Just 11% of home owners in US now in negative equity, latest research shows

Some 11% of home owners in the United States still have loans worth more than their homes despite the recovery in the real estate market reaching its highest point, new research suggests.

Prices are expected to rise more slowly in 2017 and while rising home values are freeing home owners from negative equity, allowing them to re-enter the market, some 10.9% are still underwater.

Research from real estate firm Zillow shows that the negative equity rate in the third quarter of 2016 was down from the 13.4% recorded a year ago and the number who owe more than their mortgage has fallen by nearly two thirds since the housing bubble burst four year ago.

Home owners in the Western half of the country have the lowest rates of negative equity with 26.1% of home owners with a mortgage have less than 20% equity in their homes, or are in effective negative equity.

Nationally 5.3 million home owners were in negative equity in the third quarter much less than the peak of the housing crisis in the first quarter of 2012 when 15.7 million home owners were underwater on their mortgages.

According to Zillow the numbers are another sign that the housing market has nearly regained the value lost during the recession and is only 2.7% below the peak reached at the height of the bubble. But not all regions have experienced the same recovery, though, and some markets are still well below those bubble highs.

Zillow points out that underwater home owners can’t refinance to take advantage of still low mortgage rates and they can’t sell their homes except in short sales, which keeps these homes off the market, contributing to low inventory.

Seven of the 10 large metros with the lowest rates of negative equity are along the West Coast, and also have strong economic markets. Fewer than 5% of home owners are underwater in San Jose, San Francisco, Portland, Denver and Dallas. In these metros, home values have also surpassed the highest point reached during the bubble, and are now higher than ever.

Chicago and Las Vegas have the highest levels of negative equity with 17% and 16.8% of home owners underwater respectively. Home values in these markets remain well below their peak levels.

‘As the housing market recovers and home values rise, the number of homeowners underwater on their mortgages continues to drop,’ said Zillow chief economist Svenja Gudell.

‘In addition to the individual homeowners who are underwater, negative equity affects the housing market as a whole, so this is good news not only for these owners, who are now able to either sell their home or at least regain some financial stability, but also for buyers who may find more options now. I expect homes will gain value steadily, for solid economic reasons, and that negative equity rates will continue to fall,’ she explained.

She added that home owners who have less than 20% equity in their homes may find it difficult to cover the associated costs of selling, such as agent fees, closing costs, and a new down payment if they are buying a new home. More than a quarter of home owners with a mortgage are in this situation, known as effective negative equity.