The number of homes with underwater mortgages dropped sharply in the second quarter of the year, thanks to increasing home values, according to a new report.

There were 7.1 million homes in negative equity in the second quarter of the year, according to the new analysis released today by CoreLogic, down from 9.6 million homes in the first quarter. That translates to 14.5 percent of all residential properties with mortgages, down from 19.7 percent at the end of the first quarter.

The company estimates that a total of 3.5 million homeowners have returned to positive equity in the first half of the year, but expects the rate of improvement will slow as home price gains cool off in the second half of the year. There are currently 41.5 million homes with mortgages in the United States, according to CoreLogic figures.

"Price appreciation obviously had a positive impact on home equity over the first half of 2013, especially the second quarter," said Anand Nallathambi, president and CEO of CoreLogic. "Despite the substantial decrease in negative equity, there's more ground left to gain with the 7.1 million U.S. residences that remain underwater."

A drag on housing markets

Negative equity, also known as being underwater on one's mortgage, is a situation where the amount owed on the mortgage exceeds the current value of the home. CoreLogic estimates that there was a total of $428 billion in negative equity in U.S. residential mortgages at the end of the second quarter, down from $576 billion at the end of the first quarter.

Underwater mortgages can be a drag on housing markets by limiting the number of homes that are available for sale, as owners in negative equity are reluctant to sell their homes at a loss. It also makes it difficult for those owners to move up to a different home they otherwise might be interested in purchasing.

Negative equity also greatly increases the likelihood that a homeowner will fall into foreclosure, and can make it difficult or nearly impossible to refinance a mortgage without going through a special program such as HARP.

In addition to underwater mortgages, it's estimated that some 10.3 million homes have less than 20 percent positive equity, or 21.1 of all homes with mortgages at the end of the second quarter.

Concentrated in 5 states

Nevada had the highest rate of underwater mortgages as of the end of the second quarter of 2013, with 36.4 percent of mortgaged properties underwater. It was followed by Florida, 31.5 percent; Arizona, 24.7 percent; Michigan, 22.5 percent and Georgia, 20.7 percent.

All told, those five states accounted for 34.9 percent of all negative equity in the United States.

Published on September 10, 2013