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Underwater homeowners become a smaller slice of the pie

More than 1.96 million expected to reach positive equity

underwater homeowner

Even as home values continue to recover, millions of homeowners remain so far underwater that it will take years for them to regain equity in their properties. However, the latest data from Zillow (Z) reveals that underwater borrowers are becoming a smaller and smaller piece of the pie.

In the second quarter, the national negative equity rate dropped — for the fifth consecutive month — to 23.8% of all homeowners with a mortgage, which means 12.2 million homeowners owe more on their mortgages than their homes are currently worth.

The second-quarter number is down from 13 million homeowners in the first quarter and 15.3 million during the second quarter of last year. An estimated one-third of homes are owned without a mortgage, according to Zillow.

For both homeowners with and without a mortgage, the negative equity rate was 16.7% at the end of the second quarter.

More than half of homeowners — 57% to be exact — of homeowners in negative equity are underwater by 20% or more, with 13.4% of homeowners owning more than twice the value of their home.

The latest Zillow Home Value Forecast predicted home values to rise 4.8% in the next year. If that prediction proves correct, it would take a homeowner who is underwater by 20% approximately four years to obtain positive equity.

Las Vegas, Atlanta and Orlando are the markets with the highest percentage of mortgaged homeowners in negative equity. Las Vegas has 48.4% mortgaged homeowners underwater, while Atlanta and Orlando have 44% and 39.8% underwater, respectively.

According to Zillow, the majority of the newly freed homeowners are expected to come from Los Angeles, Riverside, Calif., and Atlanta.

Zillow Chief Economist Stan Humphries believes that the widespread rising home values during the past year have played a major factor in chipping away at negative equity nationwide.

"For those homeowners who are deeply underwater, though, there is still a long row to hoe,” said Humphries. “The frustratingly slow pace of negative equity declines in the face of such robust home value appreciation is a direct result of the fact that many people in the hardest-hit markets are underwater by an enormous amount.”

“Because of this, negative equity will be a factor in these markets for years to come, constraining the supply of homes for sale and keeping people out of the market who might otherwise get involved,” he added.

DataQuick data for the second quarter shows 11.3 million homeowners still seriously underwater, down from 12.8 million a year before. DataQuick Vice President Daren Blomquist said he expects the seriously underwater number to continue to drop as home prices continue to rise, but it will be a long path to get all 11.3 million homeowners out of the seriously underwater position.

"With an average monthly price appreciation of 1.33% over the past 16 months since home prices bottomed, we are seeing about 125,000 homeowners lifted out of the seriously underwater position each month. That works out to about 1.5 million who will no longer be seriously underwater over the next year, but we expect home price appreciation to moderate over the next year and so the 1.5 million is an optimistic estimate," said Blomquist.

The Zillow Negative Equity Forecast predicts that by the second quarter of 2014, the negative equity rate will fall at least 20.9%, freeing more than 1.96 million additional homeowners nationwide.

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