Are Home Warranties Worth it? A Study in the Richmond Housing Market

Home warranties are often criticized for their lack of worth to a potential home buyer. We argue that both home buyers and home sellers may benefit from warranties, though the benefits are very small. If home buyers are risk averse, home warranties provide a valuable form of insurance. Sellers can then extract this benefit in the form of either higher prices, increased probability of sale, or faster sales. Using a large data set from the Richmond M.L.S. that spans 2000 - 2015, our preliminary results show that home warranties do indeed benefit home sellers by increasing the probability of sale and decreasing time on market, though this latter effect is limited for higher priced homes. Warranties offered on homes priced above $288,588.89 sellers induce longer time on markets and reduced probability of sales. Our results also suggest that agents who sell their own properties are 13-15% more likely to offer warranties, suggesting some principal-agent issues may be present. However the benefits are empirically not present in our results. Surprisingly, warranties tend to reduce the price of a home by $6,081, leading us to conclude that home warranties are used by agents who want to sell homes quickly and for sellers with already low prices. Our main conclusion is that home warranties are used as a substitute for lowering price, and is used by sellers whose price/time on market tradeoff who favor faster sales and lower prices relative to slower sales but higher prices