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Over 35s are Dragging us Underwater

Homeowners age 35 to 49 are three times more likely to be underwater on their mortgages than those 20 to 34 years old. One out of three boomer owners 50 years and older are likely to be underwater.

  • The U.S. negative equity rate fell to 17 percent of all homeowners with a mortgage in the second quarter of 2014, representing 8.7 million homeowners. Negative equity is expected to fall to 14.9 percent by the second quarter of 2015.
  • 15.3 percent of millennial homeowners with a mortgage are underwater, compared to 42.6 percent of Generation X homeowners and 31.1 percent of Baby Boomer homeowners.
  • The “effective” negative equity rate, including those homeowners with 20 percent or less equity in their homes, is 34.8 percent.



According to the second quarter Zillow Negative Equity Report, the national negative equity rate continued to decline in 2014 Q2, falling to 17 percent, down 14.4 percentage points from its peak (31.4 percent) in the first quarter of 2012. Negative equity has fallen for nine consecutive quarters as home values have risen. However, more than 8.7 million homeowners with a mortgage still remain underwater (Figure 1).

Moreover, the U.S. effective negative equity rate—where the loan-to-value ratio is more than 80 percent, making it difficult for a homeowner to afford the down payment on another home—remains stubbornly high at 34.8 percent of homeowners with a mortgage. While not all of these homeowners are underwater, they have relatively little equity in their homes, and therefore selling and buying a new home while covering all of the associated costs (real estate agent fees, closing costs and a new down payment) would be difficult (Figure 2). Among all homeowners—roughly one-third of homeowners do not have a mortgage and own their homes free and clear—11.9 percent are underwater.

Generational Impact

Approximately 42.6 percent of Generation X homeowners (those aged from 35 to 49) are underwater on their mortgage, compared to 15.3 percent of millennial homeowners (20 to 34 years old) and 31.1 percent of Baby Boomers (50 to 64 years old) (see Figure 7). Because it is very difficult for an underwater homeowner to list their home for sale, the wide disparities among generations stand to have ripple effects throughout the housing market. Baby Boomers may not be able to find move-up buyers for their homes as Gen X remains stuck, and millennials can’t move into the more affordable starter homes currently occupied by Gen X, especially as inventory remains extremely tight at the bottom end of the market.

So while millennials are not directly impacted by high negative equity rates because many are not homeowners, they do face a high level of competition for the few homes that are available and attractive to many first-time homebuyers and investors alike.  Younger homebuyers also likely can’t compete with all-cash offers, and the share of cash-sales has been much higher lately than is historically customary


Mounting home value declines during the housing recession led to historically high levels of negative equity, which in turn severely restricted the available for-sale inventory in the marketplace. Figure 3 shows national for-sale inventory that has been seasonally adjusted and smoothed. While inventory levels are still depressed, inventory has been increasing over the last few months.

It remains difficult for underwater homeowners to list their homes for sale without engaging in a short sale or bringing cash to the closing table. The bulk of negative equity has accumulated in the bottom tier—the bottom third of homes by home value—in most markets across the nation, which has led to especially tight inventory conditions among lower valued homes.

Figure 4 shows the share of homes by price tier in negative equity. Among all homes with a mortgage nationwide, 28.2 percent valued within the bottom third of home values were underwater in the second quarter, compared to 15.8 percent of homes in the middle tier and 9.2 percent in the top tier.

Figure 5 shows the inventory levels across the different price tiers for June for the largest metros, showing the largest inventory shortages among the bottom tier.

Some metros that are experiencing very high home value appreciation rates are also seeing large declines in negative equity, including Atlanta (down 4.7 percentage points from the previous quarter) and Riverside (down 4.9 percentage points). But in general, negative equity levels still remain very high and will be slow to dissipate as home value appreciation and foreclosure activity slows. Therefore, inventory will remain impacted for several years to come and this will cause a ripple effect in the overall housing market. Furthermore, even if potential home buyers are able to find a house they want and in theory can afford, many of them don’t have enough equity in their current home to make the move.

Figure 6 shows the loan-to-value (LTV) distribution for homeowners with a mortgage in 2014 Q2 versus 2013 Q2. The bulk of underwater homeowners, roughly 7.9 percent, are underwater by up to 20 percent of their loan value and will soon cross over into positive equity territory. However they will still be effectively underwater, as they will not gain enough of a profit from the sale of their current house to pay the expenses and down payment associated with buying a new home.

Nationally, the effective negative equity rate stands at 34.8 percent of all homeowners with a mortgage. Therefore, in a move-up market, homeowners with less than 20 percent equity will effectively still be “locked out” of the resale market. On average, a U.S. homeowner in negative equity owes $72,381 more than what their home is worth, or 39.5 percent more than the home’s value (Table 1). While roughly a fifth of homeowners with a mortgage are underwater, 93.1 percent of these homeowners are current on their mortgage payments.

The Zillow Negative Equity Report incorporates mortgage data from TransUnion, a global leader in credit and information management, to calculate various statistics. The report includes, but is not limited to, negative equity, loan-to-value ratios and delinquency rates. To calculate negative equity, the estimated value of a home is matched to all outstanding mortgage debt and lines of credit associated with the home, including home equity lines of credit and home equity loans. All personally identifying information (“PII”) is removed from the data by TransUnion before delivery to Zillow. Overall, this report covers more than 870 metros, 2,400 counties, and 23,000 ZIP codes across the nation.


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