The number of U.S. homeowners owing more than their properties were worth increased in the first quarter as home prices extended their two-year decline, Zillow Inc. said.

Almost 21.8% of all homeowners were underwater as of March 31, the Seattle real estate data service provider said in a report issued Wednesday.

At the end of the fourth quarter, 17.6% of homeowners owed more than their original mortgage; 14.3% had negative equity three months earlier.

First-quarter property values dropped 14% from a year earlier, reducing the median value of single-family homes, condominiums and cooperatives to $182,378, Zillow said. The increase in underwater homeowners will lead to more bank repossessions, the company said.

Many owners "would be more willing to bear the financial consequences of bankruptcy or foreclosure," Stan Humphries, Zillow's vice president of data and analytics, said in an interview Wednesday. "You are going to continue to see home prices fall for the rest of this year and some portion of next year."

The market with the biggest drop in home values was Salinas, Calif., where the median price decreased 37%, to $301,793, Zillow said. About 32% of all homes there were worth less than what is owed on them, according to the report.

Four other California markets — Redding, Stockton, Madera, and Vallejo-Fairfield — rounded out the top five in home value declines.

The company estimates values for homes, whether or not they are sold in the period tracked, in 161 metropolitan areas.

In 85 of the markets tracked, the annual rate of change in home values over the past five years was negative or negligible.

About 20% of all home transactions in the past 12 months were foreclosures, and short sales made up about 12%. (A short sale is when a home is sold for less than the outstanding mortgage balance.)

The data for Zillow's study dates to 1996 and comes from public records, the closely held company said. Its mortgage figures come from information filed with individual counties.

The decline in home values is holding potential sellers back from putting their properties on the market, Zillow said.

Harris Interactive surveyed 2,123 adults, 1,266 of whom were homeowners, online last month for Zillow.

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