Slowing home value growth in the U.S. is bad news for underwater homeowners, who are likely to be trapped in their mortgages for years to come, new data show.
While the U.S. negative equity rate is dropping, more than 4 million U.S. homeowners owed the bank at least 20% more than their homes were worth, according to the first quarter Zillow Negative Equity Report. The U.S. rate of negative equity among mortgaged homeowners was 15.4% in first quarter of 2015, down from 16.9% in the fourth quarter.
“It’s great news that the level of negative equity is falling, but what really worries me is the depth of negative equity,” says Zillow Chief Economist Stan Humphries, in a statement. “Millions of Americans are so far underwater, it’s likely they may not re-gain equity for up to a decade or more at these rates. And because negative equity is concentrated so heavily at the lower end, it throws a real wrench in the traditional housing market conveyor belt.”
At the peak of the real estate crisis, more than 15 million homeowners owed more on their mortgages than their homes were worth, putting them in negative equity, notes Zillow, adding that foreclosures, short sales and rapidly rising home values freed nearly half of those homeowners, leaving 7.9 million homeowners upside down at the end of the first quarter of 2015.
“Homeowners who remain underwater will likely be the toughest to free from negative equity,” Zillow says.
Low-end homes were more than three times as likely to be in negative equity than high-end homes, data show. More than 25% of those who own the least valuable homes were upside down, compared to about 8% of the most valuable homes.
The imbalance was even greater in some markets than others.
“In Atlanta, for example, 46% of low-end homeowners were underwater, compared with 10% of high-end homeowners,” Zillow says. “In Baltimore, 32% of low-end homeowners were in negative equity, compared to 9% of those who own the highest-value homes.”
Among the 35 largest housing markets, Las Vegas, Chicago and Atlanta had the highest rates of homeowners in negative equity. A smaller share of homeowners were upside down in Miami and Detroit, but homeowners there were more deeply underwater, data show. In both places, over 60% of homeowners in negative equity were more than 20% underwater.
“Potential first-time buyers have difficulty finding affordable homes for sale because those homes are stuck in negative equity,” Humphries says. “And owners of those homes can’t move up the chain because they’re stuck underwater in the entry-level home they bought years ago. The logjam at the bottom is having ripple effects throughout the market, and as home value growth slows, it will be years before it gets cleared up. In the meantime, we’ll be left with volatile prices, limited inventory, tepid demand, elevated foreclosures and a whole lot of frustration.”
Written by Cassandra Dowell