Negative home equity decreased in the third quarter, with the greatest decreases seen among lower-end homes, according to the Q3 Negative Equity report from Zillow.

The number of homes with negative equity fell to 10.9% of total homes in the third quarter this year, down from 13.4% last year and from 12.1% in the second quarter.

Negative equity continues to recede as home prices increase, growing ever closer to their 2007 peaks.

Earlier this month, a report from CoreLogic also showed an increase in home equity for the third quarter of about 10% or $726 billion from last year. 

The U.S. negative equity rate is the share of all homeowners with a mortgage that is underwater, owing more on their home than it is worth. When home values fall, as they did dramatically between mid-2007 and late 2011, negative equity rises. When home values rise, negative equity recedes.

Home values at the low end of the market are rising much faster than those at the higher end due to the large demand for starter homes. Home values for the homes were rising 9.2% annually by the end of the third quarter. This is compared to the 4.3% increase for homes at the higher end of the market.

Because of this increase, negative equity for bottom-tier homes receded more quickly during the third quarter, according to Zillow’s report. The negative equity rate among bottom-third homes fell from 19.4% to 16.9%, a drop of 2.5 percentage points. Over the same time, the negative equity rate among top-tier homes fell from 7.3% to 6.8%, a drop of just 0.5 percentage points.

However, while the gap may be narrowing, its spread is still significant. In fact, in some areas it reaches over 20 percentage points.

“In Detroit, for example, the negative equity rate among top-tier homes is 4.4%; among bottom-tier homes, the negative equity rate is almost ten times higher at 39% – a gap of 34.6 percentage points, the largest gap among the 35 largest metros analyzed,” Zillow Chief Economist Svenja Gudell wrote in the report.

Other metros with a spread of more than 20 points includes Cleveland with 28.1 points, St. Louis with 22 points, Atlanta with 21 points and Chicago with 20.5 points.

The negative equity that remains among bottom-tier homes can also help create a shortaged of inventory as homeowners in negative equity find it hard, if not impossible, to sell and buy a new home, according to the report.

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