Underwater Mortgage Borrowers Struggle to Come Up For Air

Negative equity is down to 13.1 percent nationwide, but is still a nagging problem choking real growth and limiting new inventory, according to a new report by Zillow.

Wednesday’s report found that six million homeowners were underwater in the Q4 of 2015. And while that number is still a problem, it is significantly lower than the peak 16 million underwater homeowners that existed in Q1 of 2012, and the 8 million underwater homeowners of a year ago.

According to Zillow, the millions of underwater homeowners who have resurfaced over the past year have led to a $75 billion decline in negative equity, which has helped keep the U.S. housing market jogging along steadily. But while the overall picture is vastly improved from even just a year or two ago, there are still 820,000 homeowners who owe more than twice as much on their mortgages as their homes are worth.

“Some owners are so far underwater that positive equity may be several years away, leaving them stuck in their homes unable to sell,” the report stated.

Las Vegas and Chicago have remained especially hard hit. According to Zillow, a fifth of all homeowners in these cities remain underwater. Atlanta, Baltimore, and Cleveland still have 17 percent of buyers upside down on their mortgages.

In contrast, San Jose has the lowest number of underwater homeowners, with 2.8 percent. Its closest competitor is across the Bay in San Francisco, where 4.4 percent of homeowners are upside down. Denver and Portland, Ore., each have about 5.5 percent underwater homeowners.

Svenja Gudell, Zillow’s chief economist, said that the effects of this nagging negative equity on the overall housing market could be subtle but serious.

“Over time, negative equity can act as an anchor on a housing market, preventing underwater homeowners from listing their homes and reentering the market,” Gudell said. “It is more prevalent in less expensive areas that are affordable to first-time buyers. Without these homes available, many potential buyers are sidelined and unable to take advantage of mortgage rates that remain near historic lows.”