Zillow Negative Equity Report Shows 1 in 3 Mortgage Holders Underwater

Home values have started to eke upward in places. But, so far, this has done little to buoy millions of underwater homeowners who, according to a new Zillow report, collectively owe $1.2 trillion more than their homes are worth.

Chances are you know someone in this boat. Maybe yourself. According to the Zillow Negative Equity Report, which was released today, nearly one in three homeowners with a mortgage — 15.7 million people — were underwater on their mortgage in the first quarter of this year.

Chicago's Cook County shows it is among the highest 10% in the U.S. in terms of negative equity

Those are sobering numbers. Homeowners this week were quick to point out the most frustrating downside to being underwater: putting dreams of a new house on ice because selling would mean taking an unaffordable loss.

In Chicago’s Ravenswood neighborhood, Georgia Gaconnet said the two-bedroom condo she and her husband bought in October 2009 has started to feel cramped since the birth of their daughter last year. Their condo, bought for $199,000, has dropped at least $50,000 in value, Gaconnet said, and their plans for a second child have had to wait.

“It’s kind of like we’re at a standstill,” Gaconnet, a hospital research technician, said. “We’d take such a loss to walk away.”

Michael P. Smith, a 38-year-old clinical chemist, said he owed $200,000 on his house in Lansing, MI when a job offer came up in Detroit, 85 miles away, that he couldn’t pass up. Because the move was voluntary, a short sale wasn’t an option. Their house sold for $170,000, and Smith and his wife resorted to borrowing $40,000 from his parents to cover the shortfall, plus closing costs.

“It was a good home,” said Smith, who moved into their new home in Troy, MI last month. “It wasn’t that we couldn’t afford it; it just took a dive and we were stuck.”

“Paper loss”

A drop in home value is usually what pushes a homeowner underwater — an increase in mortgage debt can, too — so it may seem surprising that the volume of underwater homeowners, which fell slightly last year, has seen a new uptick even as home values are starting to rise. In part, this is because the pace of foreclosures slowed after banks came under scrutiny for using “robo-signers.” Fewer foreclosures has meant more homeowners left with a home, but underwater.

As swollen as negative equity levels are, the problem has proved manageable — so far, anyway. Four in ten underwater homeowners owe less than 20 percent more than the value of their home. Ninety percent continue to make their loan payments on time.

So for the vast majority of underwater homeowners it remains a “paper loss,” Zillow Chief Economist Stan Humphries said. “As home values slowly increase and these homeowners continue to pay down their principal, they will surface again,” he said.

That said, Humphries points out that a spike in unemployment or a slow-down in economic growth could push more homeowners into delinquency and foreclosure.

Homeowners stretched

Rita Baumgartner counts herself in this danger-zone category. Baumgartner, who retired and moved to Spring Hill, FL  from Atlanta in 2005, had planned to spend five years in her two-bedroom ranch then sell and upgrade. Instead the house she bought for $159,900, which sits on a golf course and 15 miles from the Gulf coast, is now valued by Zillow at $88,000. She owes $145,000.

Baumgartner said her small pension and Social Security earnings are getting harder to stretch. Recently she’s taken to clipping coupons most mornings from her neighbor’s newspaper. “The bottom line is: come the end of the year I’ll be looking for a job,” said Baumgartner, who is in her early 60s.

Florida is a sea of red with 46.3 percent of all homeowners facing negative equity.

The new Zillow Negative Equity Report, released today, aims to give a more comprehensive look at how deeply American homeowners are underwater. To calculate negative equity, other reports rely on estimates of the original amount of a homeowner’s mortgage. Zillow instead compares the current outstanding amount of a homeowner’s loan, or loans, against the estimated value of their home.

Florida ranks fourth in terms of negative equity. First is Nevada, where two in three homeowners with mortgages is underwater. In hard-hit Las Vegas — like 2.4 million homeowners across the country —  more than one in four people with mortgages owe double what their home is worth.

Editor’s note: To see the full negative equity report, visit Zillow Research. Additionally, to see how homeowners in your area are faring, visit our interactive negative equity heat map in Zillow’s brand-new “Zillow Visuals” section.