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Home Equity Insurance

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  • Shiller, Robert J
  • Weiss, Allan N

Abstract

Home equity insurance policies--policies insuring homeowners against declines in the prices of their homes--would bear some resemblance both to ordinary insurance and to financial hedging vehicles. A menu of choices for the design of such policies is presented here, and conceptual issues are discussed. Choices include pass-through futures and options, in which the insurance company in effect serves as a retailer to homeowners of short positions in real estate futures markets or of put options on real estate indices. Another choice is a life-event-triggered insurance policy, in which the homeowner pays regular fixed insurance premia and is entitled to a claim if both a sufficient decline in the real estate price index and a specified life event (such as a move beyond a certain geographical distance) occur. Pricing of the premia to cover loss experience is derived, and tables of break-even policy premia are shown, based on estimated models of Los Angeles housing prices from 1971 to 1994. Copyright 1999 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

Volume (Year): 19 (1999)
Issue (Month): 1 (July)
Pages: 21-47

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Handle: RePEc:kap:jrefec:v:19:y:1999:i:1:p:21-47

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Web page: http://www.springerlink.com/link.asp?id=102945

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  1. Karl E. Case & Robert J. Shiller, 1989. "The Efficiency of the Market for Single-Family Homes," NBER Working Papers 2506, National Bureau of Economic Research, Inc.
  2. O'Brien, Thomas J & Selby, Michael J P, 1986. "Option Pricing Theory and Asset Expectations: A Review and Discussion in Tribute to James Boness," The Financial Review, Eastern Finance Association, vol. 21(4), pages 399-418, November.
  3. Constantinides, George M, 1978. "Market Risk Adjustment in Project Valuation," Journal of Finance, American Finance Association, vol. 33(2), pages 603-16, May.
  4. Takatoshi Ito & Keiko Nosse Hirono, 1994. "Efficiency of the Tokyo Housing Market," NBER Working Papers 4382, National Bureau of Economic Research, Inc.
  5. McDonald, Robert & Siegel, Daniel, 1984. " Option Pricing When the Underlying Asset Earns a Below-Equilibrium Rate of Return: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 261-65, March.
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  7. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
  8. Takatoshi Ito & Keiko Nosse Hirono, 1993. "Efficiency of the Tokyo Housing Market," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(1), pages 1-32, July.
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