A Hedge on House Prices

A new home price protection program aims to help builders calm buyers' fears of price declines.

Home buyers took a decided step back from the signing table in August as the nation's debt downgrade sent the equity markets reeling, shaking consumer confidence to the core once again. The sales slowdown underscored that for many builders the back half of the year could be a big scramble for sales and closings to clear out standing inventory. This all adds up to a period of increased sales promotions and incentive programs.

But buyers have seen the best that builders have to offer—price discounts, free upgrades and options, and energy cost guarantees, among others. And while these types of programs have been successful in the past, they don't necessarily give buyers the confidence to buy a home now versus later.

But EquityLock Solutions came up with a program that may be the boost of confidence many buyers need to pull the trigger on a home purchase. The Home Price Protection program offers buyers a chance to recoup dollars if the home price index in their local market has declined at the time they sell their homes—even if their homes' individual values haven't declined.

The program launched in April, and after working with real estate brokerages RE/MAX and Keller Williams on pilot programs, the company landed its first builder client in August. Jim Chapman, CFO of the 18-month Georgia start-up Stonecrest Homes, said he was using the program to help move roughly 40 inventory homes before the end of the year. He expected the program to improve sales velocity by releasing some of the consumer fear permeating the market while making his list prices a little stickier.

“There's been a serious sea change in consumers' view of real estate as an investment,” he said. “This [program] could become a standard operating procedure every time a home trades.”

T.J. Agresti, co-founder and CEO of EquityLock, said the program was designed to be part of a seller contribution package. For builders, they pay between 1.5 percent and 3 percent of the home purchase price, depending on the market, for the assurance that EquityLock will pay the home buyer up to 20 percent of the value of the overall home price declines in the market, as determined by the Federal Housing Finance Agency's House Price Index. For buyers in the program, this means the only way they fail to receive a payout from EquityLock is if they sell their homes for more than they bought them for and the local home price index in their markets increased.

“The ability for buyers to get into homes isn't just a credit issue anymore; it's being constrained and strangled by fear,” said Agresti. “The program gets buyers back to normal behavior about why they wanted to buy the house in the first place.”

The program has a 15-year life span, and home buyers are required to wait two years before selling their homes to be eligible for a payout. The company also will offer a discount to the homeowner to provide the program to the subsequent home buyer. —Sarah Yaussi