Nearly 2 Million American Homeowners Freed From Negative Equity In 2012

According to the fourth quarter Zillow Negative Equity Report, the national negative equity rate continued to fall in the fourth quarter of 2012, dropping to 27.5 percent of all homeowners with a mortgage from 28.2 percent in the third quarter. The fourth quarter result also represents a significant decline from the one year ago level of 31.1 percent in the fourth quarter of 2011. Overall, almost 2 million American homeowners were freed from negative equity over the course of the year. However, 13.8 million homeowners with a mortgage remain underwater (Figure 1). Of all homeowners – roughly one-third of homeowners do not have a mortgage and own their homes free and clear – 19.4 percent are underwater.


Strong appreciation and elevated foreclosure liquidation rates continue to be the main factors reducing negative equity levels across the nation. In 2012, home values appreciated by 5.9 percent nationally, while some regions saw even stronger appreciation. Figure 2 shows the relationship between 2012 appreciation rates and the decline in negative equity over 2012. Despite these high rates of appreciation, negative equity is still very high and will remain high as deeply underwater homeowners are slowly being lifted toward positive equity. Figure 3 shows the loan-to-value (LTV) distribution for homeowners with a mortgage in the nation in 2012 Q4 vs. 2011 Q4. Even though many homeowners are still underwater and haven’t crossed the 100% LTV threshold to enter into positive equity, they are moving in the right direction. The 2012 Q4 buckets on the 100%+ LTV side (the red bars) are getting smaller compared with 2011 Q4, and the black bars are getting taller. In total, underwater homeowners owe $1.01 trillion more than their homes are worth. On average, a U.S. homeowner in negative equity owes $73,055 more than what their house is worth, or 42.6 percent more than the home’s value (Table 1). While roughly a quarter of homeowners with a mortgage are underwater, 91.1 percent of these homeowners are current on their mortgage and continue to make payments.

F2The Zillow Negative Equity Report incorporates mortgage data from TransUnion, a global leader in credit and information management, to calculate various statistics. The report includes, but is not limited to, negative equity, loan-to-value ratios and delinquency rates. To calculate negative equity, the estimated value of a home is matched to all outstanding mortgage debt and lines of credit associated with the home, including home equity lines of credit and home equity loans. All personally identifying information (“PII”) is removed from the data by TransUnion before delivery to Zillow. Overall, this report covers more than 800 metros, 2,100 counties and 21,900 ZIP codes across the nation.

An interactive map of this data can be found here.

Regional Trends

High rates of negative equity have accumulated in states such as California, Florida, Nevada, Arizona and Georgia – some of the hardest hit areas of the housing recession, where home values have fallen dramatically from their peak. Many of these states are now experiencing very high appreciation rates, which are contributing to pushing down negative equity rates and freeing underwater homeowners faster than in other areas. For example, Phoenix homeowners experienced home value appreciation of 22.5 percent in 2012 and saw a reduction of 17.4 percentage points in their negative equity rate. Las Vegas saw an 11.1 percentage point decrease in underwater homeowners in 2012, while Los Angeles saw a 4.3 percentage point drop. This can be seen in Figure 2. Among the nation’s 30 largest metro areas, those with the highest number of homeowners freed from negative equity in 2012 were Phoenix (135,099 homeowners freed in 2012); Los Angeles (72,936 homeowners freed in 2012); Miami-Fort Lauderdale (70,484 homeowners freed in 2012); Dallas-Fort Worth (59,461 homeowners freed in 2012); and Riverside, Calif. (58,417 homeowners freed in 2012).

