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Underwater Rate Falls Below 20%; Declines Expected to Slow

For the first time in years, the national negative equity rate dipped below 20 percent to close out 2013, Zillow revealed Friday in its quarterly Negative Equity Report.

According to the company’s stats, negative equity declined to 19.4 percent nationally as of the end of last quarter, bringing the underwater rate down more than 8 percentage points over the course of 2013.

By Zillow’s estimate, approximately 9.8 million homeowners remain underwater on their mortgages.

“We’ve reached an important milestone as negative equity has fallen below 20 percent nationwide, which has helped free up marginally more inventory and contribute to further stabilization of the market,” said Dr. Stan Humphries, Zillow’s chief economist.

While celebrating the latest news, however, the company also notes that the “effective” negative equity rate—which includes the number of mortgaged homeowners with 20 percent or less equity in their homes—remains stubbornly high at 37.6 percent. Unable to sell their homes for enough profit to comfortably purchase a new one, these homeowners are effectively immobile in the market.

Furthermore, as home value gains slow and foreclosure numbers fall, the rate of declines in negative equity is expected to drop off. By the end of 2014, Zillow forecasts the negative equity rate will be around 17.2 percent—a much smaller drop than the one observed last year.

What’s more, Zillow pointed to 26 markets that could see a rise in negative equity as homes lose value—including St. Louis, the only market among the largest 35 that is projected to see in an increase in underwater homes.

“[A] number of headwinds will prevent negative equity from falling at the kind of sustained, rapid pace we need before the market can completely return to normal,” Humphries said. “High negative equity is just another sign of how distorted the market continues to be, and how far we still have to go on the road back to normal.”

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