Negative Equity Continues Slow & Steady Decline

Posted on July 31, 2017 by Laura Lam

zillow negative equityThe U.S. negative equity rate – the share of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – fell to 10.4% in the first quarter of 2017, the 20th straight quarterly decline. But the speed at which negative equity is falling has slowed dramatically.

The national negative equity rate fell from 10.5% at the end of 2016 and 12.7% in Q1 2016, leaving slightly more than 5 million Americans with a mortgage underwater. The rate is down substantially from its peak of 31.4% in Q1 2012, when more than 15.7 million Americans were in negative equity. But while the market has come a long way over the past few years in ridding itself of negative equity, progress is starting to slow.  The 0.1%age-point quarterly drop between Q4 2016 and Q1 2017 negative equity was the smallest since a barely noticeable drop from Q3 2014 to Q4 2014.

One reason for the slowdown is because the bulk of those homeowners that remain in negative equity are very deep underwater – 56.7% of those in negative equity were underwater by more than 20% as of the end of Q1. In addition to paying off a loan over time, the surest way to get out of negative equity is to wait for a home’s value to appreciate enough to bring it into positive equity. Home values grew at a robust annual pace of more than 7% in Q1, well above historically “normal” annual home value growth of 3% to 5%. Even so, it would take several years of growth at that rate to free a homeowner underwater by 20% – to say nothing of the roughly 15.1% of underwater homeowners who owe twice or more what their home is worth.

Among the nation’s 35 largest metro markets, the highest effective negative equity rates are in Virginia Beach (41.5%), Las Vegas (34.8%) and Baltimore (32.7%). The lowest rates of effective negative equity among large metros as of the end of 2016 were in San Jose (6.3%), San Francisco (8.3%) and Portland (10.9%).

Source:  Zillow/Builder