Zillow’s realistic look at the negative equity rate

Negative equity rate improving, but there’s more to the story

According to Zillow, although the negative equity rate among homeowners with a mortgage fell to 25.4 percent in the first quarter, another 18.2 percent likely do not have enough equity to move.

Over 13 million remain underwater and another 9 million don’t have enough equity to leave, and when including homeowners with less than 20 percent home equity, the “effective” negative equity rate was 43.6 percent (22.3 million homeowners), all unlikely to be able to afford a down payment for a new home, keeping them tied to their current home, keeping inventory levels tight.

Zillow projects that the negative equity rate will fall to 23.5 percent by the first quarter of 2014, and 1.4 million homeowners will be lifted into positive equity territory, with these “newly freed homeowners” anticipated to hail mostly from Los Angeles, Riverside, and Phoenix.

Many homeowners are simply stuck

Zillow Chief Economist Dr. Stan Humphries said, “Reaching positive equity, even barely, is an important milestone. But things like real estate agents’ fees and a down payment for the next home traditionally come out of the proceeds from the prior home’s sale. Without enough equity, these costs will instead have to come out of a homeowner’s pocket, leaving many still stuck.”

“Looking at the effective negative equity rate could explain why recent, healthy declines in the number of underwater borrowers haven’t yet translated into more homes for sale,” Dr. Humphries added. “The only cure is patience, as rising home values continue to build equity to the point where more homeowners can realistically sell.”

Negative equity differs from city to city

Among the 30 largest metro areas covered by Zillow, those with the highest effective negative equity rate, including homeowners with 20 percent equity or less, include Las Vegas (71.5 percent); Atlanta (64.1 percent); and Riverside, Calif. (59.7 percent).

Zillow predicts the negative equity rate will improve, but no dramatic surges are foreseeable, a sentiment most economists agree on.