The number of underwater homeowners fell at the fastest rate on record in the third quarter, but a recent slowdown in price appreciation means the pace of improvement will likely fade, Zillow reported.

Approximately 1.4 million homeowners who previously owed more on their homes than they were worth threw off the shackles of negative equity in the third quarter from the previous quarter. The share of homeowners with mortgages that have negative equity has fallen by about one-third since its peak in the first quarter of 2012 of 31.4 percent, or 15.7 million homeowners.

In the third quarter, 21 percent of all homeowners with a mortgage, or 10.8 million homeowners, were underwater, according to Zillow.

“Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter,” said Zillow Chief Economist Stan Humphries in a statement. “We should feel good that we’re moving in the right direction and at a fast clip.”

Still, the pace of improvement is likely to decelerate due to slowing price gains, and negative equity is sure to continue to contribute to inventory shortages, Zillow said.

“… Negative equity will remain a factor for years to come, and must be considered part of the new normal in the housing market,” Humphries said. “Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help.”

The listing portal forecast that the negative equity rate will fall to 18.8 percent by the third quarter of next year thanks to a predicted home value gain of 3.8 percent in 2014.

Source: Zillow

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