Fewer homeowners were underwater in the second quarter of 2014 marking the ninth consecutive quarter of declining negative equity, according to Zillow's latest negative equity report.
Underwater home owners are those buyers who owe more on their mortgage than the home's worth (negative equity).
The Zillow report found that one in six Americans or 17 percent (8.7 million people) were falling short on their mortgage payments in the second quarter of 2014. The figure is down from the 18.8 percent recorded in the previous quarter and is far below the 23.8 percent recorded a year earlier.
The negative equity rate - the percentage of homeowners who have paid less than 20 percent of their mortgage - also dropped to 34.8 percent from the 36.9 percent recorded a quarter earlier. The figure was 41.9 percent a year earlier.
The report also found that a large number of millennial buyers (born between 1980 to 1995) were underwater when compared to Gen X (born between 1966 to 1980) and Baby Boomers (aged 65 and older).
Zillow experts attribute the fall in negative equity to improving home values and prices. Home prices had been growing sharply in the past but of late, the rate of growth has slowed down. This could be bad news for the borrowers, but the experts predict negative equity rates will fall further to 14.9 percent by the end of the second quarter of 2015, given that the rate of home price appreciation has been stagnant.
The experts, however, added that the housing market has to grapple with negative equity rates in the years to come.
"High levels of negative equity will remain a drag on the housing market for years to come. They not only distort inventory levels, especially on the bottom end of the market, but also cause a ripple effect for first time homebuyers, through move-up buyers and high-end homebuyers," the report stated.
The report also found areas with the lowest number of underwater homeowners. Below are the top five.
- San Jose - 4.6 percent
- Austin - 8.3 percent
- Houston - 8.4 percent
- Los Angeles - 9.3 percent
- Denver - 9.7 percent
- San Diego - 10.0 percent
A new trend has caught on among these underwater homeowners. They are buying more properties and letting out some for rent to pay off the mortgage.
"Our agents are seeing people come through their door with the cash in hand to buy that next place. A lot of them obviously don't need that equity in their former home, or they're able to tap some of it out and then use it to buy the next place," Nela Richardson, chief economist at Redfin, told CNBC.
