by Calculated Risk on 11/21/2013 12:37:00 PM

From Zillow: U.S. Negative Equity Rate Falls at Fastest Pace Ever in Q3

According to the third quarter Zillow Negative Equity Report, the national negative equity rate fell at its fastest pace in the third quarter, dropping to 21% of all homeowners with a mortgage underwater from 31.4% at its peak in the first quarter of 2012. In the third quarter of 2013, more than 1.4 million American homeowners were freed from negative equity, and 4.9 million mortgaged homeowners have been freed since the beginning of 2012. However, roughly 10.8 million homeowners with a mortgage still remain underwater. Moreover, the effective negative equity rate nationally — where the loan-to-value ratio is more than 80%, making it difficult for a homeowner to afford the down payment on another home — is 39.2% of homeowners with a mortgage. While not all of these homeowners are underwater, they have relatively little equity in their homes, and therefore selling and buying a new home while covering all of the associated costs (real estate agent fees, closing costs and a new down payment) would be difficult. Of all homeowners – roughly one-third of homeowners do not have a mortgage and own their homes free and clear – 14.7% are underwater.
emphasis added

The following graph from Zillow shows negative equity by Loan-to-Value (LTV) in Q3 2013 compared to Q3 2012.

Click on graph for larger image.

From Zillow:

Figure 7 shows the loan-to-value (LTV) distribution for homeowners with a mortgage in 2013 Q3 vs. 2012 Q3. Even though many homeowners are still underwater and haven’t crossed the 100% LTV threshold to enter into positive equity, they are moving in the right direction. The good news is that, with these high rates of appreciation, negative equity has been reduced at a fast pace in the near-term. However, we expect negative equity rate reduction to slow in the fourth quarter and next year as home value appreciation is already moderating and will continue to do so later this year and into the next. ... On average, a U.S. homeowner in negative equity owes $74,632 more than what the house is worth, or 41.8% more than the home’s value. While roughly a fifth of homeowners with a mortgage are underwater, 92% of these homeowners are current on their mortgage payments.

Almost half of the borrowers with negative equity have a LTV of 100% to 120% (the light red columns). Most of these borrowers are current on their mortgages - and they have probably either refinanced with HARP or the loans are well seasoned (most of these properties were purchased in the 2004 through 2006 period, so borrowers have been current for eight years or so). In a few years, these borrowers will have positive equity.

The key concern is all those borrowers with LTVs above 140% (about 7.3% of properties with a mortgage according to Zillow). It will take many years to return to positive equity ... and a large percentage of these properties will eventually be distressed sales (short sales or foreclosures).

Note: CoreLogic will release their Q3 negative equity report in the next couple of weeks. For Q2, CoreLogic reported there were 7.1 million properties with negative equity, and that will be down further in Q3.