This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Record 1.4 Million Underwater Borrowers Freed In Third Quarter

Stocks in this article: Z ^DJI

NEW YORK (TheStreet) -- The number of borrowers who owe more than their homes are worth fell by the fastest pace ever in the third quarter, thanks to a continuing rise in home prices.

According to the latest report from Zillow, nearly 1.4 million homeowners were freed from "negative equity" in the third quarter. These homeowners now have some equity in their homes, which means they might be able to sell their homes and pay off their mortgage or refinance into a lower interest rate loan.

About 4.9 million homeowners have been pulled out of the water since the housing market bottomed in early 2012.

As many as 10.8 million Americans or 21% of all homeowners with a mortgage still remain under water. That is high, but it is down substantially from the 31.4% peak at the first quarter of 2012.

The negative equity rate matters because the deeper a borrower is under water, the more likely he or she is to default on their loan.

Moreover, the lack of equity restricts people from selling their homes. The percentage of borrowers who have relatively little equity in their homes -- less than the 20% necessary to cover downpayment for a new home and other transaction costs -- is 39.2%.

This creates a shortage of supply in the market pushing prices higher.

This is one reason why the hardest-hit areas where most borrowers are under water are now seeing the highest price increases.

Since its peak, Phoenix's negative equity rate dropped by 33.1 percentage points, Las Vegas' dropped by 31.4 percentage points and Sacramento's dropped by 27.8 percentage points. Home values in Las Vegas and Sacramento are up over 30% year-over-year as of September.

"... markets with higher levels of negative equity also have homes that remain on the market for fewer days," according to Zillow. "Of course at the end of this cycle, higher home values work to reduce negative equity and stabilize the market, a movement we have been seeing over the past quarter."

Still, some borrowers are so deeply under water, it could take years to work off their negative equity, according to Zillow.

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.

What's more, the pace of home price appreciation now appears to be slowing, due to the impact of higher mortgage rates. That means the pace of declines in negative equity will slow as well.

Zillow predicts home price gains will slow to 3.8% over the next year (September 2013 to September 2014). It expects the negative equity rate among all homeowners with a mortgage will fall to at least 18.8% by the third quarter of 2014, freeing more than 1.1 million additional underwater homeowners nationwide.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs