While rising home values have driven down the share of homeowners who are underwater, the negative equity rate remains historically elevated, according to Zillow.
During the third quarter, the negative equity rate dropped to 10.9%, representing roughly 5.3 million homeowners, from 13.4% a year before, Zillow reported Thursday. Additionally, 26.1% of homeowners with a mortgage have below 20% equity in their homes, including those who are underwater.
The decline in the negative equity rate reflects the rise in home values. Places where there are the highest concentrations of underwater homeowners have typically not seen the same home price recovery as areas with the lowest rates.
The negative equity rates in Western cities such as San Jose, Calif., San Francisco, Portland, Ore., and Denver rest below 5%. Comparatively, Zillow found that Chicago and Las Vegas have the highest levels of negative equity at 17% and 16.8%, respectively. Both of these cities still have home values that are well below peak levels.
Lower negative equity levels don’t just affect underwater homeowners, but could benefit the housing market overall. Homeowners who are upside-down on their mortgage can’t refinance nor sell their homes in a manner other than a short sale, Zillow noted.
“In addition to the individual homeowners who are underwater, negative equity affects the housing market as a whole, so this is good news not only for these owners, who are now able to either sell their home or at least regain some financial stability, but also for buyers who may find more options now,” Zillow Chief Economist Svenja Gudell said in a news release. “I expect homes will gain value steadily, for solid economic reasons, and that negative equity rates will continue to fall.”