With millions of Americans still reeling from the real estate bust's massive blow to household wealth, a little-known form of insurance has emerged as a way for homeowners to hedge their bets against another real estate downturn.
Home value insurance enables homeowners to preserve home equity should real estate prices stumble. For the last nine months, a business called Home Value Insurance Company has been offering the policy, betting that the specter of the meltdown could spur some homeowners to pay for a safeguard on what is often their largest investment.
"I think it is probably a function of an unprecedented drop in home prices and, I think, a logical result that such a business would pop up," said Daren Blomquist, vice president of foreclosure marketplace RealtyTrac. "We've really never seen that before in the history of the housing market"
The policy works like this: Normally, if a homeowner bought a home for $100,000 and sold it for $90,000 in a depressed market, he would eat a $10,000 loss. But if he's got "Home Value Protection," he doesn't shed a nickel: The business reimburses him for the $10,000 after he sells.
In the wake of the housing collapse, many Americans may appreciate the protection offered by such a policy. A recent Federal Reserve report found that household wealth fell nearly 40 percent from 2007 to 2010 and that most of the decline was due to home value depreciation.
So, where was this lifeline during the housing boom? Since most homebuyers were drinking the home-prices-never-fall Kool-Aid, no one would have bought it, said Teri Felix, vice president of Home Value Insurance Company.
"There wasn't really market demand," she said.
But assuming that that's changed, her company started offering its product nine months ago. Since then, customers in Georgia, Arizona, Indiana, Ohio and Oklahoma have "paid $200 to $300 and have gotten $5,000 of protection," she said.
The cost of insurance on a $100,000 home will run you something close to $20 a month, according to the company's website.
While home prices may have diminished $5,000 for the company's customer base in the last nine months, market bellwethers have recently been pointing to a recovery. So some see home value insurance as potentially exploitive.
"You're tapping into the fear and uncertainty that people have about home prices, given what people have been through," Blomquist said. "But you're in a situation where it seems relatively safe where home prices are not going to take, at least, a dramatic drop in the coming couple of years."
Jed Kolko, chief economist of listing service Trulia, agreed that the housing market could be on the upswing. But, he pointed out, "most people's houses won't burn down in the next year, but fire insurance still makes sense for most people, because even though it's a low probability, the cost could be catastrophic."
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