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Negative equity in US housing market falls considerably

More than seven million home owners have escaped negative equity since its peak in early 2012, both because of foreclosures and improving home values, says the data from real estate firm Zillow.

Overall US negative equity fell to 16.9% in the third quarter, down significantly from its peak of 31.4% in the first quarter of 2012.

Zillow expects the negative equity rate will continue to fall to 15.2% by the end of the third quarter of 2015.

Roughly 8.7 million home owners remain trapped underwater on their mortgages, but the negative equity rate has halved since 2012 in the markets hit hardest by the recession including Miami, Atlanta, Detroit, Riverside in California and Las Vegas.

The firm points out that declining negative equity will have a ripple effect in the housing market, allowing previously stuck homeowners to list their homes for sale and adding to overall for sale inventory just as millennial buyers are expected to begin to enter the market en masse in coming months and years.

This new inventory will also help slow home value appreciation, which has been fuelled by high demand for homes and low supply.

‘The market has made terrific strides since bottoming out in late 2011 and early 2012, with millions of underwater home owners freed in just the past few years, and millions more set to surface in coming months and years,’ said Zillow chief economist Stan Humphries.

‘Looking at negative equity helps us understand so many of the currently out of whack dynamics in the housing market, including low inventory, rapid home value appreciation and weak sales volumes,’ he explained.

‘None of these problems will be solved overnight, in large part because negative equity will likely be a part of the housing market for years, and easily into the next decade in some hard-hit areas. But we're moving in the right direction, and time will heal all wounds,’ he added.

The research also shows that owners of less expensive homes were more likely to be underwater in the third quarter than owners of more expensive homes, in some cases, much more likely.

In Detroit, for example, 49.2% of homes valued in the bottom price tier were underwater, while just 7.6% of the area's highest priced homes were upside down. Similarly, in Chicago, 41.4% of bottom tier homes were in negative equity, compared to 23.9% of middle tier homes and 10.4% of top tier homes.

Nationwide, 27.4% of bottom tier homes were in negative equity in the third quarter, compared to 15.7% of middle tier homes and 9.3% of top tier homes.

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