Price protection for home sellers?
Ugh- just what we need, insurance to protect us against yet another thing that we could “self-insure” against if we wanted to do so. See what I’m talking about by reading this article in the NY Times.
This product, for a percentage point or two of the value of the home when purchased, will insure you against loss of value.
The companies offering this product, I would guess, are betting the success of this product on a couple of strategic assumptions:
1. It assumes that there is a decent chance that a home buyer is only considering staying in their home a short period of time, probably 5 years or less, before moving to a different city, a different place in their city, or to a larger home. If someone plans to move in just a few short years, they may be more likely to purchase this insurance to protect the potential “down side” they would experience if their local housing market tanked and their house plummeted in value right as they were needing to sell it. Rather than having to come up with funds out of pocket, this insurance plan would provide for them.
2. The plans are catering to buyers with little down payment. While most home buyers with substantial down payments would never dream of buying home value insurance, individuals with little or no down payment often understand the risk they are taking and would like to have a way to mitigate that risk. They don’t want to find themselves in the same situation as their old neighbor, or as their near-bankrupt relatives who paid dearly to sell a depreciated house they couldn’t afford due a simultaneous drop in the housing market and loss of their own job and income.
While home value insurance may be helpful for some, if you buy a home you plan to live in for a while– and if you buy it with a decent down payment, there’s no need for these products and it adds yet more costs related to the home purchase transaction. Ironically, one of the major arguments to staying in a house for a while before selling is that the real estate transaction cost incurred when you sell makes up a smaller percentage of your home’s equity than it would over a longer period of time. And yet this product, which itself aims to protect your equity position in your home, just adds to that cost burden.
It will be interesting to see how these products progress — will insurance regulators step in to regulate these products as what they are (insurance!), and what will be the opinion of personal financial coaches and advisors are on these products in the coming years…? Time will tell.
Now, how exactly does this work. Is the insurance that your house won’t lose value, or that you won’t sell it and still own money on the mortgage?
i.e. If I buy a $150,000 house, put $30,000 down and sell it for $140,000 two years later, will the bank give me the extra $10,000?
If so I think the 1-2% charge isn’t that bad of an idea.