Zillow: Improvement, but 11% of Homeowners Still Underwater

Zillow Inc., Seattle, said rising home values are freeing homeowners from negative equity, allowing them to re-enter the market, but 11 percent of homeowners remain upside-down, or underwater, on their property.

The company’s Negative Equity Report said the number of homes with negative equity fell to 10.9 percent in the third quarter, down from 13.4 percent a year ago.

The share of homeowners who owe more on their mortgages than their homes are worth has dropped by nearly two-thirds since the housing bubble burst four years ago. Nationally 5.3 million homeowners were in negative equity in the third quarter, meaning they owe more than their homes are worth. At the peak in Q1 2012, 15.7 million homeowners were underwater on their mortgages.

The report also noted 26.1 percent of homeowners with a mortgage have less than 20 percent equity in their homes, or are in “effective” negative equity.

The numbers are “another sign that the housing market has nearly regained the value lost during the recession,” said Zillow Chief Economist Svenja Guddell, and is only 2.7 percent below the peak reached at the height of the bubble. Not all regions have experienced the same recovery, though, she said, and some markets are still well below those bubble highs.

“Underwater homeowners can’t refinance to take advantage of still-low mortgage rates and they can’t sell their homes except in short sales, which keeps these homes off the market, contributing to low inventory,” Gudell said.

Seven of the 10 large metros with the lowest rates of negative equity are along the West Coast, and also have strong economic markets. Fewer than 5 percent of homeowners are underwater in San Jose, San Francisco, Portland, Ore., Denver and Dallas. In these metros, home values have also surpassed the highest point reached during the bubble, and are now higher than ever. Chicago and Las Vegas have the highest levels of negative equity, with 17 percent and 16.8 percent of homeowners underwater respectively. Home values in these markets remain well below their peak levels.

Homeowners who have less than 20 percent equity in their homes may find it difficult to cover the associated costs of selling, such as agent fees, closing costs and a new down payment if they are buying a new home.