The rebound in housing took a slight pause this week with weaker-than-expected housing starts and a dip in homebuilder confidence for January.

But Zillow Inc., the largest home-related marketplace on the web and mobile, issued a report Thursday that tells the brighter side of the housing story. Nearly 2 million U.S. homeowners were freed from negative equity last year, which means they are no longer underwater on their mortgages. The cities that saw the most improvement included Phoenix, Los Angeles and Miami.

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“2012 was a pretty big year for working down negative equity,” says Zillow chief economist Stan Humphries in the accompanying video, adding that strong home value appreciation was a big contributor to that trend.

Home values rose roughly 6% in 2012 to a median value of $157,400, according to the Zillow Home Value Index. That price appreciation, along with the elevated level of home foreclosures, led to the drop in negative equity in 2012.

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While these figures are encouraging, the total number of homeowners that remain underwater is still very high. Almost 14 million homeowners still owed more on their mortgage than their homes were worth last year; down from 15.7 million at the end of 2011. Collectively, homeowners were underwater by $1 trillion in 2012.

Over the course of 2013, Zillow expects another 1 million American homeowners will no longer be underwater on their mortgage, which would reflect a slowdown in the trend. Zillow expects home value appreciation to slow to about 3% in 2013, half the pace of last year, as the supply of homes on the market increases.

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Overall, Humphries says the housing market is “doing quite well” and the “fundamentals of housing look quite good.”

The National Association of Realtor’s will release existing homes sales today at 10 am.