The national negative equity rate fell at its fastest pace ever in the third quarter, dropping to 21% of all homeowners with a mortgage, according to result of the third quarter Zillow Negative Equity Report.
Zillow also reports that roughly 10.8 million American homeowners remain underwater, owing more on their home than it is worth – but down more than 4.9 million from the peak in the first quarter of 2012.
In the second quarter, the negative equity rate was 23.8% – the largest quarter-over-quarter drop since Zillow began tracking negative equity in the second quarter of 2011, the company reports. The negative equity rate among all homeowners, both with and without a mortgage, was 14.7% at the end of the third quarter, down from 16.7% in the second quarter, according to the data.
Zillow's report also says approximately 1.4 million homeowners were freed in the third quarter from the second quarter – also a high – and roughly one-third of homes are owned without a mortgage.
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, says Zillow.
The ‘effective’ negative equity rate, which includes those homeowners with a mortgage with 20% or less equity in their homes, was 39.2% in the third quarter. Zillow notes that listing a home for sale and buying a new one generally requires equity of 20% or more to comfortably meet related expenses.
With the pace of home value appreciation slowing, Zillow predicts the pace of negative equity improvement will also slow: The negative equity rate is expected to fall to 18.8% by the third quarter of 2014, according to the Zillow Negative Equity Forecast – and more than half of homeowners with negative equity (55.6%) are 20% or more underwater.
According to the most recent Zillow Home Value Forecast, home values are expected to rise 3.8% in the next year. Assuming appreciation at that rate going forward, Zillow says it would take a homeowner underwater by 20% 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,’ comments Stan Humphries, chief economist for Zillow. ‘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.’
Large metros with the highest negative equity rate in the third quarter were Las Vegas (39.6%); Atlanta (38.2%); and Orlando, Fla. (34.2%). Among the 30 largest metro areas covered by Zillow, those with the greatest decline in the number of underwater homeowners since their peak include San Jose, Calif. (-66.4% from peak); Denver (-63.3% from peak); and San Francisco (-59.6% from peak).