Negative Equity Still Cripples Young Families

Despite rising home values that are freeing homeowners from negative equity, nearly half of all homeowners under 45, many of whom have young, growing families in need of more space, are still frozen in place because they are underwater on their mortgages.

New data released today by Zillow show that younger homeowners are more susceptible to negative equity than older owners. Some 46 percent of homeowners under the age of 40 are underwater and slightly more than half (50.8 percent) of those aged 30 to 34 are underwater. Yet younger owners between the ages of 20 and 45 are more likely to be current on their mortgages compared to older homeowners.

Zillow reported that negative equity declined in the second quarter, with 30.9 percent of U.S. homeowners with mortgages - or 15.3 million - underwater. That was down from 31.4 percent of homeowners with mortgages, or 15.7 million, underwater in the first quarter. Zillow said the total amount of negative equity in the country declined by $42 billion in the second quarter to $1.15 trillion.

Of the 30 largest markets tracked by Zillow, negative equity fell the most from the first to the second quarter in the Phoenix metro (from 55.5 percent to 51.6 percent) and the Miami-Ft. Lauderdale metro (from 46.4 percent to 43.7 percent). The Las Vegas metro continues to see the highest negative equity rate, with 68.5 percent of borrowers underwater. That was down from 71 percent in the first quarter.

“Rising home values in the second quarter caused a decline in the number of underwater borrowers, but young homeowners continue to be disproportionately affected by negative equity,” said Zillow Chief Economist Dr. Stan Humphries. “We hear about tight inventory in many markets, and it’s clear where this is coming from. Negative equity is trapping young people in their homes, preventing them from selling. These homes are likely the very starter homes potential first-time homebuyers are seeking.”

The vast majority of homeowners who are able to move up- some 71 percent- are married couples and the leading reason that homeowners buy a new home is for more space. Last year one out of five families with children moved to larger homes because they need the space, according to the National Association of Realtors.

Negative equity is a major cause of the housing depression because it makes owners with mortgages vulnerable to foreclosure and reduces household wealth used and assets for retirement other purposes. It has also been recognized as a major factor contributing to reduced home sales and lower inventories by freezing owners in their homes so that they cannot sell.

The negative equity totals in the Zillow report differ from CoreLogic’s recent finding (Rising Values Push Nearly One Million Homeowners Above Water) that only 23.7 percent of homeowners with a mortgage are now underwater because Zillow uses current outstanding data on loan balances on all mortgages from TransUnion, while other reports estimate current outstanding loan balance based on the most recent loan on a property (i.e., the original loan amount at time of purchase or refinance). Both Zillow and CoreLogic, however, reported similar, significant declines in negative equity during the first half the year as home prices stabilized and values improved in many markets.