranteed.

It may help to remember the NON-REGULATED mortgage products that led to the subsequent real estate boom and bust.

Notice that the insurance industry has remained financially stable throughout the Great Recession. No government agency was keeping an eye on those products and we know how that turned out!

Well, AIG lost money on its “lending” arm through credit default swaps. The unit requested to pay off some of its debt by using “insurance money” and was told “no” due to regulations.

Read More: Fair Rental Value Insurance

How Does Home Value Insurance Work?

When it was first introduced, this Home Value Protection insurance was not a cure all. The base value was set by an appraisal or purchase price at the start of the policy period. Homeowners could insure their home’s value based on those metrics for up to 10 years and 25% of the home value. The program was never a free for all. From the start, buyers had to meet certain standards to get up to 10 years of coverage.

Here are the basics of the Home Value Insurance Company program:

•The home must be an owner-occupied, primary residence
• New purchases or currently owned homes are acceptable
• Homes purchased within 12 months of the policy effective date are valued at the home’s purchase price
• Foreclosures and short sales are not acceptable – and may not be necessary with this type of product!
• The home’s “present” value is calculated electronically through an automatic evaluation model at the time the policy is being issued
• Maximum home values of $500,000 are acceptable (higher value homes must be evaluated by the insurer)
• You are locked into the “present” home value for 10 years
• You are covered up to a maximum decline of 25% of your home’s “present” value
• A deductible applies if the home is sold within the first two years of the policy being issued

Let’s see an example:

John Q. Public buys a home for $200,000 on January 1, 2011. John loses his job and must relocate to a different state three years later. The real estate market dips in John’s zip code and he must sell his home for $180,000 (a $20,000 loss in value).

If John had purchased a Home Value Insurance policy, the insurer would pay out the $20,000 loss.

Sounds like a great deal, but it’s not for everyone and there are some things to consider before purchasing this type of policy.

Was it really as good as it looked?

The pay out on any insurance claim is based on either the sale price of the home or the Case Shiller Index…whichever is higher.

This means that if your particular home decreased in value, but your entire neighborhood stayed put or increased in value, you would get the lesser of the two differences in value.

For example, if you had a “fire-sale” and sold your home at a rock bottom price simply to “move” it quicker, you may not recoup your entire loss…assuming your entire neighborhood didn’t actually drop that much in value.

Using the same example above; your $20,000 loss (a 10% “loss”) may only yield a $10,000 claim pay out if it was determined that the neighborhood, in general, only lost 5% in value at the time the home was sold.

Was home value protection too good to be true?

This is never a hazard insurance policy. In other words, it didn’t cover you against anything a normal homeowner’s insurance policy would. It is solely designed to protect you against a loss in home value as a result of falling prices…not a fire or hail storm.

The product seemed promising. It was featured by major news outlets across the country promising a strong future and opportunities for investors and homeowners alike. In July 2012 (less than a year after it started), the product was pulled from the market without warning or explanation.

Homeowners insurance policies are heavily regulated on all sides. Government regulators watch over products and pricing. Insurance companies also walk the tight rope between staying profitable and providing attractive coverage options for the average homeowner.

Calling home value protection insurance would be a misnomer. Even with a hard limit of 25% on drops in your home’s value with no coverage for personal property or other additional coverages, the cost to keep it going may simply have been too much.

If you’re looking for ways to protect your home’s value, routine maintenance and the right kind of home renovations can go a long way. Especially with no detailed explanation as to why Home Value Protection stopped offering this coverage after less than a year, it’s hard to know what the future would look like for another company willing to offer a similar policy limit and assurances.