Dive Brief:

• Increases in home values are helping to reduce the amount of negative equity in the U.S. housing market, but it’s still a concern, according to the third quarter Zillow Negative Equity Report.

• Overall, the U.S. saw the negative equity rate drop to 10.9% in the third quarter from 13.4% a year ago.

• Compounding the problem are the 26.1% of homeowners with a mortgage who have less than 20% equity in their homes. 

Dive Insight:

After years of struggling to crawl out from under the housing market collapse — and just when it looked like daylight ahead — builders and home sellers now face a projected year of interest rate hikes, a climb in home prices and continued tight inventory conditions.

That combination won’t do much to bring renters into the homebuying market, although they are the first-time buyers the market needs. While it’s good news for sellers that prices are close to pre-recession levels, factors like interest rate uncertainty loom large in dampening demand. Nationwide, the number of underwater homes is down to approximately 5.3 million, according to Zillow. The number swelled to its highest point in the first quarter of 2012, when it exceeded 15 million.

Interest rates have already started their climb. In mid-December, Zillow reported that the average 30-year fixed conforming mortgage rate on the website increased by 55 basis points to 3.91% since early November and was approaching its highest level since early 2015.

The lowest rates of negative equity are found in western cities such as San Jose, CA, San Francisco, Portland, OR, Denver and Dallas. Las Vegas and Chicago are experiencing the highest levels of negative equity, with approximately 17% each.

Zillow’s report indicates that negative equity is a greater concern among owners of entry-level homes than among owners of more expensive homes, with 16.9% of homes valued in the bottom one-third of homes underwater at the end of the third quarter, compared to just 6.8% of homes in the top one-third.

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