The percent of American single-family homes who are “underwater” or those with mortgages in negative equity dropped to 21 percent in the third quarter from 23 percent in the previous quarter according to the Real Estate Market Reports from Zillow.com

Being underwater is one of the two factors that lead to foreclosure, the other being, of course, not having enough income to make the monthly payments.

Year-over-year home values in the United States fell for the 11th consecutive quarter, falling 6.9 percent to a Zillow Home Value Index of $190,400. However, the rate of year-over-year decline was less for the third quarter in a row, meaning home values did not decline as dramatically year-over-year in the third quarter as they did in the second or the first.

Foreclosure sales stayed high with more than one-fifth or 21.4 percent of all U.S. home sales in September.

"The decline in the percentage of homeowners with negative equity is a positive sign, and is directly attributable to the stabilization of home values from the second quarter to the third," said Zillow Chief Economist Stan Humphries. "It is also attributable to many homeowners who were previously underwater on their mortgage losing their homes to foreclosure.

"The next several months will be critical to the housing market. Previously, we'd been expecting to see increasing foreclosure rates during the real estate market's slow winter season, a confluence of events that would likely drive inventory up and prices down. But now, with the extension of the $8,000 first-time homebuyer tax credit and a new $6,500 credit for some repeat homebuyers, we could see a bump in demand that could partially offset the increased supply of foreclosed homes on the market. The credits are likely to bring continued stabilization in prices over this period, versus the price declines that we almost certainly would see otherwise. Whether this stabilization will be sustainable after the tax credits expire, however, is yet to be seen. Some of the demand that we are buying with tax credits we are also borrowing from the future, and will likely have to pay for later in the form of weaker-than-normal demand."