NCPA - National Center for Policy Analysis

Economists Propose Home Equity Insurance

June 22, 1999

Although the share of individuals owning stocks has grown markedly in the past decade or so, the typical household in 1995 had 66 percent of its total assets in real estate -- its stake in the family home.

Some economists say this is not a very diversified portfolio. What if the value of the home falls? They suggest families would do better to stash some of their wealth in stocks and other equities.

Economists Robert Shiller and Allan Weiss have come up with a novel idea to help homeowners protect that major investment, their home, from regional real estate fluctuations: home equity insurance. The idea is that the current market value of the house would be insured.

The economists suggest several problems with their own proposal:

  • Realizing that the insurance company would have to bear all the risks of a devalued house, might not the homeowner have less of an incentive to keep his property in tip-top condition?
  • Having no concern with the resale value of the home, might the owner decorate or remodel the home in a self-indulgent manner -- to his own idiosyncratic taste?
  • Or persons might try fraud -- buying and selling houses at nonmarket prices.

Shiller and Weiss say that one way to avoid such problems might be to "offer insurance not on the change in price of the individual home but on the change in a real estate index for the neighborhood in which the home is situated."

Source: Macroscope, "A Nation of Shareholders?" Investor's Business Daily, June 21, 1999.


Browse more articles on Economic Issues