In some cases high home value appreciation rates have produced only relatively small decreases in negative equity rates. However, the depth of negative equity has been significantly impacted.  In the Phoenix metro, the percentage of homeowners with a mortgage who owed more than double what their houses were worth was reduced from 16.2 to 7.6 percent from the fourth quarter of 2011 to the fourth quarter of 2012, which can be seen in Figure 4. In the Las Vegas metro, nearly one out of every five (18.6 percent) homeowners with a mortgage owes more than twice theF3 amount of their home’s value. This number compares favorably to how deep Las Vegas homeowners were a year ago. In 2011 Q4, 26.7 percent of homeowners with a mortgage owed more than double (see Figure 5). On the metro level there is wide variation in negative equity with the percentage of underwater borrowers ranging from 2.9 to 64.8 percent. Furthermore, there is wide variation in how deep homeowners are underwater. Figure 6 provides an overview of the distribution of the loan-to-value ratio for the largest metropolitan areas (a loan-to-value ratio greater than 100 percent means that the homeowner is underwater).

As higher home value appreciation has lowered negative equity rates, these have in turn also contributed to this home value appreciation, as theyF4F5 contribute to inventory shortages. Underwater homeowners cannot put their homes on the market because they can’t sell the house for enough to cover their outstanding mortgage, despite increased demand. Therefore, as the supply of homes is constricted, buyers are more likely to bid up prices in the market and therefore drive up home values. The areas that have high rates of negative equity are also among the areas that saw the highest rates of appreciation in 2012.

While negative equity makes a household more vulnerable to foreclosure, most homeowners in negative equity will not end up in default. The majority of underwater homeowners continue to make regular payments on their mortgage, with only 8.9 percent (down from 9.9 percent a year ago) of underwater homeowners being delinquent. This implies that 2.4 percent of all homeowners with a mortgage are at high risk for foreclosure near-term. Figure 7 shows a breakdown of these numbers for the top 30 metros.


New this quarter, the Zillow Negative Equity Forecast predicts the negative equity rate among all homeowners with a mortgage will fall to at least 25.5 percent by the fourth quarter of 2013, freeing more than 999,000 additional homeowners nationwide. Of the 30 largest metro areas, the majority of these newly freed homeowners are anticipated to come from Los Angeles (72,696 homeowners freed in 2013); Riverside (62,407 homeowners freed in 2013); Phoenix (43,044 homeowners freed in 2013); Sacramento (33,356 homeowners freed in 2013); and Dallas-Fort Worth (31,434 homeowners freed in 2013). The Zillow Home Value Forecast is a conservative estimate of what negative equity rates will be a year from now. To forecast negative equity, we take the current home value of a house and appreciate it by the Zillow Home Value Forecast (ZHVF) for the MSA in which the home is located. In cases where there is no ZHVF available, we use the historical rate of home appreciation, and for metros that don’t have a historical rate of appreciation we use the historical rate of inflation at the national level. For homes that are not located in a metropolitan area, we use the forecasted national rate of appreciation. To calculate the level of home equity a year from now, we use the forecasted home value and the current outstanding debt balance, where we make no assumptions about a homeowner’s debt level a year from now. We also make no assumptions about foreclosure activity in the coming year. Therefore, this forecast is a very conservative one, as homeowners will likely continue to pay down their debt throughout the year and homes will likely continue to be foreclosed on, and both of these factors will contribute to a lower negative equity rate. The Zillow Negative Equity Forecast can therefore be considered a higher bound estimate of negative equity (see Table 2).



Negative equity will continue to impact the real estate market. In hard-hit areas where a large percentage of homeowners are underwater, the available homes listed on the market are impacted, in that their prices are bid up due to limited supply. Underwater homeowners cannot easily sell their homes, but instead have to wait for their houses to appreciate in order to be able to sell. Therefore, negative equity remains a major factor in the housing market. Home values are up 5.9 percent on a year-over-year basis in the fourth quarter of 2012, and given our forecast of an additional 3.3 percent home value appreciation over the next year (December 2012 to December 2013), we expect that negative equity rates will continue to decrease. This decrease will not happen rapidly, though, as the degree to which homeowners are underwater remains high. So even areas in which we forecast higher than normal rates of home value appreciation, we expect that negative equity rates will remain high in the near term.