August 12th, 2010 5:08 PM by Lehel S.
NEW YORK (CNNMoney.com) -- More than 20% of the nation's mortgage borrowers owe more than their homes are worth.
At 21.5% for the third quarter, it is a small improvement over the previous quarter, when 23.3% of loans were underwater, according to real estate website Zillow.com.
This so-called negative equity is a hotly watched statistic because it is a prime predictor of foreclosure -- second only to loss of income.
"It is the paramount challenge facing housing markets," said Stan Humphries, Zillow's chief economist. "We already have had record levels of foreclosure and, combined with high unemployment, negative equity is very toxic to the market."
But don't cheer about the slight gains in the past three months. Most of the improvement comes because so many people lost their homes to foreclosure
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%.
Neighboring Detroit also worsened, jumping up to 31.4%, as did Grand Junction, Colo., where the it grew to 31.2%.
Las Vegas continued to lead the nation, with 73.9% of all mortgage borrowers owing more than their properties are worth. In Phoenix, that total is 66.8%; in Orlando, 64.6%; and in Reno, 61.9%.