Private and Public Solutions to the Risks of Market Declines
In general, the value of a home tends to go up. Yet when home values are already very high, we remember that housing markets do decline at times and in specific areas. This is of special concern for the owner who has borrowed heavily on a house — as many perfectly reasonable buyers do.
Say you buy a house or condo when the market is brisk and competitive. Then, after you own it a little while, say the prices in your area start to weaken. In some cases, this could mean your place is barely valued at the amount you owe on the mortgage. Or it could mean you’ll lose money if you need to sell.
While this is not the usual case, some owners might nevertheless wonder if there are any means of protecting their home equity from an economic downturn.
U.S. Home Values Today: Historically High
Property research firm Attom Data Solutions LLC publishes a regular U.S. Home Equity & Underwater Report. The publication includes quarterly data on mortgage and equity values across the country. In Summer 2021, the data show just 4% of mortgaged homes as “seriously underwater” — down from about 6% at the same time in 2020. In other words, fewer people owe more on their mortgages than the value of their homes. Their property values are holding up well, even during our unsteady recovery from the Covid-19 pandemic.
Indeed, many people are astounded at how their home values have risen. The median home value went up 15% or more in most major cities and suburban areas over the 2020-2021 year.
Homeowners across the country have been enjoying the trend. In Arizona, Delaware, and a number of the northeastern states, home equity has gone up spectacularly. At the same time, many homeowners in several southern and western states have seen their equity pull ahead of their mortgage debt. These are good indicators of financial strength in today’s population of homeowners.
Can Homeowners’ Equity Stay Strong?
There’s a lot to watch as U.S. homeowners recover financially from shutdowns, slowdowns, and shifts in the way people do business and plan their futures. But where we stand in late 2021, it’s fair to say owning a home through the pandemic meant holding a strong, defensive asset.
Now, we can expect a gradual slowing in the market. Nothing too abrupt, because many hopeful buyers were unable to compete in the 2020-21 frenzy, and are waiting in the wings to buy their homes. Still, Redfin research shows the percentage of homes for sale that dropped in price passed the 5% mark in August. Values aren’t necessarily going down, but the amazing rise we have witnessed is subtly decelerating.
Many homeowners remember times when home values sank — and in some cases went into free-fall mode. They or their parents may have watched their equity go under water. That is, the steep decline in property values left many people with more debt on their homes than their homes were worth in the battered market. And many found themselves financially unable to keep up with debt repayment.
At that point, what happens next? Owners might consult their lenders about a short sale to avoid filing for bankruptcy or sliding into foreclosure. With short sales, lenders will accept less money than the outstanding mortgage balance, in order to spare themselves the foreclosure costs.
Even households that didn’t experience such striking setbacks during the last major crisis, between 2007 and 2012, lost a lot of wealth. A homeowner who bought a home with the median price in mid-2006, went through the housing decline, then had to sell in late 2011, could have lost a whopping 34% in home value.
Because none of these situations are pleasant, some insurance companies have, at times, offered products for home buyers concerned about them. Buyers in sellers’ markets might understandably worry that they’re buying high and be stuck selling low. Insurance could help hedge their homebuying bets.
Equity Insurance: What It Is; How It Works
Home equity insurance — sometimes called equity assurance or home value protection — cushions the owner against falling property values. The purchaser pays one premium, up front. If values decline in the particular market where the home exists, the company covers losses that occur from the start date of the policy. When home equity insurers mark a home value at the start of a policy, the owner gets a protected value. At the time of sale, the policy covers any loss in value tied to the local market’s decline since that protected value was set.
An example equity insurance policy is outlined on a flyer from the CIMA Companies. This policy enables its holder to file a claim when selling the home for under its original cost. The seller is allowed to recover an amount based on the difference between the protected value and the percentage of decline as shown by an independent home price index.
Today, when homeowners have confidence in their property values, hedging against declines might be the furthest thing from people’s minds. Yet companies have sometimes discounted the policies in times of rising values.
Local Home Equity Assurance Protection Groups
The Northwest Equity Assurance Program shields the homes on Chicago’s Northwest Side from loss of value due to local downturns. Homeowners opt in by completing an application. They pay one registration fee of $150 to $225, depending on home size, to pay for the appraisal that establishes the protected value. The fee can be waived for owners who have recent appraisal reports in hand. After staying in the plan for five years, a homeowner may file a claim.
The Home Equity Assurance Program exists under an Illinois law titled the Home Equity Assurance Act, which guarantees that the home values, for city residents who opt, in will not go down during the time they participate without coverage. The plan covers losses connected with local housing market downturns (which may not necessarily track city-wide, regional, or nationwide housing markets).
There are additional assurance hubs. For example, Southwest Home Equity Assurance Program serves Chicago’s Southwest side.
Resurgence in Equity Insurance to Come?
Home equity protection is attractive to some buyers. Some think area home prices could slide. Some might like to buy a home, but worry they won’t have time to stay in one place long enough to ride out market waves and build up equity over time.
The idea with home equity insurance is to have confidence in a home purchase when local market conditions might decline. Potential buyers who think this type of coverage could be useful should speak with a local insurance expert to know what policies may be available, and what a given policy will and won’t cover. Home equity policies are not easy to find these days. A downward trend in home values ahead could make such products popular again.
Supporting References
The Title Report: Market Data — Homeowner Equity Surges in Second Quarter (citing ATTOM’s second-quarter 2021 U.S. Home Equity & Underwater Report; Aug. 13, 2021).
Glossary of Mortgage Terms by Bankrate.com: Home Ownership and Equity Protection Act (undated).
65 ILCS 95/1, Ch. 24: Illinois Home Equity Assurance Act.
Photo credits: Kindel Media and Andrew Neel, via Pexels.