Rising Home Prices Lift Homeowners from Negative Equity

As national home prices have been steadily gaining ground back to their pre-recession levels, the number of homeowners in negative equity has been on the decline, according to a recent Zillow report.

The national negative equity rate fell for the with consecutive quarter of this year, to 23.8% of all homeowners with a mortgage, notes Zillow’s Negative Equity Report.

This is the first time the negative equity rate has fallen below 25% since Zillow began tracking negative equity with its current methodology since early 2011.

Approximately 12.2 million homeowners with a mortgage were in negative equity, owning more on their mortgages than their homes are worth, noted Zillow. This number is down from 13 million in the first quarter and 15.3 million at the same time last year.

As roughly one-third of homes are owned without a mortgage, according to Zillow’s report, the negative equity rate among all homeowners, both with and without a mortgage, was 16.7% at the end of the second quarter of 2013.

But even though millions of homeowners have been freed from negative equity as a result of rising home values, millions more are so far underwater that it may take years for them to surface, writes Zillow.

Nationwide, 57% of homeowners are in negative equity and are underwater by 20% or more, and roughly one in seven (13.4%) owes more than twice what their home is worth.

As Zillow predicts home values to rise 4.8% in the next year, it would take a homeowner underwater by 20% roughly four years to reach positive equity, that is if home prices appreciate at the expected rate going forward.

“Widespread rising home values during the past year have helped chip away at the negative equity nationwide, helping many homeowners who were only modestly underwater to come up for air,” said Dr. Stan Humphries, Zillow’s chief economist. “For those homeowners who are deeply underwater, though there is still a long row to hoe.”

Those with a large amount of negative equity may have been people in the hardest-hit markets as a direct result of the recent economic downturn, Humphries added, which have brought them 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,” Humphries said.

Looking forward, Zillow predicts the negative equity rate among all homeowners with a mortgage will fall to at least 20.9% by the second quarter of 2014, lifting more than 1.9 million additional homeowners nationwide into positive equity.

Written by Jason Oliva

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