Rate of underwater homes fell in third quarter

November 22, 2013

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According to data from Zillow, the number of homeowners who are underwater fell by the fastest rate ever during the third quarter of 2013.

Underwater homeowners are those that owe more on their mortgages than their home is worth. During the recession, the number of homeowners behind on their loans climbed significantly as equity plummeted when the housing bubble burst. For the housing market, the number of defaulted loans and foreclosures has negatively impacted the health and rate of recovery.

In the third quarter, underwater homes fell to just 21 percent of all homeowners with a loan. At its peak level, the number of homes underwater was 4.9 million more in the last quarter of 2012 than in the third quarter of 2013. Zillow reported the latest figure is roughly 10.8 million homes.

Recovery emerging
While the recent report is good news for the housing market and the economic recovery, there is still more work to be done, as almost 1 in five homes still remain underwater. Many housing markets across the country are experiencing a lack of inventory and foreclosed homes are holding homeowners back from selling their properties. The lack of inventory has driven prices up steeply in some markets over the last year.

According to Zillow, home prices rose by 6.4 percent in the third quarter of 2013. With price appreciation, negative home equity declined. With more home equity, fewer loans are likely to fall behind on their payments. During the same time that prices rose, 1.4 million homeowners were able to recover from negative equity. As home prices continue to rise, more mortgages are expected to improve.

"Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter," said Stan Humphries, Zillow's chief economist. "We should feel good that we're moving in the right direction and at a fast clip. But negative equity will remain a factor for years to come, and must be considered part of the new normal in the housing market. Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help."

Underwater insurance
Despite mortgage rates still near their all-time lows, many loans remain in trouble. This have given rise to a new trend of underwater insurance to fill the gap on the value of a home. If a homeowner cannot pay the full amount of their mortgage and has underwater insurance, the insurance company will pay the lender the remaining amount, according to CNBC.

For the many homeowners who are currently underwater, insurance will not be able to help. However, for first-time home buyers or those who have a new mortgage loan, underwater insurance might be able to help protect against a future foreclosure. The insurance is not designed for high-end homes worth more than $400,000.

Contact the Federal Savings Bank, a veteran owned bank, to discuss low cost mortgages.