Zillow: Negative Equity Concentrates in Rust Belt

As the housing market continues to recover, homeowners who are underwater on their mortgages are increasingly concentrated in the Rust Belt, while West Coast homeowners are less likely to be in negative equity, reported Zillow Inc., Seattle.

The company’s first quarter Negative Equity Report said nationally, 12.7 percent of homeowners with a mortgage were in negative equity, well down from its peak level of 31.4 percent in first quarter 2012.

The report said distribution of underwater homeowners across the country has shifted. In first quarter 2012, the West Coast, Southeast and Rust Belt regions had a disproportionately greater share of underwater homeowners. For example, the Southeast had 20.4 percent of homes with a mortgage, but 24.9 percent of homes in negative equity.

Four years later, Zillow reported, the West Coast, home to hot markets such as the Bay Area, Portland and Seattle, has only 10.2 percent of homeowners with negative equity, but 15.2 percent of all mortgaged homeowners. The imbalance was worst in the Rust Belt region, which includes Wisconsin, Illinois, Indiana, Michigan and Ohio, and which had an unevenly large share of underwater homeowners.

“When the housing bubble burst, the West Coast had more than its fair share of underwater homeowners,” said Zillow Chief Economist Svenja Gudell. “But the strong local economy and job markets have significantly helped these housing markets recover, and several are now more expensive than they were during the housing bubble. Other parts of the country didn’t get those same benefits, and until market fundamentals improve, homeowners and buyers in these areas will be facing disproportionately higher levels of negative equity as they navigate the housing market.”

For example, Las Vegas had nearly three-quarters of mortgaged homeowners underwater when the market bottomed out in in first quarter 2012. But Zillow said Chicago now has the highest negative equity rate among large U.S. markets, surpassing Las Vegas. “At its worst, Chicago had a 41.1 percent rate of negative equity, but its recovery has been sluggish and the negative equity rate has declined more slowly than elsewhere,” Gudell said.

The report said four of the 10 metros with the highest rates of negative equity are in the Rust Belt. The West Coast is home to five of the 10 metros with the lowest levels of negative equity.