Zillow: Negative Equity Weighs Down Housing Markets, Limits New Inventory

First, the good news: Zillow Inc., Seattle, reported fewer homeowners underwater, with the national negative equity rate falling to 13.1 percent in the fourth quarter.

The not so good news: the Zillow Negative Equity Report said more than 820,000 underwater homeowners still owe more than twice as much on their mortgages as their homes are worth, a reminder that some owners may not see positive equity in their homes in the foreseeable future.

The report said six million homeowners were still in negative equity, down from a year ago, when eight million homeowners were upside down on their mortgages.

Zillow Chief Economist Svenja Gudell said in the past year, millions of underwater homeowners resurfaced as the total amount of negative equity declined by $75 billion, but some owners are so far underwater that positive equity may be several years away, leaving them stuck in their homes unable to sell. Over time, she said, negative equity can act as an anchor on a housing market, preventing underwater homeowners from listing their homes and reentering the market.

“It is more prevalent in less expensive areas that are affordable to first-time buyers,” Gudell said. “Without these homes available, many potential buyers are sidelined and unable to take advantage of mortgage rates that remain near historic lows.”

Gudell added that even though the number of underwater homeowners has fallen significantly since the peak of the housing crisis, negative equity persists in many markets as it fell at its slowest pace in a year. “Things are moving in the right direction, but some owners are still deeply underwater,” she said. “As we move into the home shopping season, inventory is already low and negative equity is keeping potential additional stock from becoming available.”

The report said Las Vegas, ground zero of the housing crash, still had the highest rate of negative equity at 20.9 percent, followed by Chicago, where 20.5 percent of homeowners were upside down on their mortgages. In San Jose, only 2.8 percent of mortgaged homeowners were underwater.