Negative Equity: A New Way of Life in the Recovery

Negative Equity: A New Way of Life in the Recovery

11/22/2013 BY: KRISTA FRANKS BROCK

Fast-paced price increases have helped bring many underwater homeowners afloat. In the third quarter, 1.4 million homeowners rose to the surface as their home values once again outranked their equity, according to the Zillow Negative Equity Report released Thursday.

The third quarter drop in negative equity rate was the largest on Zillow’s record, which dates back to the second quarter of 2011.

The negative equity rate now stands at 21 percent, down about one-third from its peak of 31.4 percent and from 23.8 percent in the second quarter, according to Zillow.

“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,” said Stan Humphries, chief economist at Zillow.

“We should feel good that we’re moving in the right direction and at a fast clip,” Humphries said.

However, with analysts—including Humphries— predicting moderating price gains in the coming year, that “fast clip” is set for decline.

In fact, Humphries says negative equity will remain a persistent trait of the housing market and become “part of the new normal” for several years.

While 4.9 million homeowners have risen from underwater since the negative equity peak in 2011, one in five homeowners with a mortgage remains underwater today, according to Zillow’s data.

That’s about 10.8 million homeowners currently in a negative equity position.

The “effective” negative equity rate is even higher at 39.2 percent in the third quarter, according to Zillow.

The “effective” rate includes all homeowners who have less than 20 percent equity in their homes. This rate is significant because selling a home and purchasing a new one “requires equity of 20 percent or more to comfortably meet related expenses,” according to Zillow.

More than half of underwater homeowners are underwater by at least 20 percent, Zillow stated. Assuming Zillow’s estimate for home price growth at 3.8 percent over the next year, it will take a homeowner with 20 percent negative equity five years to rise to the surface.

Of the nation’s 30 largest metros, those with the highest concentration of negative equity are Las Vegas at 30.6 percent, Atlanta at 38.2 percent, and Orlando at 34.2 percent.

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