The number of U.S. homeowners who owe more on their mortgage than their home is worth has fallen off by nearly half in the last two years, but third-quarter data shows millions are still close to slipping back under.
In a report released this week , property data company Zillow  estimated that 8.7 million homeowners living in the nation's top housing markets were underwater on their mortgage as of the end of the third quarter, putting the country's negative equity rate at 16.9 percent. The U.S. underwater rate peaked at 31.4 percent in 2012's first quarter.
"The market has made terrific strides since bottoming out in late 2011 and early 2012, with millions of underwater homeowners freed in just the past few years, and millions more set to surface in coming months and years," said Dr. Stan Humphries, chief economist at Zillow.
By the end of Q3 2015, the company expects negative equity will drop further to a rate of 15.2 percent.
While improving trends in home values and foreclosures have helped push more homeowners into positive equity positions, many are still barely afloat, possessing too little equity to realistically afford the cost of selling their home and buying a new one. Because they're essentially locked into their houses, those homeowners are unable to contribute to their local stock of for-sale homes and are stuck in the way of entry-level or move-up buyers.
Factoring in that group, Zillow estimates the "effective" negative equity rate is closer to 35 percent.
On top of that, most of the improvement in home values has happened in the housing market's highest price tier, where homeowners are only about one-third as likely to be underwater as those in bottom-tier homes (9.3 percent compared to 27.4 percent).
The gap is even greater in some of the nation's still-struggling markets—like Detroit, where nearly 50 percent of homes valued in the bottom price tier were underwater, while 7.6 percent of the highest-priced homes were upside down.
Humphries says those problems are partly a reflection of some of the housing market's current challenges, including low inventory, rapid value appreciation, and weak sales.
"None of these problems will be solved overnight, in large part because negative equity will likely be a part of the housing market for years, and easily into the next decade in some hard-hit areas," he said. "But we're moving in the right direction, and time will heal all wounds."