Negative Equity Rate Falls at Fastest Pace Ever in Q3
The number of underwater homeowners, those owing more on their home than it is worth, fell at its fastest pace ever in the third quarter, dropping to 21 percent of all homeowners with a mortgage, according to Zillow. Roughly 10.8 million American homeowners were underwater at the end of the third quarter, down more than 4.9 million from the peak in the first quarter of 2012.
As home values rise, negative equity falls. At the end of the third quarter, national home values rose at a 6.4 percent annual pace, which helped free roughly 1.4 million homeowners nationwide from negative equity during the three-month period from July through September. Over the past year, the number of homeowners with negative equity has generally fallen fastest in states in the West and Southwest.
Below are the top 10 states where the percent change in the number of homeowners with negative equity has fallen the most over the past year:
But despite the improvements, more than one in five American homeowners with a mortgage remains underwater, a stubbornly high rate that is contributing to inventory shortages and holding back a full market recovery. The “effective” negative equity rate, which includes those homeowners with a mortgage with 20 percent or less equity in their homes, was 39.2 percent in the third quarter. Listing a home for sale and buying a new one generally requires equity of 20 percent or more to comfortably meet related expenses.
With the pace of home value appreciation slowing, the pace of negative equity improvement will also slow. The negative equity rate is expected to fall to 18.8 percent by the third quarter of 2014, according to the Zillow Negative Equity Forecast. And more than half of homeowners with negative equity (55.6 percent) are 20 percent or more underwater. According to the most recent Zillow Home Value Forecast, home values are expected to rise 3.8 percent in the next year. Assuming appreciation at that rate going forward, it would take a homeowner underwater by 20 percent roughly five years to reach positive equity.
“Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter. We should feel good that we’re moving in the right direction and at a fast clip,” said Zillow Chief Economist Dr. Stan Humphries. “But negative equity will remain a factor for years to come, and must be considered part of the new normal in the housing market. Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help.”
