Fewer Homes Underwater At End of Third Quarter

But the reason for the decline is no reason to celebrate. It wasn't because home values are rising, but many of those underwater homeowners have already gone to foreclosure.

About 10.8 million homes showed negative equity at the end of September, according to CoreLogic Inc., which tracks real estate values. That's down from about 11 million at the end of June and is the third straight quarterly decline.

An additional 2.4 million borrowers were near negative equity with less than five percent equity in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.

Negative equity, often referred to as "underwater" or "upside down," means that borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.

"Negative equity is a primary factor holding back the housing market and broader economy," said Mark Fleming, chief economist with CoreLogic. "The good news is that negative equity is slowly declining, but the bad news is that price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity."

Negative equity remains concentrated in five states: Nevada, which had the highest negative equity percentage with 67 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (46 percent), Michigan (38 percent) and California (32 percent).

The largest declines in negative equity were concentrated in the hardest hit states. Alaska experienced the largest decline, falling 1.8 percentage points, followed by Nevada (-1.6), Arizona (-1.4), California (-1.2), and Florida (-0.9). Idaho and Alabama are the only states with a noticeable increase, which is not a surprise given they are currently the two top states for home price depreciation, the company said.

Although the level of negative equity is very high, there are still many homeowners with equity. Nearly half of New York borrowers have 50 percent or more positive equity, which leads the nation.