For millions of Americans still stuck in homes with mortgages bigger that the house is worth, the long slog back to dry land is getting longer.
Nationwide, plummeting prices from the housing collapse in 2007 left more than a quarter of all homeowners with a mortgage owing more than their home was worth. Now, the recovery in home prices in many parts of the country has helped lift some underwater homeowners back above water.
But as the rebound in home prices has slowed in recent months, so has the recovery process for those still submerged with negative equity, according to the latest data from RealtyTrac.
"I'd expect to see this process of digging out of the hole slow down in 2014 because we expect home price appreciation to slow down in 2014,"
"I'd expect to see this process of digging out of the hole slow down in 2014 because we expect home price appreciation to slow down in 2014," said RealtyTrac vice president Daren Blomquist. "We're already seeing that in the smaller decrease in underwater homeowners over the last quarter."
The pool of underwater borrowers peaked at 12.8 million, or 29 percent of all properties with a mortgage, in the second quarter of 2012, according to RealtyTrac. Rising prices have lifted millions back above water. As of the first quarter of this year, some 9.1 million homes (or 17 percent of homes with mortgages) were "seriously" underwater, owing at least 25 percent more than property's estimated market value.
But the recovery has been very uneven. Like everything else about real estate, location matters a lot.
A look at the county-level data shows a wide range of recovery rates in counties within the same region. In hard hit markets such as Fresno and Stockton, Calif. For example, some 20 to 40 percent of homeowners with a mortgage are still underwater. Not far away, coastal counties such as San Francisco (4 percent underwater) and Orange County (7 percent underwater) have fared much better.
"Those counties have bounced back much more quickly," said Blomquist. "And that's happening all across the country."
Homeowners in hard-hit states have had the toughest time getting back above water. Those include Nevada, where 34 percent remain seriously underwater, Florida (31 percent), Illinois (30 percent), Michigan (29 percent), and Ohio (27 percent), according to RealtyTrac data.
Hard-hit metro areas include Las Vegas (37 percent seriously underwater), Lakeland, Fla., (36 percent), Palm Bay-Melbourne-Titusville, Fla., (35 percent), Cleveland (35 percent), Akron, Ohio (34 percent), and Detroit (33 percent).
Rapidly building equity
On the flip side, homeowners in counties with strong home price gains are rapidly building equity. That's likely to help bring more of those homes to market—helping to ease the shortages of homes for sale that have helped drive prices higher in many markets. As those shortages ease, the rate of price increase should continue to slow.
Nationwide, some 19 percent of all "equity-rich" homeowners with a mortgage owed half or less of their home's value in the first quarter, up a percentage point from the fourth quarter of 2013. Those high-equity properties are concentrated in metro areas like San Jose, Calif., (where 39 percent of homeowners have more than 50 percent equity), Honolulu (35 percent), San Francisco (35 percent), Poughkeepsie, N.Y., (34 percent), and Los Angeles (32 percent).
In past economic recoveries, rising home equity has boosted confidence and spending. That spillover effect is beginning to show up in a rise in new building permits, according to Blomquist.
"Homeowners who may have deferred maintenance or remodeling may say, 'I have all this equity; now I feel confident enough to redo the kitchen or build that extra room," he said. "That will trickle down to jobs and more money in the economy."
The recovery in home prices isn't the only path out of underwater status: Millions of these homeowners may still lose their home to a short sale, in which the lender agrees to let the homeowner sell the property for less than the outstanding debt.
But that option is less common, said Blomquist. As lenders watch home prices recover, they're less willing to take a loss and more inclined to wait for the property to appreciate and foreclose if the homeowner is behind on their payments.
And the deeper underwater, the more likely the lender will take back the property in foreclose. Homes that are seriously underwater — the amount owed is at least 25 percent higher than the home's value—are nearly three times as likely to be in foreclosure, according to RealtyTrac's data.