One in 10 home loans is under water: Economy.com

NEW YORK (Reuters) - One-tenth of U.S. homeowners hold mortgages that are larger than the worth of their homes, Moody's Economy.com said on Friday.

Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.

As a result, millions of U.S. homeowners have the incentive to abandon their properties.

With an already unwieldy supply of homes for sale, more inventory could prolong a recovery of the hard-hit U.S. housing sector, suffering one of the worst downturns in history.

Zandi earlier this week told Reuters he expects home prices to drop by 20 percent from their peak in 2006.

He expects home sales to hit bottom this spring, housing starts to reach a nadir this summer and house prices to trough in the spring of 2009.

The surge in foreclosures is putting further downward pressure on the housing market because it adds to the inventory of homes for sale, already at a lofty level.

Each foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent, Zandi said.

(Reporting by Julie Haviv; Additional Reporting by Jennifer Ablan; Editing by Dan Grebler)