Homes that are affordable to first-time homebuyers are more likely to be underwater than homes in higher price ranges, exacerbating inventory shortages in many markets because their owners are unwilling or unable to pull off a short sale or bring cash to the closing table.

An analysis by Zillow shows the percentage of homeowners with mortgages who owe more than their homes are worth has declined for the eighth consecutive quarter, to 18.8 percent, or nearly 9.7 million underwater homes.

But about 30 percent of mortgaged homes in the bottom third of home values were underwater, compared with 18.1 percent of homes in the middle third and 10.7 percent of homes in the top third, Zillow found.

The analysis showed that as price appreciation slows, the pace at which homeowners are getting out from underwater is slowing, too. The percentage of homes with negative equity has fallen 6.6 percentage points from the first quarter of 2013, when it stood at 25.4 percent.

But Zillow forecasts that the negative equity rate will still be 17 percent in the first quarter of 2015, an improvement of less than 2 percentage points.

“The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow Chief Economist Stan Humphries in a statement. “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.”

Even in a hot market like the San Francisco Bay Area, the disparity in negative equity between homes in the top and bottom price tiers is pronounced. In San Jose, the overall negative equity rate was 6.7 percent. But for homes in the bottom one third of home values, the negative equity rate was 12.1 percent.

Negative equity rates by market and price tier, first quarter 2014

Metropolitan area Negative equity rate (all homes with mortgages) Negative equity rate for homes in bottom price tier Negative equity rate for homes in middle price tier Negative equity rate for homes in top price tier
U.S. 18.8% 30.2% 18.1% 10.7%
New York/
Northern New Jersey
15.7% 28.8% 12.3% 5.6%
Los Angeles 11.6% 19.0% 8.1% 4.0%
Chicago 28.1% 44.8% 28.2% 12.9%
Dallas-Fort Worth 13.0% 21.5% 12.1% 7.6%
Philadelphia 20.9% 36.2% 21.1% 9.2%
Houston 9.4% 12.1% 9.7% 6.9%
Washington 20.6% 36.3% 18.1% 7.4%
Miami-Fort Lauderdale 24.9% 42.5% 23.6% 10.2%
Atlanta 33.6% 60.3% 32.1% 14.0%
Boston 11.5% 21.4% 7.8% 4.3%
San Francisco 10.5% 20.8% 6.0% 2.4%
Detroit 26.5% 54.2% 28.0% 10.0%
Riverside 22.9% 33.0% 21.8% 14.2%
Phoenix 22.7% 34.1% 21.5% 13.7%
Seattle 20.9% 35.7% 16.7% 7.2%
Minneapolis-St. Paul 19.3% 32.6% 17.0% 10.1%
San Diego 12.6% 19.9% 10.2% 5.2%
St. Louis 22.9% 41.5% 22.4% 11.0%
Tampa 27.1% 45.7% 26.4% 13.1%
Baltimore 22.7% 37.3% 22.8% 10.8%
Denver 10.8% 19.7% 8.8% 6.2%
Pittsburgh 11.2% 21.1% 10.3% 5.6%
Portland 14.9% 24.2% 11.7% 7.0%
Sacramento 20.0% 29.5% 17.7% 10.5%
San Antonio 12.8% 13.4% 14.2% 11.1%
Orlando 28.7% 44.3% 28.0% 16.5%
Cincinnati 21.1% 37.2% 19.3% 11.0%
Cleveland 23.4% 44.9% 21.5% 9.5%
Kansas City 20.7% 37.9% 18.8% 11.7%
Las Vegas 33.9% 48.2% 31.8% 23.0%
San Jose 6.7% 12.1% 4.1% 1.0%
Columbus 21.0% 40.7% 19.7% 8.6%
Charlotte 21.3% 34.5% 21.4% 11.4%
Indianapolis 16.8% 27.0% 15.0% 9.8%
Austin 8.6% 10.8% 8.3% 5.7%

Source: Zillow Negative Equity Report

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