Recent Boston area housing statistics — included as part of third quarter housing results reported by Zillow –– show that roughly a million U.S. homeowners finally owe less than their homes are worth.

Water Receding in Boston area Housing Market?

According to the Zillow report, the negative equity rate among homeowners in the U.S. dropped to 13.4%. That’s a 1% decrease from results compiled during the second quarter. The negative equity rate was 16.9% a year ago. Historically, the expected norm is a negative equity rate of 5% or less.

Housing experts say the quick rise in home values have helped the negative equity improvement. Home prices went up during October, increasing 6.8% from the same month a year ago. Nationwide, the home price increases have collectively lowered negative equity to almost $60 billion in the last quarter.

Despite these remarkable improvements, negative equity is still higher than it should be. And while a larger number of borrowers are now able to refinance because of increased values, a huge number of homeowners are still underwater. Analysts estimate over 6.5 million homeowners owe more on their mortgages than their home is worth. In addition, roughly 30% of U.S. homeowners with mortgages are still technically in a negative equity position. They lack the needed equity to make a down payment on their next home or can’t afford to sell their current home and move.

Some markets throughout the U.S. are faring better than others. Prices vary across the country and the recovery may be slower in some areas. Effective negative equity rates in U.S. housing markets range from a low of 8% to a high of over 30%.

A market with a higher negative equity rate has a smaller number of houses on the market. This usually impacts first-time buyers the hardest, since negative equity usually affects lower-priced homes. The nation’s supply of affordable homes for sale is short overall, but especially so for entry-level or “starter” homes. Boston area housing experts agree the biggest obstacle to a continued housing recovery is the lack of homes for sale.

With the number of repeat buyers continuing to shrink over the past ten years, there are challenges ahead. Tighter credit standards — including requiring higher FICO credit scores — have made it harder for many buyers to qualify for loans to buy larger or higher-priced homes. A decade or more ago, homeowners trading up to another home were in the 30-40 age range. Today they are much older, in the 50+ age range.

The housing outlook, therefore, is of concern to some. Inventory continues to drop resulting in a rise in home prices. And while home equity is improving, the gains often have a negative impact on the overall health of the Boston area housing market.

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The Commerce Department recently reported housing starts in the Boston area housing market and other parts of the U.S. dropped to a seven month low in October. And while single-family home construction in the South fell, a greater-than-expected surge in building permits indicate housing is still relatively strong.

A Closer Look at Boston Area Housing

Housing starts decreased 11% to slightly over one million units (adjusted seasonally) representing its lowest level since March. Despite that news, October housing starts remained above one million units for the seventh month in a row — one sign of a continued recovery to the housing market.

Experts say a stronger labor market along with a greater number of young adults leaving the parental “nest” has given increased support to the housing sector.

While residential construction makes up only about 3% of the gross domestic product (GDP) of the U.S., housing greatly affects the overall economy. Higher home prices mean increased household net worth and increased consumer spending. In addition, housing has helped the GDP grow for the last eighteen months. It has also cushioned the blow of weakened manufacturing.

Single-family home starts dropped 2.4% to 722,000 units. Multi-family housing starts dropped a little more than 25% to 338,000 units.

Despite housing starts suffering in some areas, the number of actual building permits issued was encouraging. Building permits increased 4.1% to a 1.15 million unit level last month, with single-family permits rising almost 2.5% to the highest level since December 2007.

Building permits for multi-family units increased nearly 7%, giving housing experts optimism that the market is on stable ground. The increase in permits for multi-family units — primarily apartment buildings — is a result of pent-up demand for rental units.

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Rent increases seem to be the norm rather than the exception in the Boston area housing market. While increases affect renters at all income levels, those near the bottom are being hardest hit.

Rent Inflation Affects Boston Area Housing

Higher rents are having a greater impact on the lower-cost housing units than on the higher-cost units say researchers for the Federal Reserve Bank. They reviewed national data compiled by the American Housing Survey from 1989-2013 to estimate the rate of inflation for rents and utilities. Their findings concluded around 32 million dwellings were constructed during that timeframe. Roughly 10.8 million were built to be marketed to the highest income earners, compared to only 3.1 million targeting the lowest income group.

The researchers further conclude increased numbers of new units attracting high-end earners is likely responsible for higher vacancy rates. Less competition among tenants helps mitigate rent inflation in that income group. Despite rents being higher for those new units, as a percentage it usually doesn’t rise as much as the lower-cost rental units. The reason? Supply of rental units at the lower end of the spectrum is more apt to occur from rents that were once higher, but have been lowered into the next bracket. The result is a “trickle-down” effect, meaning those units will probably still have higher rents than the lower-end housing, pushing up rent inflation for that segment.

During 2011-2013 rent inflation in the lowest bracket represented in the data was roughly 16%. Inflation in the highest bracket was -.4%.

This comes as little surprise to renters in the Boston area housing market. Annual rent growth during September was 5.2%, representing the highest increase since 2011 and marking the eighth consecutive month the rate has been 5% or more.

Based on a nationwide survey by property rental website Rent.com, property managers expect to raise rents as much as 8% next year. This is due to an anticipated rise in demand and a drop in vacancies. Vacancy rates for rental units across the nation recently dropped to 6.8% — the lowest in twenty years.

Further affecting the rent inflation dilemma is that construction of multifamily housing came to a surprising halt during the housing crisis. New units recently added are barely meeting pent-up demand. Rents and occupancy levels are enjoying all-time highs, driven in part by higher demand and lower supply. While new construction permits for multifamily units are within 1% of where they were during the same month last year, most of the new supply is in higher-priced markets. The urban centers of major cities have benefitted, but not renters in suburbia or in less-populated cities desperately in need of more affordable rental units.

Boston area housing experts say more than 25% of renters currently spend over 50% of their income on rent.

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Indirectly addressing concerns that the current Boston area housing market — among others across the nation — is destined to suffer the woes of the housing collapse of less than a decade ago, Former Federal Reserve Chair Ben Bernanke recently shared his thoughts on the subject.

Has Boston Area Housing Learned a Lesson?

Bernanke said there were a number of factors that led to the housing bubble and the 2008 financial crisis. He has been quoted as saying “financial regulatory supervision should be the first line of defense against asset price bubbles and other risks to financial stability.” While the Federal Reserve was largely criticized for their monetary policy prior to the crisis, Bernanke contends the policy wasn’t the main reason for the housing bubble. If anything, the Fed may not have done enough to regulate mortgage lending at the time.

He cited growing political support during that time for sub-prime lending as a means to provide the “American Dream” of home ownership. The positive end, therefore, justified the questionable means. And while government regulators were adamant in their efforts to get rid of predatory lending they turned a blind eye toward other bad lending practices. As a result, the Boston area housing market suffered greatly.

Bernanke seems satisfied that a number of specific shortcomings were addressed as a result of the housing bubble and ensuing collapse. In fact, he says, some people feel that mortgages are too hard to get — an “overcorrection” has resulted in trying to prevent a recurrence of the past. Yet he contends the financial system is stronger and banks and other lender capital is higher, creating a more resilient system than before.