Millions Remain Trapped by ‘Effective’ Negative Equity, Even If They’re Not Underwater
The number of American homeowners in negative equity — or “underwater,” owing more on their mortgages than their homes are worth — continues to fall. But even if homeowners are no longer underwater, they still may be stuck in their current homes.
The national negative equity rate fell in the first quarter, to 25.4 percent of all homeowners with a mortgage, according to the first quarter Zillow Negative Equity Report. But another 18.2 percent of homeowners with mortgages, while not technically underwater, likely do not have enough equity to afford to move.
Slightly more than 13 million homeowners with a mortgage were in negative equity at the end of the first quarter. But when including homeowners with less than 20 percent home equity, the “effective” negative equity rate at the end of the first quarter was 43.6 percent, or a total of 22.3 million homeowners. These homeowners likely cannot afford a down payment for a new home or other costs associated with buying and selling a home, tying them to their current homes and contributing to inventory shortages.
A homeowner technically reaches positive equity as soon as the market value of the home exceeds the outstanding loan balance, even by 1 cent. But listing a home for sale and buying a new one generally requires equity of 20 percent or more to comfortably meet related costs.
“Reaching positive equity, even barely, is an important milestone. But things such as real estate agents’ fees and a down payment for the next home traditionally come out of the proceeds from the prior home’s sale. Without enough equity, these costs will instead have to come out of a homeowner’s pocket, leaving many still stuck,” said Zillow Chief Economist Dr. Stan Humphries. “Looking at the effective negative equity rate could explain why recent, healthy declines in the number of underwater borrowers haven’t yet translated into more homes for sale. The only cure is patience, as rising home values continue to build equity to the point where more homeowners can realistically sell.”
Among the 30 largest metro areas covered by Zillow, those with the highest effective negative equity rate, including homeowners with 20 percent equity or less, include Las Vegas (71.5 percent), Atlanta (64.1 percent) and Riverside, CA (59.7 percent).
Despite some hurdles that remain once a homeowner crosses from negative into positive equity, it is undeniably better to have some equity than none at all. The first quarter Zillow Negative Equity Forecast predicts the negative equity rate among all homeowners with a mortgage will fall to 23.5 percent by the first quarter of 2014, lifting more than 1.4 million additional homeowners nationwide into positive equity. Of the 30 largest metro areas, the majority of these newly freed homeowners are anticipated to come from Los Angeles (94,642 homeowners), Riverside (74,693 homeowners) and Phoenix (51,580 homeowners).
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