These days, it seems that all we hear about are problems. The crisis of the day may vary a bit depending on the network you happen to be watching or newspaper youâ€™re reading, but the theme is basically the same: sustained unemployment, distressed homeowners, dire economyâ€¦and not necessarily in that order. Experts say that the only way to turn the tide is to attack the root of the problemâ€”consumer confidence. But how does one improve consumer confidence in such murky times? Simple, says EquityLockâ€”protect the value of their homes.
While itâ€™s impossible to create that proverbial silver bullet, Denver, Colorado-based EquityLock feels theyâ€™ve come pretty darn close. With the introduction of its Home Price Protectionâ„¢ product this past May, EquityLock believes it has developed a solution that will start rebuilding consumer confidence, one homeowner at a time.
According to EquityLock President Ted Rusinoff, the goal was to bring an affordably priced product to market that would cover the risks of homeownership. â€œWe want homeowners to be able to undergo the volatility of the housing market and still be able to continue the same quality of life they had historically enjoyed,â€ says Rusinoff.
According to Rusinoff, Home Price Protection is much like a home warranty, but one that preserves the equity or value of oneâ€™s home. Based on the local market index at the time of sale, Home Price Protection pays the homeowner if the value of the index related to his or her home has decreased since it was purchased (see sidebar for details). The intended ripple effect would be a renewed faith in real estate investment followed by an overall increase in consumer confidence.
â€œIf you look at the current shadow inventory of foreclosures and the number of people who walked away from not only their home, but the concept of homeownership, you can see that the biggest problem housing is facing is a loss of confidence,â€ says Rusinoff. â€œWe want to provide a solution that helps individuals recognize that homeownership isnâ€™t a bad dealâ€”it was the market that didnâ€™t treat them very well. We want to offer home buyers a plan that protects them from that risk next time around.â€
Economist and speaker Howard Blum believes that Home Price Protection is potentially the best remedy yet for our ailing consumer confidence. â€œPeople canâ€™t sell their homes right now and get a fair price,â€ explains Blum, founder and owner of The Financial News & Information Service. â€œWhen people start finding out that they can buy a house and not risk their hard-earned downpayment, then weâ€™ll be able to address the pent-up demand for housing and get buyers off the fence.â€
How We Got to Where We Are
The reason why the time may be ripe for a concept like Home Price Protection is because we, as consumers, have been burnedâ€¦badly. Weâ€™re wary, fearful and not willing to take risks, no matter how good the deal may seem.
According to Blum, the damage inflicted upon consumer confidence predates the housing crash to the dot-com debacle in 2000. â€œStock prices were driven down to the point where investors were hemorrhaging losses. The Federal Reserve started driving the interest rate down and investors turned to real estate. Wall Street got in early and made their killing, but the average guy got in over his head and was left holding the short end of the stick.â€
And â€œthe average guyâ€ is exactly what most American homeowners look like. â€œUnfortunately, the overwhelming majority of Americans had their retirement plans wrapped up in the equity of their homes,â€ says Blum. â€œTheir equity is now gone and they are left feeling abused and taken advantage of.
â€œHousing is very susceptible to the downward fear-based cycle,â€ adds Blum. â€œItâ€™s about fear of loss. If youâ€™re putting ten percent down on a $200,000 house, thatâ€™s a lot of money. It takes the average person a long time to accumulate $20,000. So everyoneâ€™s waiting for the bottom of the cycle before they jump into the market.â€
According to John Rodkin, a lecturer at Stanford Law School, unemployment is at the root of the housing market dilemma. â€œWorkforce mobility is very low right now relative to how it usually is,â€ says Rodkin. â€œA lot of that comes from the housing burst. People donâ€™t have the assets or credit to go somewhere else. Workforce mobility contributes to structural unemploymentâ€”people canâ€™t move where the jobs are and that has a huge impact on housing.â€
Blum agrees. â€œWhen people are fearful about keeping their jobs, they donâ€™t spend money. They want to preserve as much capital as they possibly can. The lack of consumer confidence in home investment is still palpable.â€
Equity Protection: A Consumer Lifeline?
As Blum bluntly puts it, â€œWe need something dramatic to turn the tide or we could be in the doldrums for quite a while longer.â€
Many feel that â€œsomethingâ€ is equity protection.
