You May Want to Lower Your Home Insurance to Keep Up with Deflation

If your home’s value falls due to a softening market, do you still have to insure it for the value it had last year?

This is a question, not a conclusion. And it may be a question that no one can really answer. But the query arises because of a report released this July by the Center for Economic and Policy Research called The Impact of the Housing Crash on Family Wealth. [Note that it acknowledges that there is a housing crash.]

It outlines three different scenarios for housing prices in 2009. Number One assumes no further decline in housing prices. This does not seem likely given the fact that prices are declining about 2% a month this year. That is more in line with Number Two, which assumes a further 10% decline in housing prices in 2009. Then there is Number Three, which assumes a drop of 20% in housing prices in 2009.

[Note that none of these assume a rise in housing prices. The best case scenario is -- stable prices. Pass me the aspirin, Martha.]

In fact, it calculates that some family homes are now worth what they were in 1989.
So that leads to my question: Can I get away with insuring it for less, and at least save a couple bucks a year that way?

You can insure your house for as little as you want, really, but you really should not underinsure. You need to at least figure out the replacement cost. The good news is now that the overheated building boom has cooled off, the prices of every kind of lumber product is down dramatically.

But frankly, I bet a lot of homeowners are going to be awfully tempted to burn down houses to get insurance settlement cash in hand so they can start over.
Few will get away with it, of course. Chemical accelerants can be detected by insurance investigators and law enforcement. So remember that because you really don’t want your next home to be a concrete prison cell.