You insure your home against fire and other calamities. Wouldn’t it be great if you could insure against a loss in value?
Well, now you can with a new product called an “Equity Protection Agreement” issued by a California firm called Working Equity Inc., whish was founded by former executives with Washington Mutual (Stock Quote: WAMUQ.PK),
These policies, written only for primary residences, come at a price that can run up to thousands of dollars. Still, coverage is worth considering if you want to buy a home in today’s depressed market but worry that prices will fall farther. You can also buy insurance for a home you already own.
The cost typically runs from 1% to 2.5% of the property’s value, depending on how shaky prices are in your area. One of the most appealing options is a month-to-month policy you could cancel on 30 days notice when you are confident prices are no longer likely to fall.
This would cost about $90 a month for a $375,000 house in the Philadelphia region, for example, while lifetime protection would cost about $5,600.
Technically, the policy does not insure the home’s value but pays off if an index of local home prices declines. Insure a $400,000 property and you would receive $40,000 if average prices had fallen by 10% from the time the policy was taken out until the date the property was sold, regardless of the home’s actual sale price. If prices remained flat or rose during that period, there would be no payment.
The homeowner must keep the property for 24 months after starting the policy or the claim will be denied, as it would be if the house were to fall into foreclosure. Policies are not transferrable except in the case of the homeowner’s death, and you cannot collect unless the property is sold.
Anyone thinking of buying one of these policies should first assess the risk of price declines in the local market. The deepest losses have generally hit areas that saw the biggest price gains in the middle of the decade. You can study the market with data from sources like Zillow.com. Talking to real estate agents can be helpful as well, but keep in mind they have a financial incentive to say prices will go up, not down.
Nationally, home prices have fallen about 30% from their peak in the summer of 2006, according to the S&P/Case-Shiller Home Price Indices. Prices are now about where they were in the summer of 2003. The index, covering the 20 largest markets, shows prices have been rising since spring, though that’s not true everywhere.
That makes the month-to-month insurance option the most appealing. The $5,600 lump-sum payment in the example equals about five years worth of $90 monthly payments. History shows it is very unlikely that home prices will fall over any five-year period, so it may not be necessary to have coverage for that long. Coverage for the next two or three years might be good enough.
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