Go Back

Despite Rising Home Values, Millions Still Underwater

Zillow - Cory Hopkins

National home values have been rising at a robust clip in 2013, jumping 6 percent in July compared with July 2012. And as home values rise, negative equity falls. The national negative equity rate fell for the fifth straight quarter in the second quarter of this year, to 23.8 percent of all homeowners with a mortgage, according to the second quarter Zillow Negative Equity Report. This is the first time the U.S. negative equity rate has fallen below 25 percent since Zillow began using its current methodology for tracking negative equity in early 2011.

Approximately 12.2 million homeowners with a mortgage were in negative equity, or underwater, at the end of the second quarter, owing more on their mortgages than their homes are worth. That is down from 13 million homeowners in the first quarter and 15.3 million at the same time last year. Roughly one-third of homes are owned without a mortgage. The negative equity rate among all homeowners, both with and without a mortgage, was 16.7 percent at the end of the second quarter.

But even though millions of homeowners have been freed from negative equity as a result of rising home values, millions more remain trapped. And many of them are so far underwater — owing so much more on their mortgages than their homes could fetch on the open market — it may take years for them to surface.

Nationwide, more than half (57 percent) of homeowners in negative equity are underwater by 20 percent or more, and roughly one in seven (13.4 percent) owes more than twice what their home is worth. According to the most recent Zillow Home Value Forecast, home values are expected to rise 4.8 percent in the next year. Assuming appreciation at that rate going forward, it would take a homeowner underwater by 20 percent roughly four years to reach positive equity.

“Widespread rising home values during the past year have helped chip away at negative equity nationwide, helping many homeowners who were only modestly underwater to come up for air. For those homeowners who are deeply underwater, though, there is still a long row to hoe,” said Zillow Chief Economist Dr. Stan Humphries. “The frustratingly slow pace of negative equity declines in the face of such robust home value appreciation is a direct result of the fact that many people in the hardest-hit markets are underwater by an enormous amount. Because of this, negative equity will be a factor in these markets for years to come, constraining the supply of homes for sale and keeping people out of the market who might otherwise get involved.”

Many more homeowners, while technically not underwater, may still have trouble moving from their current homes. Listing a home for sale and buying a new one generally requires equity of 20 percent or more to comfortably meet related expenses, including the down payment for a new home and associated closing costs, taxes and real estate agents’ fees. The “effective” negative equity rate, which includes those homeowners with a mortgage with 20 percent or less equity in their homes, fell to 41.9 percent in the second quarter, from 43.6 percent in the first quarter.

But home values keep rising, and as they do, more borrowers will steadily be freed from negative equity. The second quarter Zillow Negative Equity Forecast predicts the negative equity rate among all homeowners with a mortgage will fall to at least 20.9 percent by the second quarter of 2014, lifting more than 1.9 million additional homeowners nationwide into positive equity.

© 2006 - 2020. All Rights Reserved.