For many homeowners who bought during the last two years when most local markets reached their peak, subsequent declines in value have left them with negative home equity, owing more than the home is currently worth. As of September 30, nearly 16 percent (15.6%) of homeowners nationwide who bought in the last year and 17.5 percent of those who purchased two years ago have current home values that are less than the original mortgage amount. By comparison, less than 2 percent (1.8%) of those who purchased a home five years ago have seen their equity slide into the negative.
Not surprisingly, markets with the greatest proportion of homes with negative equity were those hit hardest by declining values. For example, people who purchased homes in California's Central Valley, parts of Florida and Las Vegas during the past year have seen double-digit depreciation and negative equity rates reach up to five times the national median.
"The decline in home values picked up steam in the third quarter, posting the largest nationwide year-over-year drop in more than a decade," said Stan Humphries, Zillow's vice president of data and analytics. "Continuing depreciation coupled with the downward trend in the size of mortgage down payments has left many new home owners 'upside down' on their mortgage, meaning they owe more than the current value of their home.
"Since homeownership is typically a long-term investment, it's important to keep in mind that short-term value declines mostly affect homeowners who either must sell or want to withdraw equity," added Humphries. "The run-up in home values we saw over the last several years had many home buyers counting on continued housing appreciation to drive home equity growth, but the market has proven that this strategy is no longer a safe short-term bet."
Despite decreasing home values and increasing incidence of negative equity scenarios, most U.S. homeowners still have positive equity in their homes. In fact, many homeowners who purchased in the last two years have seen overall equity increase since they made their purchase. The variances and movements in owner equity depend on many factors such as when the home was purchased, how much was put down and net market appreciation.
Americans who bought a home in the last two years placed a median down payment of 10 percent and now have a median of 13 percent equity in their investment. This is the equivalent of owning only about 200 square feet - the size of one standard bedroom - in an average 1,500-square-foot, three-bedroom, two-bath home. Most homeowners who bought five years ago have the benefit of time and the market on their side. After placing a median down payment of 11 percent, these homeowners watched home values grow at an annualized rate of 9.4 percent over the past five years and now own a median of 41 percent of their home.
