Negative equity, which occurs when homeowners owe more on their mortgages than the equity in their homes, isn’t always a bad thing. Lately it’s been playing an important role in the lower end marketplace by restricting supply.

The months’ supply of homes in April fell to 6.5 months, the lowest level in more than five years. Demand is been up, particularly for lower priced properties where supply of REOs has been particularly tight due to slow processing of foreclosures in the wake of Robogate. However, owners who would otherwise sell haven’t been able to because large numbers of them are under water.

“Negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand,” wrote CoreLogic Senior Economist Sam Khater in the latest issue of The MarketPulse, CoreLogic’s monthly newsletter. “The impact is more significant on home prices at the lower end of the price distribution where supply is tighter because negative equity is higher. Khater said that over the past two months prices of less expensive properties are up an average of 4.5 percent from a year ago, compared to 0′6 percent for higher priced homes.

CoreLogic’s most recent negative equity report, issued in March, found that 11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011, up from 10.7 million properties, 22.1 percent, in the third quarter of 2011.

The bulk of the negative equity is concentrated in the low end of the market. For low-to-mid value homes valued at less than $200,000, the negative equity share is 54 percent for borrowers with home equity loans, over twice the 26 percent for borrowers without home equity loans.

“We have transitioned from pricing dynamics driven by economic weakness and high shares of distressed sales to one of restricted supply, which will likely exist for some time to come-a reason for optimism in many hard-hit markets,” wrote Khater.