Underwater Mortgages Rise to 3.2% of US Homes

The percentage of homeowners with seriously underwater mortgages, where the outstanding loan balance exceeds the property's market value by at least 25%, rose to 3.2% in the second quarter of 2024. This represents an increase of half a percentage point from the previous year, impacting an estimated one to two million homes across the United States. An underwater mortgage, also known as being "upside down" on a loan, creates negative equity, significantly hindering a homeowner's ability to refinance their mortgage or sell their property without incurring a financial loss. This situation effectively limits homeowner mobility and can contribute to reduced housing inventory.

Real estate analytics firm ATTOM reported these findings, noting that the national average of 3.2% underwater mortgages is up from 2.7% in the second quarter of 2023. While this figure may seem modest, it translates to a substantial number of affected properties. The report highlighted specific states that experienced dramatic increases in their underwater mortgage rates. Minnesota saw the most significant jump, with 12.1% of homes now seriously underwater, up from 2.6% a year prior. Other states with notable increases include South Dakota (to 5.7% from 3.1%), Iowa (to 7.8% from 5.9%), Michigan (to 4% from 2.5%), and the District of Columbia (to 5% from 3.7%).

Conversely, several states experienced a decrease in the share of underwater mortgages. Louisiana saw its rate fall to 10.3% from 11.9%, Kentucky decreased to 5.7% from 7%, North Dakota dropped to 4% from 5%, Oklahoma declined to 4.7% from 5.6%, and New York saw a reduction to 1.5% from 2%. Despite these decreases, Minnesota, Louisiana, Iowa, Mississippi (6.4%), and Arkansas (6%) recorded the highest overall percentages of underwater mortgages in the most recent quarter.

Mortgage researcher Mujahid Merchant observed that traditionally, underwater mortgages were concentrated in Gulf and coastal states affected by climate events, but these areas have shown improvement. Merchant further noted that a common characteristic among states with high concentrations of underwater mortgages is a prevalence of low-equity-at-origination mortgages that were taken out in 2022 or later. This suggests that recent lending practices and market conditions are significant factors contributing to the current rise in negative equity situations.