Mortgage, home-equity woes linger

Number of 'underwater' borrowers is down but remains elevated, Zillow finds

The Wall Street Journal

Nearly 10 million U.S. households remain stuck in homes worth less than their mortgage and a similar number have so little equity they can't meet the expenses of selling a home, trends that help explain recent sluggishness in the housing recovery.

At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage—9.7 million households—were "underwater" on their mortgage, according to a report scheduled for release Tuesday by real-estate information site Zillow Inc. While that is an improvement from 19.4% at the end of last year and a peak of 31.4% 2012, those figures understate the problem.

In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings. Most move-up homeowners typically use their home equity to cover broker fees, closing costs and a down payment for their next home. Without those funds, many homeowners can't sell.

"It's a sobering appreciation that negative equity is going to be with us for a while to come," said Stan Humphries, Zillow's chief economist. "Negative equity is central to understanding a lot of the distortions in the marketplace right now."

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Those distortions include the inventory of homes for sale, which, while rising, is low by historical standards. It also helps explain why first-time home buyers are having such a hard time cracking the market. Real estate is in some ways like a ladder, Mr. Humphries notes, so when underwater homeowners don't trade up it makes it harder for newcomers to get in.

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At the same time, prices have risen about 11% over the past two years, and several times that in rebounding markets like Las Vegas, Phoenix and much of California. Rising prices, combined with higher mortgage rates, have given sticker shock to buyers looking for a deal. This has been particularly hard on first-time home buyers who are usually in the market for a lower-priced home.

In the report, Zillow notes that the least expensive homes—those in the lower third of the price spectrum, which first-time home buyers are most likely to be shopping for—are much more likely to be underwater than higher-priced homes. Nationwide, about 30% of homes in the bottom third of the price range were underwater in the first quarter, compared to 18% of homes in the middle third and 11% of homes in the top third. (Zillow derives its underwater data by matching its database of estimated home values with loan balances from TransUnion, the credit reporting agency.)

Regionally, underwater homes are concentrated in areas where the real-estate bust hit hardest. Among major metropolitan areas, Las Vegas had the nation's highest share of underwater mortgages, followed by Atlanta and Orlando, Fla.

Many underwater homeowners have gone into foreclosure or executed a short sale, where they sell the home for a loss. But many aren't budging. "There are people who still have their jobs and they're not late on their payment, but they can't move," said Vita Deveaux, a real-estate agent at Keller Williams Realty First Atlanta.

Take Patricia McCutcheon, 50 years old, who lives in the Clayton County area near Atlanta. Ms. McCutcheon and her husband owe $119,000 on their home, but figure it could sell for about $70,000 based on recent sales in the area. The debt hasn't kept them from moving up: In July, they are leaving their home for a new place in Paulding County. But instead of selling their underwater home, they are going to rent the place out. "It seems to be the only option that we have," she said.

Ms. McCutcheon, who is a full-time student working on a bachelor's in psychology, says she and her husband, who works in information technology, considered a short sale, but didn't want their credit rating to suffer.

Write to Conor Dougherty at conor.dougherty@wsj.com



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