Millions of underwater homeowners may not surface soon

(MoneyWatch) The number of homeowners whose houses are "underwater," or are worth less than the mortgage balance, shrunk again over the past three months, but still account for nearly a quarter of all homeowners, according to a new report.

Despite historic price gains this year, topping 6 percent nationally -- which is likely to be unmatched next year -- 21 percent of all homeowners are underwater, down from last quarter's 23.8 percent, according to real estate information site Zillow.

Although the number of homeowners underwater is down more than 10 percent from its peak in early 2012, the rate remains stubbornly high.

That seemingly small 2.8 percent drop this quarter, which represents 1.4 million homes, is actually the largest quarter-over-quarter drop since Zillow began tracking the data in early 2011.

Nearly 11 million homeowners remain underwater. Historically, the percentage of homes that are underwater should hover around zero, according to Svenja Gudell, Zillow's director of research.

These numbers are echoed in RealtyTrac's most recent negative equity report, which also tracked the number of underwater homes. According to the report, which was issued in September,  an estimated 10.7 million homeowners are underwater by at least 25 percent.

The pace of home value appreciation is also slowing, so at this time next year, Zillow predicts that at least 18 percent of homeowners will be underwater, trapping a significant percentage of the population with negative equity.

Until their home values recover to the point that they feel willing to sell, these sellers will keep their homes off the market, contributing to housing inventory shortages.

"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. We should feel good that we're moving in the right direction and at a fast clip," Zillow chief economist Stan Humphries said in a release.

"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," he added.

Negative equity isn't the only troubling aspect of today's housing market that will remain part of the "new normal": Mortgage delinquencies remain stubbornly high as well.

According to data compiled by the Federal Reserve, the number of mortgages that are at least 30 days past due remains worryingly high -- 8.59 percent in the third quarter of this year.

While that number has dropped by 0.75 percent in the third quarter, it is four times as high as the average in the 1990s and early 2000s.

The two factors are actually intrinsically tied together -- underwater homeowners are much more likely to default than those with at least 20 percent equity in their home, according to a U.S. Department of Housing and Urban Development study.

It looks like these factors will be part of the "new normal" for a while. Assuming home value appreciation levels off at 3.8 percent, which is what Zillow forecasts, it will take at least five years for someone whose mortgage is underwater by 20 percent to get back to parity. But more than half of those homeowners with negative equity are underwater by more than 20 percent.

The delinquency rate will take a while to drop back down to "old normal" levels as well. While it has decreased an average of 0.5 percent since peaking in 2010, it will take more than a decade before those numbers get to a sustainable level.

But it's not all bad news, according to Daren Blomquist, vice president of RealtyTrac.

"Even homeowners deeply underwater have reason for hope, with about 150,000 each month rising past the 25 percent negative equity milestone -- although it will certainly take years rather than months before most of those homeowners have enough equity to sell other than via short sale," he said in a release.

Top 5 major cities with the highest negative equity rates:

  • Las Vegas: 39.6 percent
  • Atlanta: 38.2 percent
  • Orlando: 34.2 percent
  • Chicago: 32.3 percent
  • Tampa: 32 percent
  • Ilyce Glink On Twitter»

    Ilyce R. Glink is an award-winning, nationally-syndicated columnist, best-selling book author and founder of Best Money Moves, an employee benefit program that helps reduce financial stress. She also owns, where readers can find real estate and personal finance resources.