Despite the national negative equity rate falling through the first quarter of 2013, millions of homeowners with mortgages that are not underwater still lack enough equity even if they wanted to move.
According to Zillow, 13 million homeowners—accounting for 25.4% of all homeowners with a mortgage—were underwater in 1Q13. However, another 18.2% of mortgage borrowers, or 9 million homeowners, while not technically underwater, likely do not have sufficient equity to afford to purchase a new home.
Meanwhile, when including homeowners with less than 20% home equity, the “effective” negative equity rate at the end of the first quarter was 43.6%, resulting in a total of 22.3 million homeowners. In realistic terms, this means these homeowners don’t have the ability to put a 20% downpayment on a new house, therefore tying them to their current property and contributing to inventory shortages.
“Reaching positive equity, even barely, is an important milestone. But things like real estate agents’ fees and a downpayment 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,” said Stan Humphries, chief economist for Zillow.
A homeowner reaches positive equity when the market value of their home is greater than their outstanding loan balance. But listing a home for sale and buying a new one generally requires equity of at least 20% to comfortably meet related costs.
Among the 30 largest metropolitans covered by Zillow, the highest negative equity rates was Las Vegas, where 71.5% of homeowners were in this category, followed by Atlanta (64.1%) and Riverside, Calif. (59.7%).
“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,” Humphries added. “The only cure is patience, as rising home values continue to build equity to the point where more homeowners can realistically sell.”
The Seattle-based real estate information provider is predicting that the negative equity rate will decline to 23.5% in a year. If this happens, 1.4 million homeowners nationwide will move into positive equity.
Zillow said the majority of these newly freed positive equity homeowners are anticipated to come from Los Angeles, Riverside and Phoenix, consisting of 94,642, 74,693 and 51,580 homeowners, respectively.