One of the biggest financial lessons learned by Americans over the past decade is that housing values don’t grow to the sky. Indeed, most homeowners today probably wish they had some way to turn the clock back and capture the maximum value their home ever had.
There’s no setting back the clock, but a new insurance product promises consumers some peace of mind by protecting against a loss in home value due to a declining local housing market. Home Value Protection was rolled out in Ohio this week and the company behind it expects to offer it nationwide within a few years.
While the appeal of home-value insurance is obvious, the devil is in the policy’s details, and those factors make Home Value Protection the Stupid Investment of the Week.
Stupid Investment of the Week highlights the conditions and characteristics that make a security less than ideal for average investors, and is written in the hope that spotlighting trouble in one situation will make it easier for consumers to sidestep problems elsewhere.
From a regulatory standpoint, insurance is not considered an investment, but it qualifies for the purposes of this column; in this case, investors may see a Home Value Protection policy as a way to hedge against drops in the real estate market.
Plenty of long-time homeowners saw their home’s value double or triple during the last boom, only to backslide to a point where they’d like to be able to lock in gains. And many homeowners — even the ones who bought in at the top of the market — don’t believe the worst is over and would jump at a chance to protect their single largest investment.
There’s no denying Home Value Protection’s wow factor, but it actually makes sense only for a minute fraction of the people it appeals to.
Here’s how the policy works:
Homeowners pay a monthly premium to lock in today’s value of their home for the next 10 years, protecting the current value against future declines in their local market. If the home was purchased within the past 12 months, the “protected value” is the purchase price; if it was purchased more than a year ago, the insurer does an appraisal based on current local market conditions.
If the home is sold at a loss during the protected period, the consumer gets the lesser of the actual loss suffered on the home or the percentage decline in the Case-Shiller Home Price Index for their zip code.
This means that someone struggling to sell a house at a decent market price can’t just dump it and expect the insurance to cover an oversized loss, and can’t let a home deteriorate to where it’s worth much less than surrounding homes, but have insurance make up for their negligence.
The maximum protected loss is 25%, and there’s a deductible if the home is sold during the first two years.
Home Value Protection estimated average premiums in the $35 to $45 per month range, noting in the Ohio roll-out that a $45 premium would protect a home value of $200,000.
Those terms and conditions are where the policy goes awry for most average homeowners. First, you must sell the house. If you plan on living there no matter what happens to the area market, you’d have to change your plans in order to protect your home’s value.
If you have wanted the insurance to protect the value of the home so that you can flip it or continue a pattern of buying, improving and re-selling houses, the deductible is high enough to negate a lot of the value of the insurance during those first two years.
Scott Ryles, chief executive officer of Home Value Insurance Company, was quick to acknowledge those shortcomings.
“There are a lot of people who have heard about it and think it’s different than it really is,” Ryles said. “It’s not a proxy for a trade or for speculating on real estate nationally or anything like that. It’s to protect the value of your home against a decline in your local market.
“If you have no intention of selling your home in the next 10 years, this probably isn’t for you,” he added, “and that’s probably true, too, if you’re planning to sell your home in the next year or 24 months. Between those two certainties — you’re staying more than two years but think you might sell before 10 — it might work well.”
Ryles acknowledged that declining home values make consumers nervous, but that the headline numbers haven’t impacted daily lives for people who view their home as an asset they use. “But the New York Times did a poll of people who wanted to move to take a new job and one out of 10 of those people couldn’t do it because they could not sell their home at a loss and afford to move,” Ryles said. “That is one of those situations where the loss of home value could affect the rest of your life.”
Home Value Protection clearly is best suited for growing families that might want to upsize as they expand, couples nearing retirement and thinking they will downsize or move in the next decade, and for people with job uncertainties. In other words, while it appeals to everyone, it’s best for special situations.
Like most special-circumstance coverage, this is expensive coverage with a limited benefit. While the maximum benefit is 25% of the protected value, the likely benefit is much less. In the Ohio policy example — $45 per month for a $200,000 home — say the homeowner sells after four years and at a 5% loss; they will have paid $2,160 in premiums for $10,000 in benefits. That’s not necessarily a difference-maker in terms of the ability to buy the next home; it’s a risk that homeowners have stomached without insurance for, well, ever.
Further, the decline in home values is slowing. The Case-Shiller Index has been up nationally for the past four months; while that simply narrows the losses that are the long-term trend, it shows why some observers feel this new coverage is way too late in the cycle to be attractive to the average consumer.
“This concept could have had some validity four to five years ago,” said David Bohannon of Consultants Corner Inc., an insurance advisory firm in Louisville. “But now with the housing market being down so much and for such an extended period, there is little chance of any significant further decline … unless, of course, the buyer overpaid for the home to begin with.”
Ultimately, Home Value Protection will be sold based on what has already happened in the housing market, but because it can only protect against what happens next; it may make consumers feel good, but it’s too late to give them what they really want.
By Chuck Jaffe
Article derived from: www.marketwatch.com
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