When the housing market capsized, millions of homeowners found themselves underwater with mortgages that were bigger than the value of their property.

While housing prices have risen and some seven million homeowners have climbed out of the murky waters of negative property values, at the end of 2014, 5.4 million homeowners still had yet to get their heads above water.

While new data finds that about ten percent of all mortgage properties (5.4 million people) remain underwater, another 20 percent (10 million) have less than 20 percent equity; 1.4 million homeowners have less than 5 percent equity. 

Negative equity has continued to be a big problem year-after-year, but in the last quarter the problem increased. The aggregate value of negative equity in the U.S. rose by $7 billion in the last quarter to $348.8 billion, but is not indicative of the overall decline. Five states are drivers of negative equity accounting for 32 percent of all underwater mortgages. The list is not too surprising since they led the housing boom of the 2000s: Nevada (24.2%), Florida (23.2%), Arizona (18.7%), Illinois (16.2%) and Rhode Island (15.8%). On the flip side, Texas, Alaska, Montana, Hawaii, and North Dakota have the highest percentages of homes with positive equity.

Families underwater are in deep trouble. They can’t afford to move because they’d likely lose money in the sale and even if they can sell their homes, they may not qualify for a new mortgage on a different home.

It’s the spring buying season when potential homebuyers venture out to check out the inventory, and unfortunately, they aren't finding that much on the market. Many of the underwater homes are concentrated on the lower end of the market which is where first time homebuyers would be shopping.

CBNC reports:

Weak housing construction and the growth of the single-family rental market have pushed down supply for sure, but one nagging leftover of the housing crash is literally trapping potential sellers in their homes: Negative equity.

Some 5.4 million homes, or 10.4 percent of all homes with a mortgage, were still in a negative equity position, … This is down considerably —18.9 percent, from a year ago—but it still keeps these borrowers from putting their homes on the market, because they would lose money.

Improvement will come with higher home prices. Rising prices in 2014 brought more than 1 million borrowers into a positive equity position. The problem, however, will take considerable time to work through and will continue to affect not only housing supply, but also consumer spending overall.

Adding to the issue is that the bulk of negative equity is concentrated at the lower end of the housing market. Owners of less expensive homes are three times more likely to be underwater than owners of expensive homes, according to a recent note by economists at Deutsche Bank.

These less expensive homes are where supply is lacking most. Builders are concentrating on higher-end homes, because that's where they can get the margin they need. First-time homebuyer demand is growing, but lower-priced homes are just not there for the buying.

This feels like a chick-and-egg problem. At best, as experts note, as home prices lift overall, equity will rise for underwater houses—it just may take some time to get to that tipping point. In the meantime, (first-time) homebuyers will remain sidelined or end up in bidding wars for the limited supply that is available.

Last year, we reported on improving signs in the housing market as the percentage of underwater mortgages is down by half to 16.9 percent from 31.4 percent in 2012. American families are shedding the debt that they incurred slowly but surely as home prices have risen, by paying down their mortgages or selling their homes. Government didn’t step in and doesn't need to.

However, Washington is inserting itself to "improve" home buying in ways that lack common sense and could lead to repeat problems in the future. Fannie Mae and Freddie Mack are once again relaxing some of the requirements for homebuyers to secure government-funded loans such as requiring only 3-percent down payments. While the heart may be in the right place, the logic is not. It’s these relaxed policies that sent market signals to lenders to be risky in lending practices in the first place.

 Homebuyers were empowered to buy more house than they could afford through loans with variable rates that started low but rose overtime and to use their homes as cash machines on the assumption that the value of their homes would always rise.

We need to get to a point where the rate of underwater mortgages is zero but that will only happen through short term pain (debt repayment and selling even at a loss) for long-term stability. This is a fight that government would be wise to stay out of.