So-called underwater homeowners have a higher foreclosure rate and a harder time relocating because they would lose money in a sale, Humphries said. The problem is greatest among borrowers under age 40, about 48 percent of whom owe more than their homes are worth.
That's slowing the recovery by shrinking inventory for first-time buyers and reducing demand for move-up homes, he said.
Total negative equity was $1.15 trillion at the end of the second quarter, a $42 billion decline from three months earlier, according to Zillow.
Sales of previously owned homes rose to an annual pace of 4.47 million in July, the National Association of Realtors reported Wednesday. The median price was $187,300, a 9.4 percent increase from a year earlier and the biggest 12-month gain since January 2006. There were 2.4 million homes listed for sale, putting a lid on transaction volume, said Lawrence Yun, chief economist for the group.
"The total supply of housing inventory appears to be balanced in historic terms, but there are notable shortages in the lower-price ranges which are limiting opportunities for first-time buyers," Yun said.
Home prices are about 33 percent below the June 2006 peak and similar to April 2003 levels, according to the S&P/Case-Shiller index of values in 20 major cities.
Zillow, which tracks home prices in more metropolitan areas, estimates that U.S. prices are about 22 percent below their peak, back to levels from early 2004, Humphries said. That means most people who bought a home in the last eight years would lose money if they sold today, he said.
Homeowners 30 to 34 years old had the highest rate of negative equity, with 50.8 percent of their properties underwater as of midyear, followed by 47.6 percent of those 25 to 29, and 46.3 percent of borrowers 35 to 39, Zillow said. The "typical age" for first-time buyers last year was 31, according to a November report by the Realtors group, while the typical age for repeat buyers was 53.
Home values are likely to appreciate at a pace of 2 percent to 3 percent annually for the next decade, meaning it will take 10 years for prices to return to their pre-crash peak, Humphries said.
In Las Vegas, 68.5 percent of homeowners were underwater as of June 30, the most of 30 metro areas analyzed by Zillow. That was down from 71 percent in the first quarter.
Phoenix had the biggest decline in its negative-equity rate, falling 3.9 percentage points to a 51.6 percent.
Philadelphia was the only one of 30 metro areas with an increase, rising 0.4 percentage point to 25.4 percent. Local prices fell 0.8 percent in the second quarter from the first, Humphries said.
Though price gains accounted for most of the home-equity improvement, the number of underwater borrowers also fell as banks seized properties with delinquent mortgages and let owners sell homes for less than what's owed on them through short sales, Humphries said.
Lenders repossessed almost 160,000 homes in the second quarter, down from about 180,000 in the prior three months, according to RealtyTrac Inc. More than 100,000 short sales were completed in the most recent quarter, according to Daren Blomquist, vice president at the Irvine, Calif.-based firm.
Zillow compiled its negative-equity report using its home-value index, outstanding mortgage debt, and lines of credit associated with properties.