Twin Cities no longer awash in underwater homes

There is positive news on the negative equity front.

Higher home prices across the country are dramatically reducing the number of homeowners underwater, those who have a mortgage that exceeds the value of their house. In the Twin Cities metro, fewer than one in 10 homeowners with a mortgage was underwater, down from 20 percent two years ago, according to a first-quarter report from CoreLogic.

That's slightly below the national average, and a positive shift for the housing recovery, which has faced a host of head winds in recent months. Nationwide, 12.7 percent of all homeowners with a mortgage — 6.3 million homes — were underwater.

"Prices continue to rise across most of the country, and significantly fewer borrowers are underwater today compared to last year," said Anand Nallathambi, CoreLogic's president and CEO. "An additional rise in home prices of 5 percent, which we are projecting will occur over the next 12 months, will lift another 1.2 million properties out of the negative-equity trap."

Though the housing recovery is well underway, the negative-equity problem has been a lingering challenge for the broader economy. People who are underwater are often stuck in their homes, limiting their ability to trade up to a more expensive house, or to move. Often, they're forced to let their house fall into foreclosure, or negotiate a short sale. Those short sales happen when a lender agrees to absorb the loss on a property by approving a sale for less than what is owed, enabling the seller to avoid foreclosure.

The negative-equity situation also has contributed to a severe imbalance between buyers and sellers by limiting the number of houses that are on the market. And many who are underwater aren't likely to invest in improvements that help fuel economic growth.

But conditions are improving in the Twin Cities, where the number of short sales has been declining steeply. During May there were only 236 new short-sale listings, a 48 percent decline from last year, according to the Minneapolis Area Association of Realtors.

Willette said getting a short sale approved can be a lengthy, frustrating process because it requires the cooperation of many parties. Because of that, many homeowners try to modify the terms of their mortgage instead. He recently listed a condominium in south Minneapolis that was worth $75,000 less than what was owed on the mortgage. It initially sold within a week, but the deal fell apart when the bank made a counter-offer. When it went back on the market, it sold within a day. "That was a battle," he said.

In the Twin Cities metro, 9.9 percent, or 57,008, of all residential properties with a mortgage, were in negative equity territory as of the first quarter of 2014 compared to 10.2 percent, or 57,966 properties, at the end of 2013.

Many of those properties are in neighborhoods with a high concentration of minorities, according to a recent report from the Minnesota Homeownership Center. In Minneapolis' Near North neighborhood, for example, more than a third of all houses were underwater last year, deepening the economic disparities in the Twin Cities.

Zillow chief economist Stan Humphries said that because of recent slowing of home price gains, the recovery itself is moderating.

"While we're on the road back to normal, this process won't happen overnight," he said.