Why are home prices rising? One reason: a shortage of homes for sale.
But how can that be? After years of poor sales, shouldn’t there be a flood of potential sellers rushing to market as conditions improve?
That seems logical, but a study by Zillow , the housing and mortgage data firm, sheds light on a big part of the problem: the “effective” rate of underwater homes. Underwater means the mortgage borrower owes more than the home can fetch in a sale. To sell, the homeowner must come up with other money to make up the difference and retire the old loan. Many people just don’t have that much sitting around, or if they do they can’t bring themselves to tap their college or retirement funds.
Zillow says that at the end of the first quarter 25.4% of all homeowners with mortgages were underwater. On top of that 18.2% had less than 20% equity, meaning the mortgage balance exceeded 80% of the home’s value. Together, these two categories create an effective underwater rate of 43.6% – 22.3 million homes.
“These homeowners likely cannot afford a down payment for a new home, tying them to their current homes and contributing to inventory shortages,” Zillow says.