The housing crisis is not over yet. According to Zillow’s Negative Equity Report published today, May 20th, more than 9.7 million Americans are living in homes with “underwater mortgages”. Nationwide, around 18.8% of homeowners were underwater as of the first quarter of 2014. Furthermore, over one-third of all homeowners with a mortgage were effectively underwater, which is defined as less than 20% net equity.

underwater mortgages

The directional trend in underwater mortgages, however, continues to be positive. Assuming recent trends hold, Zillow projects that the current national negative equity rate of 18.8% will decrease to 17% by the first quarter of 2015.

Underwater mortgages: Negative equity by price tier

Zillow Inc (NASDAQ:Z) divides homes into three tiers by price in order to facilitate comparisons. More than 30% of homes in the bottom price tier are currently in negative equity, while only 18.1% of the homes in the middle tier, and 10.7% in the top price tier are underwater, according to the data in Zillow’s report. Homes are placed in the top, middle, or bottom tiers based on their estimated value in relation to the median home price in the area. Nationally, the median price in the top tier is $306,700; the median price in the middle tier is $163,400; and the median price in the bottom tier is $98,400.

Underwater mortgages: Reason for low number of first-time home buyers

One particularly troubling take way from the Zillow Inc (NASDAQ:Z) report is that it makes it clear why there are so few first-time homebuyers in the market today — a large percentage of owners of mid-range and inexpensive homes simply can’t afford to sell.

“The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” explained Zillow Chief Economist Dr. Stan Humphries in a press release. “It’s hard to overstate just how much of a drag on the housing market negative equity really is, especially at the lower end of the market, which represents those homes typically most affordable for first-time buyers. Negative equity constrains inventory, which helps drive home values higher, which in turn makes those homes that are available that much less affordable.”