Fewer home mortgages are under water as values stabilize

The percentage of Americans owning homes that are under water is falling, according to Zillow's third-quarter Real Estate Market Reports, which focus on 156 metropolitan areas. The other good news is that home values were relatively flat between the second and third quarters, so the price declines may be over for most homeowners.

Zillow found that 21% of homeowners with single-family homes were underwater on their mortgages at the end of the third quarter, down from 23% in the previous quarter. Two factors play into the drop. One is that many under water homeowners have already lost their homes to foreclosure. The second is that home values have stabilized in some areas of country and have even started going back up in other areas.

Home values fell 6.9 percent year-over-year to $190,400, according to the Zillow Home Value Index, but home values remained relatively flat from the second quarter to the third quarter. The Zillow Home Value Index measures the value of all homes, not just those sold in a particular period.

Zillow found that home values increased in 24 of the 156 metropolitan areas it tracks and remained flat in an additional 16. But 116 of the metropolitan areas showed year-over-year declines in the third quarter.

Cash Is King

About one-fifth of all sales in September were foreclosure resales. That's up from 14.7 percent a year ago. Merced, Calif., had the highest rate of foreclosure resales at 74.2%, but this area has been near the top of this list for more than a year. Clearly, investors see this as a good opportunity for future profits as the area stabilizes. Other areas where foreclosure homes are being bought up at a rapid pace include Stockton, Madera, El Centro, all in California, and Las Vegas.

I live in one of the hard-hit areas in Central Florida. I've heard from people who want to buy a foreclosure or short-sale home that they're having difficulty getting a contract. They're finding they must compete with investors who have cash. And right now, cash is king. Anyone wanting to sell would prefer not to wait around for a mortgage to be approved (or worse, denied).

I've also heard complaints from real estate professionals handling home sales in Central Florida that appraisals are coming in so low they can't keep a contract together. This makes home sales dependent on the buyer getting a mortgage even riskier. But if the buyer is offering a cash deal, sellers often take it even if a contract comes in at a lower price. Are you seeing similar situations were you live?

Lita Epstein has written more than 25 books, including The 250 Questions You Should Ask About Buying Foreclosures.

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