Zillow: Negative Equity Still Drag on Housing Market

Zillow Inc., Seattle, said despite improvements in negative equity rates, underwater mortgages continue to hold the housing market back from full recovery, particularly in hard-hit areas.  

The company’s quarterly Negative Equity Report said the U.S. rate of negative equity among homeowners dropped a full percentage point in the third quarter to 13.4 percent, from 14.4 percent last quarter and nearly 17 percent a year ago.  

By historical comparison, however, the numbers remain high, said Zillow Chief Economist Svenja Gudell. She said typically, negative equity rates will be close to 2-5 percent. “Today, eight years after the housing crash, it remains a major barrier to a full recovery in certain markets,” she said.  

In Las Vegas, for example, 22 percent of homeowners remain underwater, with another 19 percent are effectively underwater, meaning they have less than 20 percent equity in their home and therefore can’t cover the cost of selling their home and buying another.  

Las Vegas has had the highest negative equity rate in the country for nearly five years; Kansas City and Cleveland, with 16.6 and 16.8 percent negative equity respectively, are not far behind. San Francisco and San Jose are the only large markets where less than 5 percent of homeowners are underwater.  

The report noted, however, that nearly one million homeowners were freed from negative equity in the third quarter. “The improving rate means those people may be able to sell or refinance their homes before mortgage interest rates rise, as they are expected to do in the coming weeks,” the report said.  

“Negative equity has become almost an afterthought in a handful of the nation’s hottest markets, but is holding back the recovery in dozens of large markets nationwide,” Gudell said. “Despite steady declines in negative equity, many cities are still facing tight inventory, especially among entry-level homes. Those homes that are available are often not in demand and stay on the market for a long time. This can be extremely frustrating for buyers and sellers alike, as they come face to face with the difficult side effects of negative equity.”  

Metro areas with the smallest share of underwater homeowners: San Jose, Calif. (3.0 percent); San Francisco (4.7 percent); Denver (5.5 percent); Dallas-Fort Worth (5.8 percent); and Portland, Ore. (6.2 percent)  

Metro areas with the largest share of underwater homeowners: Las Vegas (22.1 percent); Chicago (20.6 percent); Atlanta (18.6 percent); St. Louis (17.6 percent); and Baltimore (16.9 percent).