Zillow chief economist Svenja Gudell queries the digital real estate engine's third quarter negative equity data and trending patterns, and concludes a glass-half-empty take-away on its significance.

The problem is, Gudell notes, is that even though there's been a lot of progress moving home mortgage borrowers out of official negative equity, the "effective negative equity" overhang is large, and the impact of concentrations of negative equity homeowners in particular neighborhoods is a dead-weight against recovery in select markets. Here's how those two factors conspire to hamper a rebound, per Gudell:

Markets with particularly high negative equity rates usually (but not always) share a few common traits, including:

  • Fewer homes for sale, especially lower-priced homes that are both more likely to be underwater, and more likely to be sought by first-time and entry-level homebuyers. 
  • Counterintuitively, homes that are for sale in markets where negative equity is more common tend to stay on the market longer. 
  • Higher risk for elevated foreclosure rates, as deeply underwater homeowners may be more likely to default on their loan if they can no longer keep up with the payments or decide to walk away from what has become a bad investment.
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