A recent report by the real-estate website zillow.com shows that more than one fifth (21.5%) of U.S. homeowners are still "underwater": The value of their home is less than the amount they owe on it. Some markets improved, but not by much. According to CNN.com:
"In some markets, residents were helped by improving home prices. As prices rise, it narrows the gap between what homeowners owe and what they could sell for. As a result, hard-hit metro areas such as Merced, Calif., and Orlando, Fla., recorded huge declines in the number of underwater borrowers. Merced was down to 40% while Orlando fell to 64.6%.
"In fact, most markets trended up. Only 25 of 142 markets surveyed lost ground, led by Lansing, Mich., where negative equity grew to 31.5%."
Still, it looks like housing markets are stabilizing. While underwater mortgages are contributing to foreclosure rates, the most immediate effect is likely to reduce labor market liquidity since workers can't afford to leave their homes to find work elsewhere. The key to keeping the housing market stable will be a stable housing market--keeping people employed in their own jobs or by starting their own businesses.