How Many Homeowners Are Still Underwater?

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With the help of low inventory levels and unprecedented actions by the Federal Reserve, higher home prices have been a life preserver to the real estate market. Millions of Americans are no longer underwater on their mortgages, but millions of homeowners are still struggling in the wake of the housing bubble.

In the fourth quarter of 2013, the national negative equity rate declined to 19.4 percent of all homeowners with a mortgage, according to Zillow’s latest Negative Equity Report. The reduction comes after the previous quarter witnessed the fastest decline on record. In comparison, 27.5 percent of homeowners with a mortgage were underwater one year earlier. 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 years. In fact, this is the first time in years that the rate dipped below 20 percent. Almost 3.9 million homeowners were freed from negative equity during the final three months of 2013. While this is a significant improvement, many people are still underwater, especially in certain states. Nevada leads the nation with 34 percent of borrowers owing more than their homes are worth, followed by Georgia at 32 percent.

Across the nation, there are approximately 9.8 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 37.6 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.

Looking forward, Zillow expects the negative equity rate to reach 17.2 percent by the end of 2014, which will help free up inventory and return home prices to more sustainable gains: “As home values have continued to rise over the past year, millions of underwater homeowners have come up for air and are finally able to put their home on the market. This increase in inventory should, in turn, help create a more balanced home shopping season than we’ve seen in the past few years, with buyers having more choice and perhaps less competition.”

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