Negative Equity

For the first time since the 2008 housing crash, the share of American homeowners underwater on their mortgages has dropped below 10 percent. Yet negative equity continues to weigh on the nation’s housing market.

The latest negative-equity report from online real estate database company Zillow found that 9.1 percent, or 4.4 million homeowners, owe lenders more than the value of their homes; 21.9 percent fewer than during the housing crisis. Negative equity hobbles the market by cutting into inventory, as underwater homeowners tend to stay in their homes rather than sell at a loss, while demand from the largest homebuyer group in the nation, Millennials, is already eclipsing supply.

Aaron Terrazas, senior economist for Zillow, says, “In the corners of the country where home values have been stagnant in recent years, homebuyers can easily fall underwater, particularly those who buy with small down payments.”

In some metros the share of homeowners with negative equity is higher than in others, particularly in the Midwestern cities of Chicago and Detroit. Of the 35 U.S. metros measured, Detroit has the highest share of homeowners (25.4 percent) who owe 200 percent or more of their home’s value. In Cleveland, the share is 22 percent, and in Chicago it’s 20 percent.

However, Chicago had the highest effective negative equity rate in the study, topping 34 percent. This rate includes homeowners who have some equity in their homes but not enough to sell and use the profits to purchase another home. St. Louis and Washington, D.C., were the only other metros over 30 percent. Currently the national effective negative equity rate is 24.6 percent.