Bad news for potential first-time home buyers: The affordable homes most sought after by these buyers are being kept off the market because, in part, these are almost three times more likely to be underwater than most expensive homes, according to the Zillow Negative Equity Report for the first quarter.
Zillow reports that the national negative equity rate fell to 18.8% in the first quarter, with almost 9.7 million American homeowners with a mortgage underwater.
Among all homes with a mortgage nationwide, roughly one in three (30.2%) priced within the bottom third of home values was underwater in the first quarter, compared to 18.1% of homes in the middle third and 10.7% of homes in the top third.
It is very difficult for an underwater homeowner to list a home for sale without engaging in a short sale or bringing cash to the closing table, which is a major contributor to inventory shortages across much of the country, even as negative equity slowly recedes, Zillow explains.
More than one-third of homeowners with a mortgage (36.9%) are effectively underwater – unable to sell their homes for enough profit to comfortably meet expenses related to selling a home and afford a down payment on a new one.
‘The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,’ says Stan Humphries, chief economist of Zillow.
‘It's hard to overstate just how much of a drag on the housing market negative equity really is, especially at the lower end of the market, which represents those homes typically most affordable for first-time buyers. Negative equity constrains inventory, which helps drive home values higher, which, in turn, makes those homes that are available that much less affordable," he explains.
Negative equity has fallen for eight consecutive quarters but fell at its lowest pace in almost two years in the first quarter as home value growth slowed. Negative equity fell from 25.4% in the first quarter of 2013 and 19.4% in the fourth quarter, while the pace of annual home value growth slowed to 5.7% in the first quarter of this y ear, from 6.6% at the end of the fourth quarter of last.
Looking ahead, the national negative equity rate is expected to fall to 17% of all homeowners with a mortgage by the first quarter of 2015, according to the Zillow Negative Equity Forecast.
At the end of the first quarter, the number of homes foreclosed nationwide fell to 4.9 homes per 10,000, from 5.4 homes per 10,000 at the same time last year. As foreclosure activity continues to fall, the pace of negative equity improvement will also slow, as homeowners' debt is wiped from lenders' books following foreclosure.