by Calculated Risk on 5/20/2014 09:35:00 AM

From Zillow: Negative Equity Continues to Fall, Concentrated in Bottom Tier

According to the first quarter Zillow Negative Equity Report, the national negative equity rate continued to decline to 18.8 percent, down 12.6 percentage points from its 31.4 percent peak in the first quarter of 2012. Negative equity has fallen for eight consecutive quarters as home values have risen. The national negative equity rate fell from 25.4 percent in the first quarter of 2013 and 19.4 percent in the fourth quarter, while the pace of annual home value growth slowed to 5.7 percent in the first quarter of 2014, from 6.6 percent at the end of the fourth quarter of 2013. However, more than 9.7 million homeowners with a mortgage still remain underwater.
emphasis added

The following graph from Zillow shows negative equity by Loan-to-Value (LTV) in Q1 2014 compared to Q1 2013.

Click on graph for larger image.

From Zillow:

Figure6Figure 6 shows the loan-to-value (LTV) distribution for homeowners with a mortgage in 2014 Q1 versus 2013 Q1. The bulk of underwater homeowners, roughly 47 percent, are underwater by up to 20 percent of their loan value, and will soon cross over into positive equity territory. However they will still be effectively underwater, as they will not gain enough of a profit in the sale of their current house to pay the expenses and down payment associated with buying a new home.

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 6.2% 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 Q1 negative equity report in the next couple of weeks. For Q4, CoreLogic reported there were 6.5 million properties with negative equity, and that will be down further in Q1 2014.