The Department of Home Security
Do you pay out more dollars or fewer dollars for the alarm than the system will save you?
There was a (for me) thought-provoking article in The New York Times the other day on weighing the value of home security systems.
Our house had an alarm when we moved into it 11 years ago. It was not particularly useful. With children too young for school, there was somebody in the house almost 24/7 so the alarm almost never got turned on. After a while it broke, I never bothered to get it fixed, and eventually I just canceled the contract. All that is left now are some unobtrusive but ugly motion detectors in the corners of some rooms.
Home alarms are more about psychology than economics. That much is clear from the overwrought TV commercials the alarm companies run. They do not mention the discount you will get on your insurance or the average reduction in property loss. Instead we get unlikely dramas with burglars in ski masks and foiled home invasions.
But, just for fun, let us pick up the theme of the Times piece: Are home security systems worth the money in strictly economic terms? Do you pay out more dollars or fewer dollars for the alarm than the system will save you?
On the cost side, there is the installation cost of the system itself as well as the ongoing cost of monitoring by the alarm company. Best I can remember, I think we paid $400 a year for monitoring. After poking around on the Web for a bit I think this is broadly typical.
Of course, I have no idea what the initial installation cost was. Alarm systems are priced like cell phones, heavily subsidized when attached to multi-year contracts. And like cell phones, the most basic systems approach free-with-contract, while the more elaborate ones can carry a noticeable upfront cost. The one here had bells and whistles, so I am going to assume it set the previous owner back a few thousand dollars.
On the benefit side, there is the discount you get on your homeowners insurance and the expected reduction in loss from burglary. The author of the Times article says he saved $222 a year on his insurance, and that sounds like the right ballpark for what we were saving. I remember the annual fee being about $150 higher than the insurance savings.
What you will save, on average, from losses due to getting your stuff stolen is a much more slippery number. The Times cites a statistic that the average loss for a home with a security system is $2,077 lower than for homes without a system. I am not entirely comfortable with that calculation. For one thing, it is possible that alarms are more common in rougher neighborhoods where the residents have less valuable things to steal. Or perhaps the opposite is true, that richer folks with more stuff to take are more likely to have an alarm.
In either case, the loss-per-incident figure is not quite what I want to know anyway. I thought a major benefit from an alarm was supposed to be deterring break-ins altogether. What I really want is the average loss per year due to burglary for alarmed and unalarmed houses.
It took me a moment to realize it, but I already have that number. It is the discount on the homeowners insurance. Insurance companies are pretty good at this sort of thing. It is possible that the reduction in average annual losses due to an alarm, i.e., the reduction in the amount the insurance company will have to pay out, is somewhat greater than the insurance premium discount, but it is unlikely to be much greater, and it is certainly not any lower.
Moreover, this observation quickly leads to the epiphany that the reduction in expected loss is not something you need to know after all. Including it in the calculation would be double-counting. The insurance company will pay for your loss, alarm or not. If you do have an alarm, you essentially need less insurance and so you will save some money.
If the money you save on insurance is more than the alarm costs, then the alarm is a good investment. I gather this is a relatively unlikely event. And the reason for that is not too subtle. As the Times article describes, home alarms just do not work all that well. Eighty percent of alarms from these systems are false, and the police respond to such calls with all the urgency that you would expect from that statistic.
Which leaves us with the noneconomic “peace of mind” reasons for buying an alarm. I am ambivalent about this as a justification. On the one hand, if it really makes a person happy to spend money in this way, then who am I to object? There are few such opportunities in life. On the other, I don’t think it should make anybody happy.
In 2007 there were 2.18 million burglaries in the U.S., of which 68% were at residences. There were 128 million housing units in the U.S. in 2007. So, on average, the chances of a U.S. home being burgled in a year is something like 1 in 86. And an alarm will not eliminate the chance of burglary. It will only, we presume, somewhat reduce that already small chance and, apparently, reduce the size of the loss. Does paying $100-plus a year for this really make you happier?
Related reading at Bad Money Advice:
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