How Many Homes in the Country Are Still Underwater?

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In addition to low housing inventory, the unprecedented amount of monetary easing from the Federal Reserve has acted like a life preserver to the real estate market. However, many Americans still find themselves underwater or anchored to their current homes.

In the third-quarter of 2013, the national negative equity rate declined at its fastest pace on record to 21 percent of all homeowners with a mortgage, according to Zillow’s latest Negative Equity Report. In comparison, 23.8 percent of homeowners with a mortgage were underwater in the previous quarter. The peak was made in the first quarter of 2012 at 31.4 percent.

The national negative equity rate has now declined for six consecutive quarters, and fell below 25 percent earlier this year for the first time since Zillow began using its current methodology in 2011. In fact, around 1.4 million American homeowners were freed from negative equity during the third quarter. While this is a significant improvement, many people are still trapped in their homes.

Across the nation, there are approximately 10.8 million homeowners who still owe more than their homes are currently worth. Zillow also finds that the effective negative equity rate — homeowners with less than 20 percent home equity — is at 39.2 percent. Meanwhile, roughly one in seven homeowners owe more than double what their home is worth.

A homeowner technically reaches positive equity when the market value of the house exceeds the outstanding loan balance by any amount, but the associated costs of listing a house and moving prevents many Americans from selling. Zillow notes that listing a home for sale and buying a new one typically requires equity of 20 percent or more to comfortably meet related expenses.

“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.”

With the help of centrally-planned interest rates and low inventory levels, home prices have been on the rise. In September, home prices across the nation increased on a year-over-year basis for the 19th consecutive month. According to CoreLogic, a property information and analytics provider, home prices jumped 12 percent in September from a year earlier. In fact, home prices have posted double-digit gains for eight straight months.

Home prices are still 17.4 percent below their bubble peak in April 2006, but every state logged an annual increase in September. West Virginia and Arkansas posted the smallest gains at 0.9 percent and 1.3 percent, respectively. Looking ahead, Zillow predicts the negative equity rate among all homeowners with a mortgage will decline to 18.8 percent by the third quarter of 2014.

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