Home Equity Insurance & the Demise of Home Value Insurance Corporation

Journal of Applied Business Research (JABR), Volume 30, Number 6, November/December 2014

16 Pages Posted: 5 Nov 2014 Last revised: 6 Nov 2014

See all articles by Zachary Smith

Zachary Smith

Saint Leo University

Alan Harper

South University

Date Written: November 1, 2014

Abstract

This study uses the demise of the Home Value Insurance Company (HVIC) to explore whether the concept of home equity insurance is implementable. Shiller, R. and Weiss, A. (1999) and Goetzmann, W., Caplin, A., Hangen, E., Nalebuff, B., Prentce, E., Rodkin, J., Spiegel, M. and Skinner, T. (2003) have provided a platform to evaluate this concept by questioning whether a product that allows homeowners to transfer the risk associated with a decline in housing prices should be structured as insurance. This study explores the cost associated, in the U.S. Real Estate Market, with this risk transfer process in the pre- and post-mortgage crisis periods by simulating the cost of insurance using the theoretical pricing of ATM (at the money) put options based upon the Black Scholes Option Pricing Model from 1989 to 2013. As the U.S. Housing Market transitioned from the pre-crisis to the post-crisis periods the hypothetical breakeven cost of insurance increased from 0.60% to 20.85% of the starting value of the index. The demise of HVIC seems to be a cautionary tale: Given the recent changes in the underlying dynamics of the U.S. Real Estate Market it does not seem prudent (for insurers) to use insurance contracts to transfer the risk associated with a decline in the value of U.S. Residential Equity Wealth.

Keywords: Home Equity Insurance, Home Value Insurance Corporation, Black Scholes Option Pricing Model, Simulation

Suggested Citation

Smith, Zachary and Harper, Alan, Home Equity Insurance & the Demise of Home Value Insurance Corporation (November 1, 2014). Journal of Applied Business Research (JABR), Volume 30, Number 6, November/December 2014, Available at SSRN: https://ssrn.com/abstract=2518834

Zachary Smith (Contact Author)

Saint Leo University ( email )

1481 D Street #3016
Virginia Beach, VA 23459
United States

Alan Harper

South University ( email )

301 Bendix Road, Suite 100
Virginia Beach, VA 23452
United States

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