Crain’s Chicago Business highlights an issue that is slowing the real estate market in the Chicago area: homeowners with underwater mortgages.

More than 506,000 Chicago-area homes—or one-third of the market—were underwater as of the fourth quarter, according to California research firm CoreLogic Inc. That’s up 7.6 percent from the previous year.

Underwater properties are bogging down a residential market that’s clawing back from its post-crash ditch. By opting to stay put, these homeowners are removing a substantial portion of potential saleable properties from the market, limiting choices for those who are ready to buy…

Rising prices ultimately will push more underwater homeowners to sell, Mr. Humphries says, but it’ll be a while before prices get anywhere near the levels seen in the market apex of just a few years ago. The S&P/Case-Shiller index of single-family homes, a closely watched barometer of values, in February stood 34 percent beneath its September 2006 zenith.

For buyers, meanwhile, the process of finding and closing on a home has become a scrum—and it’s likely to stay that way for a while. This spring, showings are drawing crowds and bidding wars, and fast sales are common, buyers and brokers say.

I wonder how much of this is tied to the psychology that people feel losses, such as the value they may have lost in their house’s value, more than equal gains. What tactics could be used to convince people that they might be better off getting out of the mortgage? I’ve seen one such argument: the value loss on a smaller house is likely to be less in absolute dollars and then homebuyers could benefit from larger drops in prices for larger houses.