Would you insure your home for today's value if you had the option?
It sounds too good to be true: buy a house and then if down the road you fail to sell for what you paid to make the purchase, your insurance policy will make up the difference. That?s what ?Home Value Protection: Insurance against housing market declines,? seems to be offering, though. While skeptics have called HVP names as nasty as ?The Stupid Investment of the Week,? for some, this type of policy might be a good move. BEIL spoke directly to HVP executive vice president and marketing officer Teri Felix to get a clear idea of exactly how this intriguing insurance opportunity works and, furthermore, just for whom it is intended.
BEIL: So how does this insurance really work?
Teri: Home Value Protection is the only insurance policy of its kind available in today?s market. We offer protection on the current value of the home against future losses. Basically, when you purchase a new home, the protected amount would be the purchase price. If you were seeking to insure a home that you already owned, then we would base our coverage based on current market value. So if you buy a $200,000 home, that $200,000 would be the amount that we would base your policy on. Say that in three years you want to move and housing prices have dropped by 10 percent, leaving you with a house you can only get $180,000. We would cover the difference between the $200,000 you paid and the $180,000 fair market value, meaning you would get a check for $20,000. And of course, if your home appreciates and you sell for more than market value, you would not be eligible for a claim.
Note: If a seller sells their property for less than market value as determined by the Case-Schiller Home Price Index, HVP covers the difference only between the market value and the originally-insured price. So if you sold that home for $150,000, you would still get a $20,000 check rather than a $50,000 one. And there are also some time constraints on when you can sell. Sell the house too quickly and you may not get anything at all (covered further down).?
BEIL: Is there any precedent for this type of coverage?
Teri: Actually, back in the 1970?s a pilot of this type of insurance was done in the Chicago area to encourage people to move back into a certain portion of Chicago. At that time there were fears about loss of home values in the area, so this type of program was piloted. However, up until the mid-2000?s most people were under the assumption that home values could only go one direction ? up ? and so there was no real demand for the service. Of course, even in strong housing markets there are peaks and valleys within a rising trajectory. Our goal is to help homeowners whose largest financial asset is their home and assist them in protecting that asset from an uncertain market.
BEIL: Can investors use this insurance product?
Teri: Our product is for primary homeowners and covers only the primary home that is actually occupied. So investors could cover their own residences, but not investment properties.
BEIL: Is there a deductible?
Teri: For the first two years, there is a deductible. The first year there is a 10 percent deductible and the second year there is a 5 percent deductible. Sell after 25 months or more, and you have no deductible at all. Going back to the $200,000-house example, if you sold that house after 13 months for a market value of $180,000, you would still come out ahead because your deductible of 5 percent would be $10,000 so you would still get $10,000 more than market value on the home. Sell before 12 months are up, though, and you would not get a check since 10 percent of $200,000 is $20,000.
BEIL: What is your response to people who call this type of insurance ?stupid??
Teri: That?s a Wall Street view, for the most part. If you?re viewing this insurance as an investment product rather than real insurance, it may not make sense for you. However, for most people, their home is their primary savings vehicle, and if their home value is wiped out they lose most of their assets. Home Value Protection insurance is no different than fire protection. If your house burns down and you have no fire protection, your investment is lost, there is no way to recover it, and the event can be financially devastating. Without Home Value Protection, if you have to sell your house at a loss as many people are being forced to do in today?s housing market, that can be financially devastating as well and you may not be able to recover from the event. In 2008, many housing experts were saying we were at the bottom of the housing market and since then many areas of the country have experienced housing price drops of another 10 percent or more. Will this insurance help you recover what you have already lost? No. But it can protect you for the future.
BEIL: What are the broader implications of this type of insurance for the housing market?
Teri: We believe that our coverage could help restore confidence in the housing market by getting would-be home-buyers off the sidelines. Right now, we?re hearing horror stories about people who bought last year losing value in their homes today. If you have a buyer on the fence because they?re not sure if the market has hit bottom, this is a solution for them. And if their home rises in value and they want to take out a new policy at a higher value, that is an option on a monthly basis as is letting the policy go if you no longer feel you need it.
Note: HVP is currently available in Ohio. Teri predicted that it will be available in Georgia and Oklahoma in the next few months, and reported that the company expects to have the ability to cover about a quarter of U.S. housing stock in the next six months.
So what do you think about home value protection insurance? Is it brilliant, bogus or somewhere in between?
Thank you for reading the Bryan Ellis Investing Letter!
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Source: http://investing.bryanellis.com/717/training-education-an-introduction-to-home-value-insurance/
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