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Tide is Receding on Underwater Mortgages…but Millions of Homeowners Still Can’t Breath

Last year, 2 million homeowners came out from underwater on their mortgage (meaning they now have positive equity in their home), according to Zillow. And another 1 million more will break the surface this year.

The main reason for that is home price appreciation. As home values go up, homeowners who owe the bank more than their house is worth have a chance to breathe if the price goes up beyond the amount of the loan. Home prices are increasing, and the inventory of homes for sale is tightening: last December prices saw the biggest one-year jump in five years, and the inventory of existing homes for sale is at the lowest level in 7 years.

Of course, the irony is that home prices are increasing and inventories are slimmer in part because so many homeowners are locked out of the market because they can’t sell due to being underwater on their mortgage. Simply being stuck waiting on the sidelines means they are taking a slice out of the inventory that could be on the market.

And while it’s good that more homeowners are no longer drowning in their mortgages, it’s not that good. The appreciation in prices has not made a big dent – 13.8 million homeowners are still below, or just skimming, the surface…that amounts to 27.5% of homeowners with a mortgage.

According to Zillow’s chief economist, “negative equity is still very high, and millions of homeowners have a very long way to go to get back above water…negative equity will remain a major factor in the market for the foreseeable future”.

Collectively, American homeowners with a mortgage are underwater to the tune of over $1 trillion.

That 2 million homeowners are now able to catch their breath is good news, but many millions more are still waiting for the tide to ebb.


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