Borrowers Underwater on Their Mortgages Decline

Home-price gains are pulling more mortgage borrowers above water, but the problem of borrowers owing more on their homes than they are worth could persist in some markets for years to come.

At the end of the first quarter, 15.4% of homeowners with a mortgage—or about 7.9 million—had mortgage balances that surpassed their homes’ value, according to real-estate information company Zillow Group Inc., down from 16.9% in the fourth quarter of last year.

But 4 million of the underwater borrowers owed at least 20% more than their homes were worth, Zillow said, leaving them little reason for cheer even as the housing market heats up around them.

The negative-equity problems could lead to higher foreclosure rates in hard-hit markets while also limiting the supply of homes for sale, said Zillow chief economist Stan Humphries.

“It’s clear that it’s going to be a long-term problem in the housing market, not a short-term problem we can quickly get past,” said Mr. Humphries.

Negative equity was especially prevalent on homes with lower values and in markets hardest hit by the financial crisis, Zillow said.

More than a quarter of owners with a mortgage on the least-valuable third of homes were underwater, Zillow said, compared with 8% in the most valuable third of homes. Housing markets with the highest levels of negative equity included Atlanta, Chicago and Las Vegas.

In Phoenix, where 19% of mortgaged homes in the first quarter were underwater, tight inventory at the lowest price points is frustrating many buyers, said Michael Orr, director of Center for Real Estate Theory and Practice at the W.P. Carey School of Business at Arizona State University. He said for-sale homes priced below $200,000 are typically getting many offers.

The number of active listings overall in Phoenix fell 19% between May 1, 2014, and May 1 this year, Mr. Orr said, while median prices rose to $215,000 from $204,500.

“It’s quite a significant part of the reason that we’ve got low supply,” Mr. Orr said. “Some of them are not in financial difficulty but can’t sell. They would rather just sit on it and hope that at some point prices go back up.”

see more: http://www.wsj.com/articles/borrowers-underwater-on-their-mortgages-decline-1434081661