Housing Bubble Insurance

Can you protect the value of your home when the housing market drops?
By Daniel Gross
Posted Friday, Nov. 18, 2005, at 6:08 AM ET

Thanks to rising prices, homeowners increasingly view their houses as investments. At the end of 2004, U.S. residential real estate was worth $18.6 trillion—more than the entire stock market. The National Association of Realtors reported that 23 percent of homes bought in 2004 were investment properties. It's no surprise that there's now a company, Condoflip.com, which aims to let people trade homes the way they trade stocks.

More people have more riding on their homes—and second homes—as investments than ever before. And yet there's no good way to insure those investments. Homeowners policies only cover the infrastructure from physical damage. But if your home falls in value from $1 million to $750,000 thanks to market dynamics, you can't call Allstate. So far, the only methods of hedging against the value of your home are crude and inefficient. You can short the stocks of publicly held home-building companies, like Toll Brothers or Pulte, or buy and sell options on them. But when you do so, you're betting on management and all sorts of other factors. There's no guarantee Toll will fall when the value of your house drops.