Negative Equity Recedes in Third Quarter; Fewer than 30% of Homeowners with Mortgages Now Underwater

Today, Zillow released its third quarter Negative Equity Report. Negative equity for homeowners with mortgages has fallen to 28.2 percent from 30.9 percent in the second quarter. That’s great news for struggling homeowners.

Slightly more than 14 million U.S. homeowners with a mortgage were in negative equity, or underwater, in the quarter, owing more on their mortgages than their homes are worth. That was down from 15.3 million in the second quarter. Additionally, the nation’s 30 largest metro areas covered by Zillow’s report all experienced quarter-over-quarter declines in negative equity.

Negative equity rates are driven in large part by home values – when home values rise, negative equity rates fall; when values fall, negative equity rates tend to rise. In the third quarter, home values rose 1.3 percent compared to the second quarter, to a median value of $153,800, according to the Zillow Home Value Index (ZHVI). Throughout much of 2011 and into the first half of this year, home values fell, and negative equity rates rose. The past two quarters have reversed this trend, and we’re hopeful it will continue.

However, a number of factors could affect home values – and as a result, negative equity rates – in the fourth quarter. Most notably, it is critical that ongoing negotiations centered around resolving the fiscal cliff problem do not adversely affect consumer and investor confidence. If markets don’t react favorably to the shape of fiscal cliff agreements, it is possible pessimism and uncertainty will slow down household formation and cause home buyers and sellers to reconsider the wisdom of buying or selling.

The detailed Zillow Negative Equity Report is also available on the Zillow Real Estate Research page.

You can see how negative equity affects your area in an interactive visualization by clicking on the map below.