A long-awaited study by the Department of Housing and Urban Development on warranties for existing homes concludes that only 11 per cent of buyers would elect such coverage if it were offered by the federal government. Less than 5 per cent of resale houses now carry any kind of protection against unexpected home repairs.
The HUD report was made in response to a congressional request for a feasibility study of a warranty program for not only FHA-insured houses, but for the more than 3 million previously occupied houses sold annually.
HUD's analysis of the home warranty market indicated that with a $225 premium - the break even price - twice the current number of contract holders would buy one from either a public or private warrantor. The estimate is based on the assumption that all existing home buyers would be required to state whether or not they desired coverage. One reason so few contracts are now in effect is public ignorance of this relatively new concept.
No recommendations were made in the report, but project director Norris Evans said last week that the findings pretty well rule out the possibility HUD Secretary Patricia Roberts Harris will decide to propose a national program.
According to Evans, even a voluntary program involving the public would require a large increase in HUD staff and raise questions about the propriety of HUD getting into the private market. Such a system would mean that home buyers using conventional financing would subsidize FHA buyers' repairs.
The nascent home warranty industry has been fearful that a low-cost government program would undercut it. Legislation making a warrant mandatory for the private sector could swamp the dozen or so companies now in business and make way for fly-by-night operators.
Most feared of all, said Cary Cooper, president of Certified Homes Corp. of Columbia, Md., is the specter of federal regulation in a industry that is now sparingly regulated. Only a few states now regulate the amount of reserves a warranty company must keep on hand to pay claims.
As far as coverage for FHA-backed houses alone is concerned, the report concludes there is no way it could pay for itself and attract even 5 per cent of FHA buyers.
Subsidizing a mandatory program for the 191,000 FHA-backed mortgages made each year at the rate of $100 each (assuming the warranty holder paid a $240 premium) would cost the taxpayer $1.9 million annually.
Premiums for home warranties in the private sector now run between $100 and $450, depending on the cost of the existing house, the systems covered and the the deductible. The average for a $70,000 house is $235 for one year. The reason an FHA warranty would be so much more expensive is that FHA homes tend to be older and therefore more subject to repairs. The report notes that the average cost of repairing a major unexpected housing problem for 8 out of 10 FHA homeowners is $530. For the half of non-FHA homeowners who experience major problems, the average repair is $481.
Structural and mechanical problems account for 70 per cent of all major repairs; appliances, 20 per cent. Two-fifths of the problems involve plumbing and roofs. Roofs are, on the average, the most expensive to repair.
Through telephone surveys with 1,814 homeowners, the contractor, Mathematica Policy Research of Princeton, calculated that the average cost of roof repair was $756 for non-FHA, $817 for FHA.