The idea of insurance to protect homeowners from declining home values has been batted around for years, but now it’s a reality. On September 28, Ohio homeowners became the first in the nation who can buy a real insurance policy to protect their primary residences against lost value when they sell.
Though the initial product offering is limited to one state, if it’s successful the Home Value Protection Insurance Company hopes to offer it nationwide. It could transform the way homes are bought and sold in America by reducing the risk of lost value that has scared so many buyers away from the closing table.
Price pessimism is a major reason buyers are postponing their purchase plans, according to recent consumer surveys by Fannie Mae and Move, Inc. Forecasts like yesterday 2012 outlook from Fiserv, which predicts values will fall another 3.6 percent before stabilizing in mid-2012, fuel their fears.
Would home value protection insurance help calm buyers’ fears? “Absolutely,” said John Sheehan, an associate broker with Llewellyn Realtors in Maryland. “People are always looking for a guarantee. They don’t want to look like a jerk if prices go down after they buy.” Sheehan said virtually all his buyers would be interested in the product and for 15 to 20 percent it might make the difference in deciding to buy now rather than wait.
Here’s how the policy works. The insured home must sell for less than its protected value and also local home values must have declined during the policy period. If both have fallen, the homeowner ca n file a claim for the lesser of the two amounts: the drop in local home values as measured by the Fiserv/Case-Shiller Single Family Home Price Index or the difference in the sales price and the insured value. Claims are limited to a maximum of 25 percent of the insured value.
Claims on homes sold within two years after the policy purchase are subject to a deductible. For the first 12 months after the initial policy purchase, the deductible is 10 percent of the insured value. For months 13-24 after the initial policy purchase, the deductible is 5 percent of the insured value. There is no deductible after the first two years of continuous coverage.
Typical monthly premiums are estimated in the $35 to $45 range. ’To reassure policyholders, our policy limits any increase to no more than 5 percent. We don’t set a limit on decreases. Our goal is to keep coverage affordable, and to that end, we don’t foresee making frequent changes to premiums, said Teri Felix, executive vice president of marketing at Home Value Protection Insurance.
“I don’t think buyers would balk at the price,” says Sheehan. “It’s less than the cost of PMI or an HOA.”
“Ten years ago people didn’t believe they needed coverage on the valuation of their real estate. Before 2007, prices had never fallen on a year-over-year basis. Today owners want to protect themselves against future losses,” said Ms. Felix.
Felix reports that initial reception in the Ohio market, which has suffered greatly from falling values and foreclosures over the past four years, has been good. The company is building a network of more than 300 independent agents across the state and it is supporting the new product with an advertising campaign targeting homeowners and home buyers.