This Day On The Street
Continue to site
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

Record 1.4 Million Underwater Borrowers Freed In Third Quarter

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.

Must Read: [video] Fed Tapering Expected in Coming Months (Update 1)

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.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
Z $28.08 12.05%
AAPL $94.19 -1.04%
FB $118.06 0.54%
GOOG $695.70 0.48%
TSLA $222.56 -4.20%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs