If you read watch the news, you’ve heard about the recovering housing market—prices are up, inventory is low, mortgage interest rates are below 4%, and more people have jobs. Hooray, housing is no longer dragging the economy down the drain. Yet, more than 10% of homeowners are still underwater.

To be exact, 5.4 million, or 10.8% of all mortgaged properties, had negative equity in the fourth quarter of 2014, according to a new report from CoreLogic, a California-based data provider. Negative equity means homeowners owe more than their home is worth.

What causes negative equity?

  • Some homeowners borrowed against their home’s value during the housing market’s heyday, taking out a home equity line of credit in addition to their mortgage. When values collapsed, they were left owing more than the current market value of their home.
  • Other homeowners saw their home’s value plummet below the level of their existing mortgage. They were in the hardest-hit markets such as Nevada, Florida, and Illinois. These owners saw home values slashed to pennies on the dollar in some cases.

But being underwater doesn’t automatically mean homeowners are struggling and at risk of foreclosure. As Jonathan Smoke, chief economist at realtor.com® points out, every new car buyer is underwater the moment he or she drives off the lot.

“You don’t struggle just because you may owe more than your home is estimated to be currently worth,” he said. “You struggle if you lose your job or face sudden health care bills. If being underwater is itself a problem, then new car owners would routinely struggle with making car payments.”

While we don’t know if these homeowners are having a hard time making their payments, we do know that negative equity disqualifies these homeowners from refinancing into lower-rate mortgages.

No one likes making payments for an asset that is losing value. But homeownership is a long-term commitment. The housing crisis was a blip in a 30-year mortgage contract.

Still, some states have been slower to recover than others and these five states account for 31.7% of negative equity, according to CoreLogic. Nevada with 24.2% of homeowners with negative equity; followed by Florida (23.2%), Arizona (18.7%), Illinois (16.2%), and Rhode Island (15.8%).

“We expect the situation to improve over the course of 2015,” said Anand Nallathambi, president and CEO of CoreLogic. He said he expects prices to rise 5% this year and lift about 1 million homeowners out of negative equity.

But the news is not all bad. About 1.2 million homeowners regained equity last year, according to CoreLogic. In fact, the number of underwater homeowners dropped 18.9% year over year.

(Source: Realtor.com)