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How 10 million underwater mortgages are hurting the housing market

Daily Ticker

Despite all the improvement in the housing market over the last few years, close to one-fifth of homeowners remain underwater on their mortgages.

Related: One of the biggest disappointments of the recovery

According to a new Zillow report, 18.8% of U.S. homeowners with a mortgage, or 9.7 million households, were underwater on their mortgages at the end of the first quarter. That's an improvement from the end of last year when this figure was 19.4%, and it's a large improvement from a peak of 31.4% in 2012. But it shows that negative equity is still an issue in the housing market.

What's more, there is an additional 10 million households, Zillow reports, that have 20% or less equity in their homes. For those homeowners, it would be difficult to sell without coming up with some money to cover the broker fees, closing costs and the down payment for the next home. Typically sellers use their home equity to cover these costs.

In the accompanying video, Yahoo Finance Editor-in-Chief Aaron Task talks about the impact of these equity issues on the housing market, remarking that the data shows "how bad the bursting of the bubble was...how ridiculously high prices got and how much they crashed." 

Task points out that the improvement in underwater households shows the market has worked some of this problem out, but "it is going to be a major headwind for several years to come." 

Related: More homes than ever are beyond the reach of the middle class

This headwind blows in the face of first-time buyer, for example. Zillow found the least expensive homes are much more likely to be underwater than higher-priced homes. First-time home buyers are more likely to be looking for homes at this lower-end of the price spectrum. The lack of availability means it's difficult for first-time buyers to purchase a "starter" home. Many experts see first-time buyers as essential to the housing market recovery -- but underwater borrowers' inability to trade up is holding back the process.

Related: Fannie and Freddie: Too big to wind down

Check out the video to see what policy help is still available for homeowners, and what they can do. 

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