Home values rise, but millions still drown in debt

More than three million U.S. borrowers have risen above water on their mortgages so far this year, thanks to swift home price appreciation, according to a new report from online real estate company Zillow.

The negative home equity rate fell in the second quarter of this year, the fifth straight quarterly drop, but it is still alarmingly high and continues to hamper the housing recovery.

Currently, 23.8 percent of homeowners with a mortgage, or approximately 12.2 million, owe more than their homes are worth, down from 15.3 million one year ago, according to the report. Some, however, are still so far underwater that even with fast-rising prices, it will take years for them to see any home equity.

"Widespread rising home values during the past year have helped chip away at negative equity nationwide, helping many homeowners who were only modestly underwater to come up for air. For those homeowners who are deeply underwater, though, there is still a long row to hoe," said Zillow Chief Economist Dr. Stan Humphries in a release.

Nationwide, more than half of all underwater borrowers are in in the red by 20 percent or more, and roughly one in seven owes more than twice what their home is worth.

The numbers seem incredible, given that home prices are up about 12 percent year-over-year, according to the latest S&P/Case-Shiller home price index for June, but that same index shows prices nationally are still off 23 percent from their peak in 2006. In some of the hardest hit housing markets, home values are still down around 30 percent from their recent peaks.

"Negative equity will be a factor in these markets for years to come, constraining the supply of homes for sale and keeping people out of the market who might otherwise get involved," said Humphries.


Adding to the problem is the number of borrowers who have so little equity in their homes that they are unable to afford a move. This "effective" negative equity rate, defined by Zillow as less than 20 percent equity, is improving but it still stands at 41.9 percent of all borrowers.

"Unfortunately, moving from negative equity to neutral or slightly positive equity probably won't make a big enough difference financially for most recently-underwater homeowners to put their homes up for sale," said Rick Sharga of Auction.com. "Until they've had a chance to build significant equity, or increase their savings, they simply won't be able to come up with the down payment they'll need for their next home purchase."

Source: CNBC, Diana Olick, 29 August 2013