Home warranties provide peace of mind

June 11, 2005|by JAMES M. WOODARD / Copley News Service

An increasing number of home sales include the protection of a home warranty plan. Let's take a new look at this coverage.

Home warranties take the form of a home service contract. They cover most of the cost of maintaining and repairing a home's major appliances and systems - such as heating, air conditioning and plumbing - during the active term of the contract. Typically, home warranties are purchased for a one-time, upfront fee when a resale home is being purchased, and the coverage is in force for one full year. In most cases, they can be extended by the homeowner for an added fee, and warranty companies usually promote such an extension.

Buyers often pay for a home warranty for the financial protection and peace of mind it offers. Sellers sometime make the investment to enhance the property's marketing appeal. Brokers welcome it because it helps sell the property and decreases the risk of liability.


One study shows that paying for home repairs is one of the top gripes expressed by homeowners. About 77 percent of surveyed owners said, in effect, that repairs to home systems or appliances are very frustrating. About 54 percent of Americans have had to repair a home system or major appliance one or more times during the past year.

American Home Shield reports its average customer uses their warranty plan twice per year. American reports that it spends about $230 million annually for repair and maintenance jobs. Last year alone, American covered about 1.2 million homes. This company claims to be the warranty firm that started this industry niche some 30 years ago.

In California, where home warranties are most frequently contracted, about 90 percent of resale home transactions include warranty protection, reports the Home Warranty Association of California.

"This record high level of home warranty sales reflects the continuing hot housing market, the high value home sellers and buyers place on warranty protection and the strong concern about home repairs," said Mark Lightfoot, HWAC president.

Lightfoot said the typical home warranty customer uses his or her contract about twice a year.

"This means customers are receiving good value for their invested dollars, particularly when you consider that the cost of a one-year warranty averages around $250," he said. "It's a good value in today's market where costs of home repairs are growing," he said.

It should be noted that most home warranty contracts do not cover acts of nature - flooding, wind damage, etc. They basically protect homeowners from costs of everyday breakdowns of their home's heating and cooling systems, water heaters, dishwashers and other appliances. Customers pay a "service fee" every time a contractor is sent to their home to satisfy a claim.

Q: Who are the biggest buyers of new homes these days?

A: Young families and individuals are the primary buyers of new homes, reports the National Association of Home Builders. The most active young buyers are from Generation X, those born in the 1960s and '70s, and Generation Y, those born after 1979. These groups are purchasing 55 percent of all new homes and are fast becoming the key trendsetter in U.S. housing markets, reports the U.S. Census Bureau and the NAHB.

Generation X buyers account for about 28 percent of all U.S. households. Yet they were responsible for about 49 percent of all new home purchases in the most recent reporting period. Members of Generation Y purchased 6 percent of new homes, and baby boomers bought 33 percent. Seniors over age 60 purchased about 12 percent.

Another NAHB study reveals that 37 percent of Gen-Xers and 27 percent of individuals from Generation Y intend to buy homes in the next two years, compared to just 13 percent of baby boomers and 6 percent of seniors. The younger buyers might be thriftier than their parents with respect to their housing choices. However, those families moving up say they want a home that's about 50 percent larger than their current residence.

Q: Are Federal Housing Administration-insured reverse mortgages still available?

A: Yes, but the FHA's Home Equity Conversion Mortgage program has nearly reached its 150,000-loan cap established by Congress. The cap was recently interpreted as applying to all such loans ever written, not the current portfolio of outstanding loans, reports the Mortgage Bankers Association.

MBA's data indicates that since the program's inception in 1989, FHA has endorsed close to 140,000 HECM loans. At current endorsement rates, the cap will likely be reached in early summer.

While sales of these loans grew moderately during the 1990s - rising from several hundred loans to an average of about 7,000 per year - since 2001 the program has grown exponentially, with more than 37,000 HECM loans insured by FHA last year. MBA predicts this year's volume will exceed that of last year by a strong margin.

Q: Are discount real estate brokers reliable?

The Herald-Mail Articles