Number of US home owners in negative equity continues to fall

Some 17% of home owners in the United States with mortgages were still underwater in the second quarter of this year despite home values rising steadily.

That amounts to around 8.7 million home owners but the figure is falling, down from 18.8% in the first quarter of the year and 23.8% a year ago, according to the latest negative equity report from real estate firm Zillow.

The data also shows that the effective negative equity rate, or the percentage of home owners who have less than 20% equity in their home fell to 34.8% in the second quarter, down from 36.9% from the first quarter of 2014, and down from 41.9% from last year.

The report points out that home owners with less than 20% equity in their current home may have a difficult time covering the costs on selling and purchasing a new property.

Looking ahead, the national negative equity rate is expected to fall to 14.9% of all home owners with a mortgage by the end of the second quarter of 2015, according to the Zillow Negative Equity Forecast.

Of the 35 largest metros covered by Zillow, some 28.9% of home owners in Atlanta, 27.4% in Las Vegas and 27.1% in Chicago were still underwater on their homes at the end of the second quarter. The lowest rates of negative equity were in San Jose at 4.6%, San Francisco at 8.2% and Austin at 8.3%.

Research from Zillow shows that Generation X home owners are far more likely to be underwater on their mortgage than millennial and Baby Boomer home owners, a generational block that could limit the market for years.

Approximately 42.6% of Generation X home owners, that is those aged from 35 to 49, are underwater on their mortgage, compared to 15.3% of millennial home owners aged 20 to 34 years old and 31.1% of Baby Boomers aged 50 64 years old.

Because it is very difficult for an underwater home owner to list their home for sale, the wide disparities among generations stand to have ripple effects throughout the housing market. Baby Boomers may not be able to find move-up buyers for their homes as Gen X remains stuck, and millennials can't move into the more affordable starter homes currently occupied by Gen X.

In general, the least expensive homes most likely to be sought by millennial and first time buyers are more likely to be underwater than middle and top tier homes. Among all homes with a mortgage nationwide, 28.2% valued within the bottom third of home values were underwater in the second quarter, compared to 15.8% of homes in the middle tier and 9.2% in the top tier.

‘On the surface, the housing recession did not overtly impact millennials' housing wealth to the degree it did Generation X and the Baby Boomers, as most millennials were likely too young to have purchased a home during the bubble years,’ said Zillow chief economist Stan Humphries.

‘But as this huge generation begins to consider buying homes, they're entering a market still very much in recovery and far from anyone's definition of normal. Because so many homes are stuck in negative equity or are effectively underwater, the inventory of homes for sale is severely constrained, leading to more competition for those that are available,’ he explained.

‘And millennials likely don't have the resources to compete with cash offers or engage in bidding wars. The reality is, negative equity is part of the new normal, and finding creative solutions to keeping homes affordable, available and accessible to this generation will be critical going forward,’ he added.