Mortgages Emerged from 'Underwater' Status at Fastest Pace in Q3

Mortgages Emerged from 'Underwater' Status at Fastest Pace in Q3The U.S. negative equity rate — measuring the percentage of borrowers who owe more on their mortgages than the value of their homes — fell at its fastest pace ever in the third quarter, dropping to 21 percent of all homeowners with a mortgage, Zillow said Thursday.
That’s almost 5 million homeowners emerging from “underwater” status, thanks in large part to persistently higher home prices, including double-digit gains in many communities.
However, about 10.8 million homeowners remain underwater.
In the second quarter, the negative equity rate was 23.8 percent. The decline marks the largest quarter-over-quarter drop since Zillow began tracking negative equity in the second quarter of 2011.
With the pace of home value appreciation slowing, however, the pace of negative equity improvement will also ease. The negative equity rate is expected to fall to 18.8 percent by the third quarter of 2014, according to Zillow’s forecast.
“Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter,” said Zillow Chief Economist Dr. Stan Humphries.
But negative equity will remain a factor for years to come, Humphries added.
Moreover, short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help.
More than half of homeowners with negative equity (55.6 percent) are 20 percent or more underwater.
Zillow expects home values to rise 3.8 percent in the next year. Assuming appreciation at that rate going forward, it would take a homeowner underwater by 20 percent roughly five years to reach positive equity.
Large metros with the highest negative equity rate in the third quarter were Las Vegas (39.6 percent), Atlanta (38.2 percent) and Orlando (34.2 percent). Among the 30 largest metro areas covered by Zillow, those with the greatest decline in the number of underwater homeowners since their peak include San Jose (-66.4 percent from peak), Denver (-63.3 percent from peak) and San Francisco (-59.6 percent from peak).

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