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Foreclosures and lengthy days on market bolstered sales of home warranties at the outset of the housing crash four years ago, but now that foreclosures are down and tight inventories are shrinking days on market, are warranties in for tough times?

Will Home Warranties Weather the Recovery?

Foreclosures and lengthy days on market bolstered sales of home warranties at the outset of the housing crash four years ago, but now that foreclosures are down and tight inventories are shrinking days on market, are warranties in for tough times?

For an annual fee of $250 to $600, home warranties will pay the cost of repairing the mechanical problems that regular home insurance doesn’t, such as clogged pipes, HVAC breakdowns, furnace failures, and appliances that conk out. With the housing bust, sellers trying to go the extra mile to land buyers offered home warranties to sweeten the deal. In 2008, 42 percent of all sellers are offering incentives, including one-year warranties according to the NAR Profile of Home Buyers and Sellers.

In 2012, however, with inventories of homes for sale down nearly 20 percent from the year before, only 22 percent of sellers offered home warranties to attract buyers.

Another hot market for warranties was REOs, which exploded in 2007 and peaked in 2010. Though they don’t cover pre-existing conditions, warranties provide buyers of distressed properties a degree of protection should a rehabilitated property experience expensive problems. Now foreclosures are down significantly. Completed foreclosures fell 23 percent in November compared to a year ago and the national foreclosure inventory declined 18 percent from November 2011, from 1.5 to 1.2 million properties as demand from investors kept local inventories low.

Despite the increase in sellers using home warranties as buyers’ incentives and the popularity of warranties on REOs, generally the home warranty business declined during the past five years. Industry revenue was expected to fall at an annualized rate of 2.3 percent to $1.7 billion by the end of 2012 according to the IBIS World Property Report. The recession led to a sharp fall in existing home sales, causing declines in warranty sales. Consumer confidence also significantly dropped; as a result, consumers pulled back on items that were covered under their original home warranty plans, leading to lower warranty premiums .

Incentive sales may already be hurting. A RE/MAX survey a year ago fround that home warranties ranked only fourth among the five most common buyer incentives that RE/MAX agents are seeing. Reduced sales price, paying a portion of closing costs, and making repairs were more popular . Moreover homes are selling 9 percent faster than they were a year ago, accordiong to Realtor.com, making incentives unnecessary.

Will the recovery replace in overall volume the sales being lost to incentives and and shrinking foreclosure sales? With existing home sales forecasted to rise from 4.68 to 4.75 million in 2013, the highest level since 2007, warranties might weather the changing economic climate in good form.

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