Will Home Price Warranty Restore Confidence?
There's no question that consumer confidence, or lack thereof, is the greatest barrier in the way of a full-blown housing recovery.
Credit, while tough to get, is historically cheap, home prices have fallen so far as to open the market to many more buyers, and there is ample inventory from which to choose.
The trouble is, no one wants to catch a falling sword, and home prices are still falling.
So what if you had a guarantee that even if your home lost value, you wouldn't lose your initial investment? That's the idea behind EquityLock Financial's new "Home Price Protection." It's not insurance, but a warranty that you buy based on an index of home prices in your local area.
Here's how the company describes it:
You purchase an EquityLock Home Price ProtectionTM contract that refers to a local index of housing values. If the index has dropped by the time you sell the house, we pay you the percentage of the index drop multiplied by the value of your home at the time you bought the Home Price ProtectionTM contract.
The transaction is structured as a contract, and not as an insurance policy; therefore the payment is made if the market index falls, regardless of whether you sell the home for more or less than you paid for it.
The cost of the warranty is anywhere from 1 1/2 to 3 percent of the value of the home, depending on your particular market and how volatile it may be. The company is regulated by the DC Risk Finance Bureau to insure against any losses as a business.
"What we're generally talking about here is pooled risk," explains EquityLock's CEO TJ Agresti. "It's all the markets combined. Your market in New York or Atlanta may go down, but not all markets will go down at the same time, and this is exactly what we saw in the last correction."
Agresti believes a product like this can actually save the housing market because it will provide the necessary home buyer confidence that has recently been trashed beyond recognition.
"People are afraid and they need something to overcome that fear that they are experiencing right now, and home price protection is the solution. If I don't have to worry about am I going to lose money on my biggest asset and I've shifted that risk to somebody else, I'm a lot more willing to go ahead and make that buy," argues Agresti.
The warranty doesn't work if your home goes into foreclosure, but it does pay on a short sale, where the bank lets you sell the home for less than the value of the mortgage. That opens up a huge can of worms, because if you do a short sale, the bank is taking your loss; if you get a warranty that then pays you back for the loss, my guess is the banks are going to have a hissy fit. Agresti says that is "going to be up to the home owner and their lender."
I'm not sure how many home buyers or home owners for that matter want to put even more money into housing right now, even as an insurance-like policy. But think of it this way: It's not insurance, it's a warranty against a fall in a local index. If you sell your home for more than it was worth when you bought it, despite the fact that your local market index fell, you could actually make money on this warranty.
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