Even as home values approach the highest levels reached during the housing bubble, 11 percent of homeowners with a mortgage are underwater, according to the third quarter Zillow Negative Equity Report.  

The share of homeowners who owe more on their mortgages than their homes are worth has dropped by nearly two-thirds since the housing bubble burst four years ago. Nationally 5.3 million homeowners were in negative equity in the third quarter, meaning they owe more than their homes are worth. At the peak in Q1 2012, 15.7 million homeowners were underwater on their mortgages.

The numbers are another sign that the housing market has nearly regained the value lost during the recession, and is only 2.7 percent below the peak reached at the height of the bubble. Not all regions have experienced the same recovery, though, and some markets are still well below those bubble highs.

Underwater homeowners can't refinance to take advantage of still-low mortgage rates and they can't sell their homes except in short sales, which keeps these homes off the market, contributing to low inventory.

Seven of the 10 large metros with the lowest rates of negative equity are along the West Coast, and also have strong economic markets. Fewer than five percent of homeowners are underwater in San Jose, San Francisco, Portland, Ore., Denver, and Dallas. In these metros, home values have also surpassed the highest point reached during the bubble, and are now higher than ever.

Chicago and Las Vegas have the highest levels of negative equity, with 17 percent and 16.8 percent of homeowners underwater respectively. Home values in these markets remain well below their peak levels.

"As the housing market recovers and home values rise, the number of homeowners underwater on their mortgages continues to drop," said Zillow Chief Economist Dr. Svenja Gudell. "In addition to the individual homeowners who are underwater, negative equity affects the housing market as a whole, so this is good news not only for these owners, who are now able to either sell their home or at least regain some financial stability, but also for buyers who may find more options now. I expect homes will gain value steadily, for solid economic reasons, and that negative equity rates will continue to fall."

Homeowners who have less than 20 percent equity in their homes may find it difficult to cover the associated costs of selling, such as agent fees, closing costs, and a new down payment if they are buying a new home. More than a quarter of homeowners with a mortgage are in this situation, known as effective negative equity.