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Home values rise, but millions still drown in debt

Thursday, 29 Aug 2013 | 12:01 AM ET
Construction workers build a new home in Miami, Florida.
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Construction workers build a new home in Miami, Florida.

More than three million U.S. borrowers have risen above water on their mortgages so far this year, thanks to swift home price appreciation, according to a new report from online real estate company Zillow.

The negative home equity rate fell in the second quarter of this year, the fifth straight quarterly drop, but it is still alarmingly high and continues to hamper the housing recovery.

Currently, 23.8 percent of homeowners with a mortgage, or approximately 12.2 million, owe more than their homes are worth, down from 15.3 million one year ago, according to the report. Some, however, are still so far underwater that even with fast-rising prices, it will take years for them to see any home equity.

(Read more: Home sales suffer on higher rates: Realtors)

"Widespread rising home values during the past year have helped chip away at negative equity nationwide, helping many homeowners who were only modestly underwater to come up for air. For those homeowners who are deeply underwater, though, there is still a long row to hoe," said Zillow Chief Economist Dr. Stan Humphries in a release.

(Read more: He's not buying a house—why is Obama on Zillow?)

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CNBC's Diana Olick discusses if potential changes to mortgage rules will cause lenders to pull back. With Casey Crawford of Movement Mortgage and David Lykken of Mortgage Banking Solutions.

Nationwide, more than half of all underwater borrowers are in in the red by 20 percent or more, and roughly one in seven owes more than twice what their home is worth.

The numbers seem incredible, given that home prices are up about 12 percent year-over-year, according to the latest S&P/Case-Shiller home price index for June, but that same index shows prices nationally are still off 23 percent from their peak in 2006. In some of the hardest hit housing markets, home values are still down around 30 percent from their recent peaks.

(Read more: Map: Tracking the recovery)

"Negative equity will be a factor in these markets for years to come, constraining the supply of homes for sale and keeping people out of the market who might otherwise get involved," said Humphries.

Adding to the problem is the number of borrowers who have so little equity in their homes that they are unable to afford a move. This "effective" negative equity rate, defined by Zillow as less than 20 percent equity, is improving but it still stands at 41.9 percent of all borrowers.

"Unfortunately, moving from negative equity to neutral or slightly positive equity probably won't make a big enough difference financially for most recently-underwater homeowners to put their homes up for sale," said Rick Sharga of Auction.com. "Until they've had a chance to build significant equity, or increase their savings, they simply won't be able to come up with the down payment they'll need for their next home purchase."

(Read more: As investors shift, housing is the new stock market)

Negative equity is one of the prime reasons behind the little inventory on the market, and ironically, that low inventory is pushing home prices higher. Rising mortgage rates and decreasing affordability will inevitably slow home appreciation, but they are unlikely to reverse it. Returning home equity could increase refinance activity, but cash-out refinances have been running very low, and rising rates have pushed refinance applications down 57 percent from a year ago, according to the Mortgage Bankers Association.

"The impact will be felt more on a local market basis than on a national one, since we're likely to see significant regional variances in home price appreciation and subsequent refinancing, and that we probably won't see a high enough volume of refinance loans—certainly very few cash-out refi loans—to have a major effect on the overall economy," noted Sharga.

(Read more: The risk of rising rates on housing)

Markets with the highest percentage of underwater borrowers include Las Vegas (48.4 percent), Atlanta (44 percent) and Orlando (39.8 percent), according to the report. Zillow economists predict an additional 1.9 million borrowers will be back in the black on their mortgages by this time next year.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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