home equity foreclosureNegative equity—owing more on your mortgage than your house is worth—has been a devastating multi-headed hydra over the past six years. Negative equity makes homeowners vulnerable to foreclosure should they hit hard times. It has sapped the primary source of retirement wealth for working families, and it has frozen owners in place, making it difficult for them to move away for better jobs or to move on to homes that better fit their pocketbooks or family needs.

For the first time in years, negative equity has declined sharply as the result of improving home values in many real estate markets, moving some one million homeowners into the black. According to Federal Reserve data, home equity rose by $457.1 billion in the first quarter of 2012, a 7.4 percent increase from the previous quarter, and its highest level since the second quarter of 2010.

Hundreds of thousands more owners will rise above the surface if prices continue to improve during the balance of the year. According to CoreLogic, at the end of the first quarter some 1.9 million of the 11.4 million borrowers underwater at that time were within 5 percent of reaching positive equity. Those 11.4 million borrowers represented 23.7 percent of all residential properties with a mortgage. This is down from 12.1 million properties, or 25.2 percent, in the fourth quarter of 2011.

A steep decline in negative equity might have some unintended consequences. A major reason prices are starting to rise is an inventory drought. Some 20 percent fewer homes than last year are on the market this year. A major reason for the drought is negative inventory; millions of owners simply can’t afford to sell. But as rising values push homeowners out of negative equity, many who have delayed their plans to move up or move on may act.

Early next spring, at the beginning of the 2013 home-buying season, would be the logical time to see how much inventories rise. Healthier inventories might slow the price rise, but they also might stimulate sales and keep prices moving north. The inventory shortage has kept home sales lower than they would have been otherwise, as many buyers couldn’t find what they were looking for. Rising demand from first-time homebuyers eager to act while homes are affordable and move-up buyers who have been long absent from the marketplace could strengthen and broaden the housing recovery.

Few will miss the record levels of negative equity that have crippled net worth and curtailed retirement plans. Homes made up 47.6 percent of the total non-financial assets held by Americans in 2009 and household net worth declined 40 percent from 2007 to 2010 due to a decline in housing prices.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

During his 30 year career in public relations and journalism, Cook has been a print and broadcast news correspondent, served two Members of Congress as press secretary, was a senior executive in the world’s largest independent public relations firm in Washington and Chicago and was vice president of public affairs for the National Association of Realtors from 1999 to 2007.At NAR, Cook supervised external communications including news and editorial coverage, video production, speech writing and communications strategic planning. He helped to manage NAR’s multimillion dollar network advertising program.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.