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How are millions still underwater as home prices rise?

Fast-rising home prices brought 1.5 million borrowers up from underwater on their mortgages in 2015, but there are still twice as many drowning. In total, 3.2 million homeowners nationally still owe more on their mortgages than their homes are currently worth, according to a new count by Black Knight Financial Services.

That brings the average negative equity rate to 6.5 percent, a vast improvement from the worst of the housing crash, but still well above historical norms. More concerning is that negative equity is now concentrated at the bottom price tier of the market. More than 16 percent of borrowers in these homes are underwater, which means they are frozen in place, unable to sell without losing money; these are the homes the market needs most, in order for young renters to become homeowners.

Sinking house underwater
Mike Kemp | Getty Images

"Even after four years of improvement, the recovery has not reached all corners," said Ben Graboske, senior vice president of Black Knight Data & Analytics. "When we looked at the population by home price levels, we found that over half of the nation's underwater properties are in the lowest 20 percent of their respective markets. That's the highest share on record."

At the current rate of improvement in home prices, it would take more than five years for the negative equity rate at the low end of the housing market to reach 2005 levels, which is twice as long as homes in the top tier of the market, according to Graboske.

As with everything in real estate, the underwater numbers vary depending on location. Nevada, where home prices are still 34 percent below their peak, wins the dubious distinction of having the largest share of underwater borrowers at 14 percent.

Looking beyond states, at the lowest end of local markets, the bottom 20 percent in terms of price, Memphis, Tennessee, Cleveland, Detroit and St. Louis show negative equity rates at more than 40 percent. Again, these borrowers cannot move without paying into their homes and are 10 times more likely to default on their home loans than those who have even a small amount of equity.

Ironically, the negative equity on the low end of the market is fueling overheated price growth across even the midtiers of the housing market. That is because it plays heavily into the severe lack of supply of homes for sale this spring. Underwater borrowers are less likely to move. On top of that, homebuilders are not focused on the low end, because they can't make enough money on cheaper homes to offset their rising costs for land and labor. The resulting short supply pushes prices higher for what is available on the low end.

Even those who might be able to pay into their houses to move are not willing to because of a fundamental shift since the recession: Americans are becoming much less mobile and living in their homes far longer.

"The economy has become less dynamic, and so you have less movers in the real estate market. You've got folks who are more reluctant to move because they're not comfortable with the job market. They view their employment much more skeptically," said Sam Khater, chief economist at CoreLogic.

Again, the negative equity situation continues to improve, but not fast enough to fuel a market that desperately needs more homes for sale. If overheated prices finally push buyers back, it will take even longer for underwater borrowers to find air.