More homeowners above water

Rising home prices help

A big jump in home values has pulled 3.2 million homeowners above water on their mortgages in the past year, but that pace will slow if home price gains taper.

At the end of June, 12.2 million homeowners with mortgages — 23.8% — remained underwater, owing more on their mortgages than their homes were worth, according to an analysis by Zillow. That’s down from 15.3 million a year ago.

The drop in underwater borrowers correlated with a robust jump in home prices, which were up 12.1% for the 12 months ended in June, CaseShiller’s 20- city index shows.

Fewer underwater homeowners is a “big plus” for the economy, says Mark Zandi, chief economist at Moody’s Analytics. “The home is still the most important asset most Americans have.”

Rising home values make people feel wealthier so they’re more likely to spend. On the flip side, if homeowners are underwater, they’re more cautious with spending, Zandi says.

Underwater borrowers are also more likely to default on home loans, which can weigh on surrounding home values. They also face more obstacles to refinance into lower- cost mortgages, which can also hurt their spending, says Svenja Gudell, Zillow senior economist.

While millions of homeowners remain underwater, another 18% of mortgaged homeowners have 20% or less equity in their homes, Zillow’s data show.

That much equity is generally needed to sell one home and have enough funds to buy another one. The swollen ranks of underwater and low- equity homeowners have affected the existing home market, Zandi says. Many people feel they can’t sell, or they don’t want to sell, at today’s prices, he says.

Even with the rapid home price gains in the past year, 57% of underwater homeowners carry mortgage debt that’s 20% or more what their homes are worth, Zillow says.

It will take years for them to regain equity, even as home values continue to recover. Some homeowners may never get back to a positive- eq- uity situation, Gudell says.

Of the top 30 markets covered by Zillow, Las Vegas has the most deeply underwater homeowners. Almost 13% of mortgaged homeowners there owe twice or more what their home is worth, Zillow says. Miami is second with 8.7% of mortgaged homeowners in that situation, followed by Detroit at 8.2%.

Overall, Las Vegas also has the highest percentage of mortgaged homeowners who are underwater, at 48.4%. Atlanta is next at 44% and Orlando at 39.8%.

If home price gains slow, as many economists expect, the reduction in the number of underwater borrowers will slow, too. Over the next year, Zillow forecasts another 1.9 million homeowners will rise above water.

Separately, mortgage finance giant Freddie Mac reported Thursday that the average 30- year mortgage rate fell to 4.51% for the week ended Aug. 29, down from 4.58% a week ago. The average 15- year fixed mortgage fell to 3.54% from 3.60% a week ago.