PhotoIt's not as bad as it was, but it's still not very good.

That's the bottom line of Zillow's latest report on negative equity in residential real estate, the percentage of homeowners who still owe more on their mortgages than their homes are worth.

Nationally, 13.7% of urban homeowners are underwater, compared to 11.2% of homeowners in the suburbs.

The numbers, of course, present something of a “glass is half full/empty” scenario. While the percentage is double digits five years after the housing market began its recovery, it is down sharply from the nearly one-third of homeowners who found themselves underwater on their mortgages immediately after the housing market crash.

At that time, real estate values plunged because so many homes financed with subprime mortgages had gone into foreclosure. Home values had inflated to unrealistic proportions because almost anyone could qualify for some kind of mortgage, increasing demand for homes beyond anything sustainable.

Bad timing

People who purchased homes in 2006 or 2007, when prices reached their peak, were the most likely to find themselves owning tens of thousands of dollars more on their homes than they could sell them for. Not only could they not sell their homes, they could not refinance them either. That led to many foreclosures when homeowners who purchased homes with low “teaser” interest rates could not refinance to a lower rate and more affordable payment.

Now, eight years after the housing market collapsed and five years after it started to recover, the Zillow Negative Equity Report finds a remarkable parity between urban and suburban property. That's largely due to the fact that home prices recovered sharply in cities because younger home buyers prefer an urban setting.

But Zillow found some metro areas where the spread between urban and suburban negative equity rates is significant. Cleveland and Detroit have the biggest difference – 13.6 and 10.8 percentage points, respectively. In these metros, urban home values aren't reflecting the national trend and are trailing behind the overall region's recovery.

Nearly everyone was affected

"At its worst, negative equity touched all kinds of homeowners in all kinds of markets," said Zillow Chief Economist Dr. Svenja Gudell. "The type of community a given home was in – urban or suburban – mattered little.”

That's not the case now. In some cities, new residents have flocked to the urban core, renovating properties and revitalizing neighborhoods. It's these developments, says Gudell, that has helped to raise urban home values.

The overall rise in home prices over the last five years has also helped shrink the negative equity rate from crisis levels. And for the first time since then, Zillow notes, none of the largest housing markets in the nation have negative equity rates over 20%.

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