D.I.Y. Home Price Protection

Daniel Markovits and I have a new piece in Slate arguing that sellers could use a fairly simple escrow agreement to provide buyers with price protection:

Why would sellers ever agree to such an arrangement? For starters, it may help them sell their homes. And it wouldn’t necessarily cost them very much. Sellers could commit to reimbursing their buyers for any fall in the average value of homes in their area in the year following a sale. Such price protection would give buyers confidence that they won’t regret their purchases even if the market does fall further and cheaper houses come on offer — confidence that they need in order to buy now. And if buyers gain confidence, prices won’t fall, so sellers won’t have to pay. … And it’s natural for sellers to provide the insurance that price protection involves. If they can’t sell their houses, they’re going to end up bearing the house price risk anyway.

Turns out some sellers have already started providing this type of protection. Cousins Properties in March announced the Cousins Assurance Program to assume most risks for qualified condominium buyers for a luxury condo high rise in the Buckhead area of Atlanta. The program description says:

If your home appraises for less than your purchase price after three years and you wish to move, we will refund your equity.

Now might be a propitious time for a gentle government nudge in this direction. Mandatory price protection would be a bad idea; but “the government might develop standardized escrow forms or require real estate agents to offer buyers and sellers the option of including price protection in their contracts.”

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  1. David says:

    Shouldn’t this be something you buy from an insurance company? Kind of like the way you can buy home repair insurance that covers the buyer if the a/c needs to be replaced in the first year?

    But what kinds of fraud would this new insurance make possible? A buyer could sell for a “loss” to a friend in the insured period and collect the insurance.

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  2. Tariq F says:

    Hmmm… Somewhere implicit in this is the idea that if lots of people start doing this we’ll stem housing price declines and everyone will be happy. After all, more buyers will buy (after all they’re no longer afraid of losing money) and if many people do so the market will stop falling.

    But wouldn’t this idea carried out at a massive scale (i.e., from the government “nudge” that is advocated) achieve nothing more than temporarily supporting (distorting) the market? After all, such an insurance policy would only be offered by a seller if he recognizes a significant risk that the house is worth less than the selling price. And so long as sellers are willing to offer such insurance against further price drops — while getting no protection from the risk that the price goes up (and that they lose upside) — it just suggests to me that the equilibrium market price of that house is lower than being discussed.

    Another way of looking at it is: would this work in the stock market? Sellers should sell with no insurance (either upside/downside) when a stock is at a level reflecting fundamentals. They’ll only offer insurance against a drop in value if they recognize a greater likelihood of a future decline than a future rise in value – which, of course, in an efficient market should already be priced into the stock price.

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  3. Mike says:

    Why would a seller take this risk when they can just mail in the keys? There’s no financial risk (no 1099 penalty for a primary residence) beyond a hit to your credit report that will be irrelevant in a few years.

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  4. ScotterOtter says:

    Isn’t this how we got in trouble in the first place? A seller would be betting that housing prices won’t go down. Just like people who bought expensive property they couldn’t afford and assuming the value would increase.

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  5. Matt says:

    And if the seller doesn’t pay up and values fall, they could get foreclosed on too.

    This is a terrible idea unless you make the scummy Real Estate agents pay for it with their 6% taxi ride money.

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  6. Kim says:

    shouldn’t a housing purchase be made for a place you want to lay your head rather than a flip? If you love the house and can afford the house does it matter what houses are going for if you don’t wish to move?

    What if you were in the house for 12 years and the prices were stable but in the thirteenth year you had to move and your equity was less than what you owed?

    For many homeowners this has been a real scenario depending on the economics of the area where you live.

    An alternative would be for everybody to rent then they could come and go as they please and gamble making money in some other way.

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  7. Juliius says:

    Such mass-advertisement of ignorance is dumb-founding. I’m in Southern California and there isn’t anyone with any equity to refund. Bank-Owned Sales are topping 50% of the sales out there and another big chunk of sales are short-sales. The few remaining sales where there is some equity does not constitute the sort of critical mass which is needed to have any sort of global effect. More than likely, anyone selling right now with much equity in their home must really need the cash, or they wouldn’t be selling – deferring 10% of the sale price (which may be ALL of the equity) for 12 months is a deal killer for a seller.

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  8. Andrew says:

    “If your home appraises for less than your purchase price after three years and you wish to move, we will refund your equity.”

    Who would be appraising the houses? The same experts that rate subprime loans AAA?

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