Freefalling home prices have been the hallmark of the housing market over the past several years, but thanks to a twist on home financing, consumers don't have to lose any more sleep over evaporating home equity.
"Home Price Protection," offered by Colorado-based EquityLock Solutions, is kind of like a warranty for current homeowners and prospective home buyers. "We pay homeowners if the local market index declines, even if the homeowner ends up selling their own home for a profit," says Ted Rusinoff, president of EquityLock Solutions.
Rusinoff estimates a few thousand people have taken advantage of the program since its inception in April last year. The company announced Monday that it secured financing to allow homeowners to spread out the cost of the service in monthly installments.
How exactly does the program work? It all depends on the local house price index, as calculated by the Federal Housing Finance Agency. Suppose a homeowner bought a home for $300,000 when the local housing price index was 100. A few years down the road, the price index falls to 90 and the homeowner can only sell the home for $290,000. EquityLock would pay the seller $30,000 at the time of sale—10 percent of the original purchase price.
Even if the seller ultimately makes a profit—say for instance, she was able to sell the house for $350,000—she would still get a payout from the company if the local price index fell. If the price index stays the same or rises, the contract ends with no value.
"You want to make sure the product creates a positive relationship for the homeowner and their community," Rusinoff says. "It should allow them to fix up their home and whatever else without being penalized [if the market drops]."
Sounds like a sweet deal, given how the bursting housing bubble wiped out years of homeowners' built-up equity, limiting their mobility, and even forcing them into foreclosure.
But signing up for the program now might be "too little, too late," some experts say.
Economists predict prices will fall a bit more in 2012, but the majority of catastrophic value declines are behind us. Most economists are actually predicting home price stabilization and even upswings in some fortunate metro areas.
"It's a bit like putting your seat belt on as you're pulling into your garage," says Greg McBride, senior financial analyst for Bankrate.com.
There's also the price for the protection. Consumers pay a one-time contract fee of just over 2 percent on average of the home value they want to protect (the actual price of coverage depends on where you live). For instance, for a home worth $200,000, it would cost about $4,100. Can't afford the lump sum? EquityLock Solutions offers financing so consumers can break up the fee into monthly payments, at about 10 percent interest.
"The ability to hedge risk is a good thing, but you have to evaluate the cost of the protection," McBride says. "It's not cheap. For most people that kind of chunk of change is put to better use adding to the down payment and creating their own equity."
Still for certain people, the idea of insuring against home price declines isn't all that far-fetched. "If you're depending on your home equity for retirement or other financial goals, it might be worth it," says Pete D'Arruda, president of North Carolina-based Capital Financial Advisory Group. "Don't let fear influence you, but on a case-by-case basis and considering how [the last bubble] put people's entire retirement in jeopardy, it could be right for the right person."
"I don't like the idea that future value can 'only go up from here,'" D'Arruda adds. "Hoping is not a real strategy."