Underwater Borrowers Gasp for Air as Home Equity Rises: Zillow

NEW YORK ( TheStreet) -- Rising home prices are helping to pull more borrowers from being underwater, but the housing recovery could still be easily derailed, real estate information provider Zillow said on Thursday.

The proportion of borrowers who owe more than their homes are worth fell to 28.2% in the third quarter, from 30.9% in the second quarter, the steepest quarter-over-quarter decline in negative equity since the Zillow revised its methodology in 2011.

Much of the decline was explained by rising home prices. The Zillow Home Value Index rose 1.3% in the third quarter to a median value of $153,800.

The drop in underwater borrowers or those with negative equity is a good sign because it means more borrowers can take advantage of the drop in interest rates and refinance. It could also encourage some homeowners to list their properties amid rising home prices.

The number of underwater borrowers is still staggering at slightly more than 14 million. Other industry estimates have the number of negative equity borrowers at over 10 million.

One reason for the difference could be that Zillow estimates negative equity based on current outstanding loan balances on all mortgages as opposed to other reports that calculate it based on the most recent loan on the property.

Of the 30 largest metros covered by the report, the five experiencing the greatest quarterly declines were Phoenix, Las Vegas, Denver, Sacramento, California and Orlando.

With the exception of Denver, each of these cities still have over 40% of their borrowers underwater. In Vegas, over 63% of the homeowners have negative equity, while in Atlanta the ratio is over 50%.

Recent housing data has been encouraging but the market remains fragile according to economists.

"The housing market has found real momentum of its own, but is not immune from shocks to the broader economy," Zillow economist Stan Humphries said in a statement. "If negotiations centered on resolving the fiscal cliff don't inspire confidence in investors and consumers alike, recent home value gains - and, as a result, falling negative equity rates - could stall."

--Written by Shanthi Bharatwaj in New York

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