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Nearly half of younger homeowners are "underwater"

(MoneyWatch) The number of U.S. homes worth less than what is owed on their mortgages has dropped over the second quarter, thanks mostly to rising property values. Yet millions of homeowners remain "underwater," including nearly half of those under the age of 40.

In the second quarter, 30.9 percent, or 15.3 million homeowners, had negative equity in their homes, down sequentially from 31.4 percent, according to a new report from real estate listing firm Zillow. That means 400,000 homeowners are no longer upside down on their mortgages.

Some 46 percent of younger homeowners are underwater, a much higher rate than with older mortgage holders. Zillow chief economist Stan Humphries notes that younger buyers tend to have bought their homes more recently, just as the housing market was falling apart. They didn't have much time to see their homes increase in value before the bubble burst. The youngest buyers, those in their 20s and early 30s, also may not have put much money down when they bought their homes.

"Many of these young homebuyers may have been purchasing a [Federal Housing Administration] mortgage with a 3.5 percent down payment, for example," he said. "It doesn't take much of a drop in home prices to put a homeowner with a 3.5 percent down payment underwater."

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There is a silver lining for younger homeowners. though. "The younger homeowners are in shallow water relative to their older cohorts," Humphries said. "And you're seeing higher delinquency rates with older homeowners."

On average, homeowners in the 20-to-24-years-old range are only 12 percent underwater. By comparison, 50-to-54-year-old homeowners are generally 30 percent underwater, and 10 percent of these are significantly behind on their mortgages. Only 6 percent of younger mortgage holders are delinquent.

Still, even for homeowners who are least underwater, it will likely take years to recover their property's full value, or at least enough value where they can consider selling their homes. Home prices continue to improve from the housing crash, but only by a percentage point or so a year.

For homeowners who have been able to hang on this long, there's little motivation to sell now. That willingness to stay put is putting a squeeze on the number of homes for sales in many markets, which is simultaneously helping home prices increase and gumming up home sales.

Homeowners never want to sell when real estate prices are touching bottom, but plenty of people want to buy these days, particularly investors looking to rent out single-family homes and first-time homebuyers hoping to find a good deal.

Both of these potential buyers are competing for homes in the low- to mid-range price tiers. Meanwhile, the supply of pricier homes is still outpacing demand, which would potentially come from all these under-40 homeowners who are unwilling to sell while they're still underwater.

The shrinking number of people with negative equity in their homes is one of many signs that the housing market is improving. Home values are up 1.2 percent over last year, while sales are up about 10 percent, according to the National Association of Realtors. But most real estate industry observers acknowledge that the country's real estate market is nowhere near normal yet.

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