Negative Equity Declines Slightly on the Back of Modest Home Value Gains

Posted by: Stan Humphries    Tags:      Posted date:  August 22, 2012  

The housing market is finally showing signs of life, with many metropolitan areas having hit the elusive bottom and seeing home value appreciation, however negative equity remains a drag on the housing market. According to the second quarter Zillow Negative Equity Report, 30.9 percent of U.S. homeowners with a mortgage are underwater (see Figure 1) – 15.3 million people – in the second quarter of 2012. Recent home value appreciation in many markets across the US has pushed negative equity levels down from 31.4 percent last quarter. However, negative equity is still slightly elevated from the 2011 Q2 percentage of 30. In total, underwater homeowners owe $1.15 trillion more than their homes’ worth. Over 40 percent of underwater homeowners (12.5 percent of all homeowners with a mortgage), owe between 1 and 20 percent more than their home is worth. On the other end of the spectrum, about 2.2 million underwater homeowners (4.5 percent of all homeowners with mortgages) owe more than double what their home is worth (see Figure 2). On average, U.S. homeowners in negative equity owe $75,235 more than what their house is worth, or 43.9 percent more (see Table 1). While roughly one out of every three homeowners with mortgages is underwater, 90.8 percent of these homeowners are current on their mortgage and continue to make payments.

The 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 over 800 metros, 2,100 counties, and 22,200 ZIP codes across the nation.

An interactive map of this data can be found here:

Regional Trends

The extent to which U.S. homeowners are underwater varies greatly by region. 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 peak. As home values fall, negative equity increases. In 36 out of 787 metros, more than half of all homes with mortgages in the metro are underwater. Among these regions are larger metros such as Las Vegas (68.5 percent), Atlanta (54.4 percent), Orlando (51.9 percent), Phoenix (51.6 percent), and Riverside (51.2 percent). See Table 1 for summary statistics in the top metro regions.

Drilling down to the metro level there is a wide variation in negative equity with the percent of underwater borrowers ranging from 4.7 to 69.7 percent. Among the least underwater metros are Bismarck, ND, State College, PA, and Honolulu, HI. On the other end of the spectrum are markets like Las Vegas, NV and Merced, CA. One out of every four homeowners with a mortgage in the Las Vegas metro owes more than twice the amount of their home’s value. In Merced, one out of every five homeowners owes more than twice the amount in their home’s value. Figure 4 provides an overview of 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).

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 9.2 percent of underwater homeowners being delinquent. This implies that 2.9 percent of all homeowners with a mortgage are at high risk for foreclosure near-term. Figure 3 shows a breakdown of these numbers for the top 30 metros.

In terms of historical performance, we saw negative equity significantly decrease in some metropolitan areas while it continued to increase in others. These movements are highly correlated with home value movements. As home values in Phoenix have been aggressively rising, negative equity has continued to recede, falling from 55.5% in the first quarter to 51.6% in the second quarter.


With unemployment remaining flat or even rising in some parts of the country, negative equity remains a major factor in the housing market as the combination of negative equity and elevated unemployment spawns fresh foreclosures. With evidence of foreclosure starts increasing in many parts of the country, even while foreclosure liquidations continue to decline, we do expect this dynamic to put downward pressure on the negative equity rate (as homes in negative equity are foreclosed, sold in short sales, or have their principals reduced in a modification process).  Downward pressure on negative equity from ongoing foreclosures processes will be amplified by modest increases in home values over the coming few years.

This report is also available to download in PDF format here.

About the author
Stan Humphries
Stan is Zillow's Chief Economist. To learn more about Stan, click here