Underwater insurance, as millions of homeowners emerge for air
Fast-rising home prices brought more borrowers up from underwater in the third quarter of this year than at any time since the housing recovery began. In the quarter, 1.4 million borrowers came into a positive equity position, and nearly 5 million have recovered since the crash.
“We should feel good that we’re moving in the right direction, and at a fast clip,” said Zillow Chief Economist Stan Humphries.
We are not, however, out of the woods. Twenty-one percent of all homeowners with a mortgage, or nearly 11 million borrowers, still owe more on their loans than their homes are worth, though that is down from a peak of 31 percent early last year, according to Zillow.
And at 39 percent, the “effective” negative equity rate—borrowers who have less than 20 percent equity in their homes—is still staggering. To buy a new house, most homeowners need at least 20 percent equity to pay all the needed expenses, including today’s high down payments.
“Negative equity will remain a factor for years to come and must be considered part of the new normal in the housing market,” Humphries said. “Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help.”
Negative equity has been one of the greatest barriers to a full and robust housing recovery. Sale inventories are painfully low nationwide because so many homeowners don’t have the equity to move up (or even down). That lack of listings has depressed sales and pushed prices higher—good for the equity dilemma but bad for potential buyers.