Approximately 10.8 million homeowners are currently underwater, meaning they owe more on their property than it is worth. This figure is down more than 4.9 million from the peak experienced in 1Q12 and is a 21% decline when the negative equity high was 31.4% of all mortgaged homeowners.
In the second quarter, the negative equity rate was 23.8%, according to the Seattle-based analytic firm. The quarter-over-quarter decline represents the largest drop since Zillow began tracking negative equity in the second quarter of 2011.
From the second quarter to the third, about 1.4 million homeowners regained positive equity, which is also the biggest quarterly drop recorded by Zillow.
“Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter. We should feel good that we’re moving in the right direction and at a fast clip,” says Stan Humphries, chief economist for Zillow.
Even though there have been improvements, more than one in five American homeowners with a mortgage remains underwater. This is contributing to inventory shortages and holding back a full housing recovery.
The highest negative equity rates in the third quarter were found in Las Vegas (39.6%), Atlanta (38.2%), Orlando (34.2%), Tampa Bay (32%), Chicago (32.3%) and Detroit (31.3%).
Home price appreciation is forecasted to slow down in 2014, Zillow said earlier this month, which in turn will hurt the pace of negative equity improvement. In a year, Zillow is projecting that the negative equity rate will fall to only 18.8% and that more than half of homeowners with negative equity will be at least 20% underwater.
If home values rise by 3.8% next year as Zillow expects, it would take a homeowner who is underwater by 20% about five years to reach positive equity.
“Negative equity must be considered part of the new normal in the housing market,” Humphries says. “Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help.”