Rodkin has been researching the housing market and equity assurance plans since 2002 and is co-author of â€œHome Equity Insurance: A Pilot Project.â€ He looks back to a 1970s case study in Oak Park, Illinois, a community area inflicted with a downward fear cycle based on racial tensions and the phenomenon of â€œwhite flight,â€ which induced decreasing home values.
â€œTo counter this situation, the Illinois government guaranteed a floor to home values, which basically said to people, â€˜You donâ€™t have to race to sell your house; weâ€™ll guarantee the floor and protect your equity.â€™ Placing a floor on home values stops the fear, which then allows you to solve other problems, like foreclosures and underwater homeowners. Once you provide relief in these areas, then you can start unclogging the system and give people the ability to sell homes.â€
In the mid-â€™90s, Robert Schiller of Case-Schiller fame, authored a report on the idea of home equity protection and, since then, other economists have chimed in with support of the concept. According to Rodkin, however, bringing the concept to actuality was very difficult.
â€œThe regulatory environment could be very murky,â€ he explains. â€œIf the product was developed as an insurance product, then every state would have to make its own decision depending on state laws.â€
Home Price Protection, on the other hand, is a contract designed to guard homeowners against the risk of a continued or ensuing market decline.
â€œIf youâ€™re looking to break the cycle of fear, then you want to get a contract into the hands of people so they know they now have a firm floor thatâ€™s going to be there no matter what,â€ says Rodkin. â€œIf this is created as an insurance product, thereâ€™s worry that if they canâ€™t make the payments, then the coverage is gone. If you have a tough financial year and canâ€™t meet your premium, you could end up losing the equity insurance in the year you need it most.
â€œWith the EquityLock approach, you pay for the product one time,â€ Rodkin continues. â€œAs the vagaries of the market go up and down, that Home Price Protection contract is still in place. Stability wise, it ends up being better for the housing market to get this type of contract into the hands of homeowners.â€
The Evolution of EquityLock
The value of equity protection came to the attention of EquityLock co-founder Mike Bishop when he was working on a number of big-ticket real estate transactions back in 2004, including commercial and vacation-type developments. A contract to prevent a propertyâ€™s resale value from changing should there be an adjustment in the market was just what he needed to get his projects off the ground.
Bishop soon realized an equity protection product could be of value to individual home buyers as well. But this was in 2005, when the home buyer had a different mindsetâ€”real estate was a sure thing and equity protection was deemed unnecessary. Unfortunately, that attitude was to soon change.
In 2009, Bishop reconnected with T.J. Agresti, a colleague from a previous career, and the two soon assembled a team of financial, insurance and risk management professionals, and developed the Home Price Protection product. Rusinoff, a veteran of the insurance and financial services industries, came into the picture in 2010 to vet the project before the team officially rolled it out to market.
Rusinoff determined that the product and concept were indeed viable, and that the timing was critical. â€œPeople were so skeptical and there was so much turmoil, that a calming voice was desperately needed,â€ says Rusinoff. â€œIn places like Oak Park and Syracuse, New York, this strategy had been proven to protect the confidence of homeowners and, therefore, those markets preserved the value of their homes. We realized Home Price Protection could be the right thing for housing and the economy on a national level.â€
Helping Consumersâ€¦and Communities
For Rusinoff, Home Price Protection is a critical component to a personâ€™s overall investment strategy.
â€œTypically, a home purchase represents the largest asset in a personâ€™s net worth, but most people donâ€™t have the ability to manage that risk by buying four different houses in four different markets,â€ Rusinoff explains. â€œThey have the ability to care for and update the home, but they canâ€™t control what has the largest effect on their homeâ€™s valueâ€”market conditions and the value of homes around them. Home Price Protection allows them to now manage the risk of the market itself.â€
While Home Price Protection brings immediate relief to individual homeowners, it also holds promise for improving neighborhood home values and the foreclosure crisis at large.
