Nationwide, almost one out of every five homeowners with a mortgage owes more to their lender than their properties are worth. But if you subtract those states, the rate drops to about one in 10, according to a report released Friday by First American CoreLogic.
The new data underscore the staggering scope of the U.S. housing recession, but also the challenges that government officials face in designing a massive new program to help homeowners avoid foreclosure, with layoffs soaring and the economy sinking.
Some experts predict the problem will get much worse.
Nationally, home prices are already down about 20 percent from their peak in mid-2006. By the time the housing market hits bottom, prices may be down 40 percent from the top, leaving 40 percent of homeowners underwater, according to Nouriel Roubini, economics professor at New York University.
"There is a huge incentive to walk away from your mortgage," said Roubini, who has attracted attention for his gloomy - and accurate - predictions of the U.S. financial market meltdown. He gave no forecast for when the real estate market would bottom out.
Another pessimistic analyst, Desmond Lachman of the American Enterprise Institute, said that "unless there's government intervention on a big scale...we're really not going to bottom."
The problem is much worse in far-flung suburban neighborhoods where builders flooded the market with new homes and buyers put down small, or no, down payments, said Mark Fleming, First American CoreLogic's chief economist. In desirable urban neighborhoods and close-in suburbs, "a lot of people bought their homes years ago. It's much more difficult for them to be in a negative equity situation." Fleming said.
Rising mortgage rates are also making matters worse for prospective borrowers. The rate on a 30-year, fixed-rate mortgage averaged 6.46 percent this week, up sharply from 6.04 percent last week, Freddie Mac reported Thursday.
Higher rates coupled with lower home values means fewer people can tap their home equity. The percentage of U.S. homeowners who pulled cash out of their homes remained at a four-year low in the third quarter, Freddie Mac said.
While some underwater borrowers certainly will lose their homes to foreclosure absent a massive - and successful - government refinancing plan, many will continue to make their payments and wait for values to recover. And of course roughly 30 percent of Americans own their homes outright.
Still, it remained unclear whether the government would be able to do much for many borrowers in trouble, especially given the amount of time to start up a new program.
"Certainly it can't hurt," Bernard Baumohl, chief economist at the Economic Outlook Group in New Jersey. "How much it's going to help is an open question."
On Thursday, White House press secretary Dana Perino tried to dispel reports that the Bush administration is near agreement on a plan to help about 3 million homeowners avoid foreclosure. Perino said several different ideas are on the table, and that no announcement is imminent.
The plan, widely expected to be run by the Federal Deposit Insurance Corp., would be the most aggressive effort yet to limit damage from the U.S. housing recession.
Despite all the pessimism, even some bearish analysts see modest signs of encouragement. Home sales have stabilized this fall as bottom-fishing buyers snapped up bargain properties in places like Las Vegas and Southern California. New foreclosures, currently flooding the market, are likely to taper off by the middle of next year, said UBS mortgage securities analyst Thomas Zimmerman.
"There may be some turning points not that far away," Zimmerman said. "The really severe part of this collapse in the housing market may be behind us."
Associated Press Writers Jennifer Loven, Martin Crutsinger and Adrian Sainz contributed to this report.