In the third quarter of 2012, home values showed the biggest quarterly gain since 2006. National home values appreciated 1.3 percent from Q2 to Q3 2012, with much of that appreciation focused in hard-hit areas, like Arizona, Florida and California. As home values rise, negative equity rates decrease. According to the third quarter Zillow Negative Equity Report, 28.2 percent of U.S. homeowners with a mortgage (roughly 14 million people) are underwater (Figure 1) in the third quarter of 2012. Of all homeowners – roughly one-third of homeowners do not have a mortgage and own their home free and clear – 20 percent are underwater.
The strong appreciation many regions experienced in the third quarter pushed negative equity levels down from 30.9 percent last quarter to 28.2 percent this quarter. This is the first time negative equity has fallen below 30 percent, and is the biggest quarter-over-quarter drop in negative equity, since Zillow revised its methodology for determining negative equity in the first quarter of 2011. In total, underwater homeowners owe $1.02 trillion more than their homes’ worth. More than 42 percent of underwater homeowners (11.9 percent of all homeowners with a mortgage), owe 20 percent or less than their home is worth (Figure 2). On average, U.S. homeowners in negative equity owe $73,163 more than what their house is worth or 42.5 percent more (Table 1). While roughly a quarter of homeowners with a mortgage are underwater, 90.3 percent of these homeowners are current on their mortgage and continue to make payments.
The Zillow Negative Equity Report incorporates mortgage data from TransUnion, a global leader in credit and information management, to calculate various statistics. The report includes, but is not limited to, negative equity, loan-to-value ratios and delinquency rates. To calculate negative equity, the estimated value of a home is matched to all outstanding mortgage debt and lines of credit associated with the home, including home equity lines of credit and home equity loans. All personally identifying information (“PII”) is removed from the data by TransUnion before delivery to Zillow. Overall, this report covers more than 800 metros, 2,100 counties and 21,900 ZIP codes across the nation.
An interactive map of this data can be found here: http://www.zillow.com/visuals/negative-equity/
The plight of negative equity is not equally distributed across the nation. High rates of negative equity have accumulated in states such as California, Florida, Nevada, Arizona and Georgia – some of the hardest hit areas of the housing recession, where home values have fallen dramatically from peak. See Figure 5. In 6 percent of the 21,964 ZIP codes covered by the Zillow Negative Equity Report, more than half of all homes with a mortgage are underwater. Most of these ZIP codes are located in especially hard-hit regions, for example, in metros such as Las Vegas (with a negative equity rate of 63 percent), Atlanta (50.4 percent), Phoenix (45.5 percent), Modesto (56.5 percent), Stockton (55.5 percent), Riverside (47.3 percent) and Detroit (45.2 percent). See Table 1 for summary statistics in the top metro regions.
However, many of these hard-hit regions also experienced strong home value appreciation over the last few months. Interestingly, high negative equity rates have contributed to appreciation, as they contribute to inventory shortages. Underwater homeowners cannot put their homes on the market because they couldn’t sell the house for enough to cover their outstanding mortgage, despite increased demand. Therefore, as the supply of homes is constricted, buyers are more likely to bid up prices in the market and therefore drive up home values. In the third quarter, these hard-hit areas saw large declines when comparing their current negative equity rates to 2012 Q2 rates. Of the 30 largest metro areas covered by the report, the five experiencing the largest quarterly declines in negative equity were Phoenix (-6.2 percentage points), Las Vegas (-5.5 percentage points), Denver (-4.9 percentage points), Sacramento, Calif. (-4.6 percentage points) and Orlando (-4.2 percentage points).
Drilling down to the metro level there is wide variation in negative equity with the percent of underwater borrowers ranging from 5.1 to 65.6 percent. Furthermore, there is wide variation in how deep homeowners are underwater. For example, in the Las Vegas metro, one out of every five homeowners with a mortgage owes more than twice the amount of their home’s value, as opposed to one out of every four in Q2. In the nation as a whole, one in every 26 homeowners owes more than double what their house is worth. Figure 4 provides an overview of the distribution of the loan-to-value ratio for the largest metropolitan areas (a loan-to-value ratio greater than 100 percent means that the homeowner is underwater).
While negative equity makes a household more vulnerable to foreclosure, most homeowners in negative equity will not end up in default. The majority of underwater homeowners continue to make regular payments on their mortgage, with only 9.7 percent of underwater homeowners being delinquent. This implies that 2.7 percent of all homeowners with a mortgage are at high risk for foreclosure near-term. Figure 3 shows a breakdown of these numbers for the top 30 metros.
Negative equity is most common in younger age brackets with 33.9 percent of borrowers age 20 to 24, 42.4 percent of borrowers age 25 to 29, 46.6 percent of borrowers age 30 to 34, and 42.7 percent of borrowers age 35 to 39 underwater on their mortgages. All told, 43.9 percent of borrowers under the age of 40 are underwater on their mortgages. However, while the rate of negative equity is higher in younger age brackets, the delinquency rate is noticeably lower.
Negative equity is impacting the real estate market. In hard-hit areas where a large percentage of homeowners are underwater, the available homes listed on the market are impacted, in that their prices are bid up due to limited supply. Underwater homeowners cannot easily sell their homes, but instead have to wait for their house to appreciate in order to be able to sell it. Therefore, negative equity remains a major factor in the housing market. Home values are up 3.2 percent on a year-over-year basis in the third quarter of 2012, and given our forecast of an additional 1.7 percent home value appreciation over the next year (September 2012 to September 2013), we expect that negative equity rates will continue to substantially decrease.
Further analysis can be downloaded here.