Negative Equity Rate Decline in Q2 Fueled by Appreciation in Least Valuable Homes

The negative equity rate on U.S. single-family homes fell below 15 percent during Q2, totaling approximately 7.4 million homes at the end of the quarter—slightly less than half the total of upside down homes at the worst of the crisis, according to the Zillow Q2 2015 Negative Equity report released Thursday.

A lingering effect of the financial crisis nearly seven years later, the number of borrowers who owe more than their homes are worth in the United States totaled 15 million at their peak. That number has been reduced to slightly below half by many factors, including foreclosures, short sales, and rapidly rising home values.

In the first half of 2015, strong appreciation for the least valuable third of homes (which are more likely to be underwater than more valuable homes) fueled the continued decline of the nation's overall negative equity rate, according to Zillow.

"If the overall negative equity rate is going to continue to fall, it will need to keep being driven down by improving health at the bottom end of the market," Zillow Chief Economist Dr. Svenja Gudell said. "The least valuable homes really bore the brunt of negative equity during the recession, and that's where most negative equity remains concentrated today. As more first-time buyers enter the market seeking these less expensive homes, home value growth at the bottom end could continue to outpace growth overall, which will be good news for millions of underwater homeowners in these homes."

"If the overall negative equity rate is going to continue to fall, it will need to keep being driven down by improving health at the bottom end of the market."

In the Atlanta market, nearly 43 percent of the last valuable homes were underwater, compared with only 9.4 percent of high-end homes. Annual appreciation in value of the bottom tier of homes has outpaced overall home value appreciation for all homes in Atlanta since June 2014, which has likely driven the negative equity rate in that market down from 29 percent to 21 percent during that time. According to Zillow, markets that have struggled with high negative equity rates such as Sacramento, Riverside, and Phoenix, have seen similar trends to the one in Atlanta.

Las Vegas (23.8 percent), Atlanta (20.4 percent), and Chicago (19.2 percent) continued to have the highest rates of single-family negative equity among the 35 largest housing markets in the country. The negative equity rate among condo-owners was much higher than that of single-family homes at the end of Q2 (20 percent). Only in three markets, Detroit, Memphis, and Pittsburgh, were single-family homeowners more likely to be underwater than condo owners, according to Zillow.