An increase in underwater mortgages is a concerning sign to many watching the U.S. economy. A recent report from real estate data firm ATTOM revealed that in the first quarter of 2024, one in every 37 homes in the U.S. qualifies as “seriously underwater,” which means that the current market value of the home is at least 25% lower than the mortgage current owed. This trend is especially pronounced throughout the southern region of the United States.
Current Statistics
The latest 2024 U.S. Home Equity and Underwater Report from ATTOM revealed that 2.7 percent of homes are designated as “seriously underwater,” which is slightly up from 2.6 percent in the last quarter of 2023.
Historical Context
While owning an underwater mortgage is one of the top nightmares for a homeowner, especially one looking to sell the home, the number of underwater homes is still much lower than prior to the COVID-19 pandemic. Prior to 2020, the percentage of underwater mortgages was more than double what it is today.
Causes of Underwater Mortgages
Determining if a mortgage is underwater involves more than just comparing the purchase price of the home to the current market estimates. Bloomberg reports that homes are in danger of becoming seriously underwater when homeowners overpaid for the property, as often happened during the pandemic buying frenzy, or when homeowners opted for a minimal down payment initially.
Paying a minimal down payment can leave little margin for equity if and when property values decline.
Pandemic Influence
The aforementioned frenzy in the real estate market began during the COVID-19 pandemic when individuals and families stuck at home decided to make changes to their living environment to accommodate more time spent there for months on end. New towns and cities saw increased interest as people became detached from large cities filled with now-empty office buildings.
Government Stimulus Effect on Home Prices
In addition to homebuyers deciding to trade-up their homes for new ones and in some cases buy second vacation homes in more remote locations, government stimulus activities and historic low interest rates also led to more competition among buyers in the real estate market, leading to a surge in property prices.
This intervention was a boon to current homeowners looking to sell but has left many homeowners with high purchase prices that may have outpaced the long-term market prices.
Economic Changes
In an attempt to combat inflation, the Federal Reserve (Fed) implemented a stringent series of interest rate increases in the past few years.
The Fed’s business is to control inflation, not regulate the housing market, but invariably the increased interest rates have impacted the housing market by affecting the ultimate affordability of homes once the cost of obtaining a mortgage was considered. This increase in mortgage rates also contributes to the increase in underwater mortgages.
Regional Variations
There are regional differences in the mortgage data within the United States. In the South, for example, the rise in percentage rates of underwater homes is higher than in other regions of the U.S.
State-Specific Data
The most significant increase in the rate of underwater mortgages was found in Kentucky, where the rate of seriously underwater homes (25 percent or more discrepancy) rose from 6.3 percent to 8.3 percent in just three months.
Additional State Increases
While Kentucky’s data was the most stark, West Virginia, Oklahoma, and Arkansas also saw an increase in the percentage of underwater homes from the last quarter of 2023 through the first quarter of 2024.
Metro Area Impact
The metropolitan area of Baton Rouge, Louisiana, has 13.4 percent of mortgages that are seriously underwater, the highest rate among metropolitan areas in the U.S.
Comparison with Other Cities
Following Baton Rouge, other Southern metro areas including New Orleans, Jackson, and Little Rock also have relatively high rates of underwater mortgages.
Surprising Entry
Among metropolitan areas, only one non-southern metro area made the top-five list of underwater mortgage rates– Syracuse, New York. In the Syracuse metro area, 5.6 percent of homes meet the threshold for seriously underwater.
Economic Implications
Homeowners, realtors, developers, economists, and more are eying this troubling trend in trying to understand and predict the next phase of the housing market. An increase in underwater mortgages could have a significant trickle-down effect on the economy at large.
Homeowners with underwater mortgages could potentially foreclose on their homes and remain in a state of financial instability whether they stay or whether they decide to leave the property.
Looking Ahead
It is unlikely the trend toward greater numbers of underwater mortgages will reverse so long as inflation continues to persist and interest rates remain at their current elevated levels compared to where they had been in the years of the pandemic.
