Rising home prices have thrown a life preserver to thousands of locals who are underwater on their home loans.
Thanks to double-digit price gains over the past year, the number of Las Vegans with negative equity — owing more on their mortgage than their home is worth — fell below the 50 percent watermark in the quarter that ended in June, according to real estate website Zillow.
That means most of the market is above water for the first time since Zillow began tracking equity in early 2011, and housing inventories and consumer spending could benefit, experts said.
The share of locals with negative equity fell to 48.4 percent in the second quarter, down from 54.3 percent in the first quarter and well below a high of 71 percent in the first quarter of 2012, Zillow reported Wednesday. Zillow’s analysis compares current outstanding loan amounts on individual owner-occupied homes with the homes’ current estimated value. Credit reporting agency Trans-Union provided the loan details.
The rapid receding of underwater properties took researchers by surprise. Svenja Gudell, a senior economist with Zillow, called the market’s fast appreciation “baffling” but said the price gains have spurred an equally speedy equity comeback.
“It’s nice to see a market that was so hard hit be able to rebound so quickly,” Gudell said. “While your numbers are still extremely high, you’ve really come a long way and had a really good reduction in negative equity.”
The news wasn’t all good. The Las Vegas Valley’s negative equity was more than twice the national level of 23.8 percent, and it was exponentially higher than a healthy rate of less than 5 percent.
Plus, Las Vegas ranked No. 1 in negative equity among the country’s 30 biggest markets, with Atlanta’s 44 percent and Orlando, Fla.’s 39.8 percent placing a distant second and third.
Even with the decline, the valley had 161,486 households underwater — to the tune of $15.7 billion — at the end of June. And the number of homeowners who owe more than double what their home is worth was at 26.7 percent, twice the national rate of 13.4 percent.
Still, the local market crossed a threshold that is important for a few reasons.
First, more owners will list homes for sale because they finally can, Gudell said. That will ease tight inventories that drove up prices more than 30 percent year over year in July and kept first-time buyers out of the market as cash investors dominated. Foreclosures may slow because there is little incentive to default on a house that you might be able to sell for a profit, Gudell said.
Rising home values also create a wealth effect because homeowners feel richer when their house is worth more than they owe.
“If your house is an asset you can lean on, that does a whole lot for consumer confidence. A healthy housing market drives a healthy economy,” Gudell said.
Bryan Kyle, owner and broker-manager of First Serve Realty in Las Vegas, said his company and its clients definitely feel a difference.
As values plummeted and big numbers of homes sank underwater in 2010, First Serve expanded its property management arm from a dozen or so homes to nearly 200. Many of those customers couldn’t sell and were trying to hang on by renting out. At the market’s lowest point in 2011 and 2012, 80 percent of First Serve’s revenue came from property management.
Things are different today. Clients are selling some of those homes, and 70 percent of the firm’s sales come from brokerage services, Kyle said. For the first time in years, First Serve is sending out postcards and mailers to grab new sales business.
“Everybody we talk to is in a much better mood. Everybody is happy to hear what their home is worth, as opposed to a year or two ago, when nobody wanted to know what that bank-owned house around the corner just sold for,” he said.
Equity gains aren’t even. Some ZIP codes and areas remain harder hit.
“There are still a lot of people in trouble. I’d say 70 to 80 percent of the people we’re managing for are still not in a position to sell even if they wanted to,” Kyle said.
In North Las Vegas’ 89030 ZIP code, 72.1 percent of homeowners were underwater in the second quarter. In 89115, around Nellis Air Force Base, 66 percent had negative equity.
ZIP codes with the lowest negative equity included Summerlin’s 89134, where 25.7 percent owed more than their home was worth, and Anthem’s 89052, which had a negative equity rate of 30.5 percent.
Las Vegas isn’t even the worst upside-down town in Nevada.
Among all 800 U.S. cities Zillow tracks, Fernley, about 40 miles east of Reno, had the highest share of underwater owners, at 57.1 percent. Pahrump ranked third, at 49.3 percent. Las Vegas was fourth overall.
Gudell said submarkets that suffer most from negative equity tend to be far from central business districts or have large numbers of new homes that sold at the market’s 2006 price peak.
Because the Las Vegas Valley was building 36,000 new homes a year during the housing bubble, it could be years before negative equity retreats to healthy levels. As more owners sell, price gains will ease, and equity increase will slow, Gudell said.
Zillow forecasts that the share of local homeowners underwater will drop to about 40 percent by the second quarter of 2014, freeing 23,600 more households from negative equity. But it will take five years or so to drop below 20 percent, Gudell said.
That should keep a bit of a lid on inventories. Though housing supplies should rise, there’s little risk of a big flood of homes onto the market, Gudell said.