Number of Homeowners Underwater on Their Mortgages Falls by 40%

The number of U.S. homeowners underwater on their mortgages has fallen by more than 40% since 2012, signaling good news for the housing market, according to the third quarter Zillow Negative Equity Report. 

More than 7 million Americans who at one point owed more on their mortgages than their homes were worth have escaped either by paying down their mortgage balance, through short sale and foreclosure or because their home values have improved. 

“The market has made terrific strides since bottoming out in late 2011 and early 2012, with millions of underwater homeowners freed in just the past few years, and millions more set to surface in coming months and years,” said Zillow chief economist Dr. Stan Humphries, in a statement.

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While roughly 8.7 million homeowners still remain trapped underwater on their mortgages, the negative equity rate has halved since 2012 in the markets hit hardest by the recession, including Miami, Atlanta, Detroit, Riverside, Calif., and Las Vegas.

Overall, the negative equity rate fell to 16.9% of all homeowners with a mortgage in the third quarter, down from 21% in the third quarter of 2013. It is expected to fall to 15.2% by the end of the third quarter of 2015. 

Declining negative equity will have a ripple effect in the housing market, Zillow says, allowing previously stuck homeowners to list their homes for sale and adding to overall for-sale inventory just as millennial buyers are expected to begin to enter the market en masse in coming months and years.

This new inventory will also help slow home value appreciation, which has been fueled by high demand for homes and low supply.

“Looking at negative equity helps us understand so many of the currently out-of-whack dynamics in the housing market, including low inventory, rapid home value appreciation and weak sales volumes. None of these problems will be solved overnight, in large part because negative equity will likely be a part of the housing market for years, and easily into the next decade in some hard-hit areas. But we’re moving in the right direction, and time will heal all wounds,” Humphries said. 

Written by Emily Study

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