Home Value Protection: Does It Make Financial Sense?
Negative equity and home price volatility have turned home price protection into a desirable yet unattainable option since protecting local housing markets from future devaluation is a challenge few insurers are willing to take on.
“It’s a gamble,” says Carl Streck, principal of MountainSeed Appraisal Management, an appraisal and valuation services company based in Atlanta that serves community banks with at least $100,000 in capital as well as larger entities with up to $25 billion in assets. “The claims process can be a nightmare” because the cost of the product can increase dramatically if the property owner sells during a downturn.
So whether this type of policy is worth the risk, at least to some extent, seems to be a mater of opinion.
“A key concern” for buyers and owners of large inventories of foreclosed homes is the lingering housing market uncertainty and its downward pressure on housing prices, says Scott Ryles, CEO of Home Value Insurance Co., a subsidiary of Home Value Protection Inc.
To protect homeowners and homebuyers from price-related losses, the company said, it has started to offer Home Value Protection, a property and casualty insurance policy designed to alleviate the risk of declining home values by locking in the purchase price. Home Value Insurance is the underwriter and licensed insurance carrier of the policy, which is offered on properties ranging in value from $60,000 to over $500,000.
Ryles says policyholders understand that housing prices have a history of being volatile, so it makes sense to them to protect their home’s value for as little as $1 to $2 a day. Average monthly premiums range from $20 to $30 a month.
If a policyholder sells the property during a down market for an amount that is smaller than the insured value, the policy insures the value for up to 10 years since issuance. The policy enables policyholders to insure their downpayment and the equity they may be building in their home, and is renewable if the property value appreciates. It is applicable for existing homeowners and new buyers.
These types of insurances are very affordable to the homeowner and profitable to the issuer when issued on large portfolios if there are no claims. And according to Streck, several large banks are requiring such insurance. Some small-size lenders also see value in these types of insurance options.
Another concern is subjectivity.
Some appraisal companies are offering insurance products for their valuation services since after all valuation has a subjective component involved, he says. Home value insurance products have been around for many years. In today’s market, however, insurance policies for single-family homes are not that popular. MountainSeed Appraisal Management considered the idea and decided against it, Streck says. “In the end you don’t know how it plays out,” which is why few carriers continue to offer it.
Ryles is of a different opinion. He claims the Home Value Protection is the first insurance policy in the country to protect homeowners from local housing market volatility.
The local approach appears to be the key to his belief. The insurance is currently available only in Ohio and Oklahoma, in compliance with the insurance departments of both states.
Ryles has done his homework.
A statewide survey of Ohio homeowners conducted by Home Value Insurance last October revealed that for 67% of respondents their home is their biggest investment, and 72% rank declines in housing market value as the biggest risk to their home, compared to only 12% for fire, 10% for tornadoes and 5% for floods.
Other data show “historically homeowners are more than twice as likely in any given year to suffer from a decline in home prices,” he said, than flood, fire or burglary, yet homeowners tend to be more inclined to purchase insurance that protects against those types of hazards.
Fiserv Inc. data show home price declines over the past year represented a loss of over $12 billion in value for Ohio homeowners, of which about $2 billion was accrued during the third quarter when home prices dropped another 0.43%. Hence, he argues, the typical homeowner in Ohio lost an estimated $3,200 in home value over the past year, so policyholders in areas where the housing market continued to decline during the second half of 2011 were protected against an average decline in home value of $1,600.
In Oklahoma City and Tulsa where price declines were 2.8% and 3.1% the average loss in value was $3,900 and $4,100, respectively. These markets have experienced numerous down cycles, he said, for example home values dropped 23% between 1983 and 1988 before they recovered 14 years later in 1997.
Is that just a sales pitch?
While so far data indicate the overall market is flat, everyone agrees the home price story is local. According to data provided by Hanley Wood Market Intelligence, Oklahoma City is “the best all‐around” housing market in 2012. This top-ranked housing market “has been a relative pillar of stability compared to many other areas across the country,” analysts wrote. The area features positive job growth since 2010, stable home prices, low unemployment and positive demographic trends mostly thanks to “a number of strong local industries” that provide solid footing for the economy. According to the report “home prices are not likely to increase dramatically in Oklahoma City, but should see steady incremental rises.” As a result they expect over 2,800 new home sales in Oklahoma City, “an impressive amount for its size in the current environment.” And the vast majority of sales will be single-family homes, so Home Value Protection may look attractive to mortgage holders in this area.