â€œOne of the biggest problems the housing market is facing is the effect of foreclosures on the values of other homes in the area,â€ says Rusinoff. â€œEach foreclosure home that gets sold for 50 percent of its actual value becomes a comparable price in your neighborhood for your home. Weâ€™re finding that banks and other institutions with a large amount of REO inventory are comfortable putting those properties on the market at market value and allowing them to be sold through their REALTORÂ® channels, as opposed to selling them at auction, if thereâ€™s a Home Price Protection contract attached to it. They know this will help sell the home faster and for more.â€
Home Price Protection is actually designed to bolster the overall value of a community, according to Rusinoff. â€œIf youâ€™re going to provide some protection around the market, it has to be done in a way that allows homeowners to do whatâ€™s in the best interest of the home as opposed to designing a product that allows the homeowner to live hard, trash the home and then leave. Our product allows you to do all the things you would do to improve the homeâ€™s value without having it count against you. If the market is down when you sell, you still get paid.â€
The larger impact of a product like Home Price Protection is the ripple effect it could have on the economy at large. â€œItâ€™s a phenomenon that starts with someone feeling like theyâ€™re not going to get burned when they sell their home,â€ says Rusinoff. â€œIf people have more peace of mind, that means more confidence will move into the housing market. More people moving into the housing market creates a trickle-down effectâ€”youâ€™re creating jobs and adding back to the ailing economy.â€
A White Knight for Real Estate
Perhaps no one has been affected by the housing downturn more than hardworking real estate professionals.
â€œREALTORSÂ® want something that helps their listings stand out and something that will protect the buyer,â€ says Rodkin. â€œOne of the most common objections a REALTORÂ® faces is, â€˜Iâ€™m worried the price is going to go down.â€™ Having Home Price Protection in their quivers will undoubtedly help them sell more properties.â€
According to Rusinoff, itâ€™s simple: Home Price Protection helps real estate agents sell more houses faster at the listing price. â€œYouâ€™ll get greater traffic to your listings, which means youâ€™ll be able to find a buyer sooner, who will be less concerned about buying at the listing price because they know the value of the home is protected.â€
Itâ€™s easy to understand, therefore, why EquityLock has quickly garnered support from the real estate community, â€œItâ€™s been great to receive the national support weâ€™ve had from a number of real estate partners. Once a real estate agent understands how Home Price Protection works, they run with it.â€
A Quick Fix or the New Normal?
â€œWhat the economy needs is for the sales volume of housing to come back, not necessarily the prices,â€ says Rodkin. â€œWe need people to buy and sell homes. A product like Home Price Protection enables people to trade homes again.â€
But is Home Price Protection an answer to a short-term problem or is there life for the concept beyond the real estate downturn?
According to Rusinoff, itâ€™s short-sighted to think that Home Price Protection wonâ€™t be necessary once the market corrects. â€œThat assumes that you always have control of the timing of your home sale, and control of the market behavior at that time,â€ he explains. â€œYou might need to move because your Mom has fallen ill, because you have a new job or because the home youâ€™ve always wanted in the neighborhood youâ€™ve always wanted to live in is suddenly for sale. Thereâ€™s no controlling what the market conditions will be at the time you sell your home; our product provides a constant layer of protection against that.â€
Home Price Protection at a Glanceâ€¦
Protection from economic downturns â€“ A home represents the largest asset for many people and a market drop can have devastating consequences.
â€¢ EquityLock Solutions protects the asset, the individual and the community regardless of market conditions.
â€¢ The Home Price Protection contract is a financial agreement between a homeowner and EquityLock Solutions that protects a homeâ€™s value from market downturns.
Preserving your homeâ€™s value â€“ EquityLock Solutions helps homeowners to invest and improve their properties with confidence.
â€¢ Improvements to the house also affect the overall value of the community.
â€¢ When the value of one home increases, the value of the surrounding homes increases as well.
â€¢ Home Price Protection pays homeowners if the local market index declinesâ€”even if the home sells for a profit.
Not an insurance policy â€“ Home Price Protection preserves the equity or value of oneâ€™s home as a contract to manage against market risk.
â€¢ Contracts are underwritten individually and the average contract price is 1.9%, but determined individually and by market.
â€¢ The buyer can file a claim 24 months after the contract has been signed and coverage continues for 15 years.
â€¢ The contract preserves home value up to a 20% maximum decline in the index.
For more information, visit www.equitylocksolutions.com .