First-time buyers know owning is a better investment than renting, but the type of homes first-time buyers are looking for are being kept off the market in part because nationally, those homes are almost three times more likely to be stuck underwater than more expensive homes.
That’s the finding of the Zillow (Z) negative equity report for the first quarter.
The national negative equity rate fell to 18.8% in the first quarter, with almost 9.7 million American homeowners with a mortgage underwater, owing more on their mortgage than their home is worth.
Specific to the challenges of first-time buyers in terms of affordability, among all homes with a mortgage nationwide, roughly one in three (30.2%) priced within the bottom third of home values were underwater in the first quarter, compared to 18.1% of homes in the middle third and 10.7% of homes in the top third.
It is very difficult for an underwater homeowner to list their home for sale without engaging in a short sale or bringing cash to the closing table, which is a major contributor to inventory shortages across much of the country, even as negative equity slowly recedes.
“The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow chief economist Stan Humphries. “It’s hard to overstate just how much of a drag on the housing market negative equity really is, especially at the lower end of the market, which represents those homes typically most affordable for first-time buyers. Negative equity constrains inventory, which helps drive home values higher, which in turn makes those homes that are available that much less affordable.”