Journal of Real Estate Finance and Economics, 19:1, 21±47 (1999)
# 1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Home Equity Insurance
ROBERT J. SHILLER
Cowles Foundation, Yale University, New Haven, CT 06520
ALLAN N. WEISS
Case Shiller Weiss, Inc., 1698 Massachusetts Ave., Cambridge, MA 02138
Home equity insurance policiesÐpolicies insuring homeowners against declines in the prices of their homesÐ
would bear some resemblance both to ordinary insurance and to ®nancial 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 ®xed insurance premia and is entitled to a claim if both a
suf®cient decline in the real estate price index and a speci®ed 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.
Key Words: real estate risk, insurance, hedging, mortgages
In this article we propose insurance policies to enable individuals to protect themselves
against the risks of declines in the prices of their homes. As far as we have been able to
determine, there is no precedent for true insurance policies on home price.
despite the neglect of such home equity insurance policies in the past, these policies could
be extremely important. The risk of decline in the market value of homes is far greater than
the risk of ®re or other physical disaster; the potential signi®cance of an insurance industry
that protects market value of homes is much larger than that of the existing homeowner's
property insurance industry. The market value of residential real estate in the United States
was approximately $6 trillion in 1990, substantially larger than the market value of the
equities traded on all stock exchanges in the United States (see Miles et al., 1991).
Individual holdings of residential real estate tend to be not only extremely undiversi®ed,
concentrated in single geographic areas, but also often leveraged up through mortgage
Since true insurance products on real estate have never really been attempted, there are
some fundamental problems to be worked out. There are two basic categories of problems,
which we attempt to address here. The ®rst is the economic problem: creating policies that
serve the particular needs of homeowners well. We must make sure that the insurance
policies cover as much of the homeowners' risk as possible without creating excessive
moral-hazard problems and that the policies appropriately address the owners'
uncertainties about selling the home or otherwise making use of the home equity. The