The amount of single-family homes saddled with mortgages in negative equity dropped to 21% in Q309 from 23% in the previous quarter, according to online real estate service Zillow. Zillow indicated that, although more underwater mortgages dropped into foreclosure, home values stabilized somewhat in the quarter. For the 11th consecutive quarter, home values shrank, falling 6.9% compared to the same time period last year. But the rate of decline narrowed in Q309, meaning home values did not fall as dramatically year-over-year as they did in the second or first quarters, according to the report. Zillow’s Home Value Index flattened in Q309, dropping 0.4% from the end of the second quarter. The Index measures home values in 156 metropolitan statistical areas (MSAs). Real estate owned (REO) property sales remained high, accounting for 21.4% of all US home sales in September. REO sales took up 74.2% of sales in Merced, Calif., 69.3% of sales in Stockton, Calif. and 67.5% of activity in Las Vegas. The report also added that 26.9% of homes sold for less than what the seller originally paid. Stan Humphries, Zillow’s chief economist, said that a combination of stabilizing home values and foreclosures spurred the decline of homeowners strapped with negative equity. “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,” Humphries said. “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.” President Barack Obama signed the “Worker, Homeownwership and Business Assistance Act of 2009″ Friday, extending the homebuyer tax credit deadline to May 1, 2009. Write to Jon Prior.