Overall, 9.3 million U.S. residential properties were deeply underwater at the end of 2013, according to data from Realtytrac. The latest figure is down from 10.7 million deeply underwater housing units in September 2013 and 10.9 million through January 2013.
A borrower that is deeply underwater has a loan to value of 125% or above, meaning the homeowner owed at least 25% more than the estimated market value of the property.
Negative equity peaked in May 2012 when 12.8 million residential households were deeply underwater, which was 29% of mortgaged properties.
During the housing downturn we saw a downward spiral of falling home prices resulting in rising negative equity, which in turn put millions of homeowners at higher risk for foreclosure when they encountered a trigger event such as job loss, says Daren Blomquist, vice president at RealtyTrac.
Now, the reverse trend is happening, where rising home prices is leading to fewer borrowers with negative equity.
This is giving millions of homeowners a lifeline to avoid foreclosure when they encounter a trigger event, Blomquist added. On the other end of the spectrum, the percentage of equity-rich homeowners is nearing a tipping point that should result in a larger inventory of homes listed for sale and give the overall economy a nice shot in the arm in 2014.
The states with the highest percentage of residential properties deeply underwater in December were Nevada (38%), Florida (34%), Illinois (32%), Michigan (31%), Missouri (28%) and Ohio (28%).
Additionally, fewer foreclosures were deeply underwater in December compared to three months earlier. A total of 239,470 residential properties, or 48%, actively in the foreclosure process were considered deeply underwater, which is 60,000 less than September.
Meanwhile, 31% of all residential properties in the foreclosure process had some positive equity, up from 24% with equity in September.
However, millions of homeowners nationwide are in such deep equity that it will not be easy for these borrowers to regain their equity.
The longer these homeowners remain in a negative equity position without relief in the form of a principal loan balance reduction, the more likely that foreclosure will become the path of least resistance for them, Blomquist says.