Dwelling Fairness Weakens as Underwater Mortgages Tick Up

Quite a lot of financial elements are influencing the share of severely underwater mortgages, which is up barely in most states and contributing to decrease residence fairness.

The share of mortgaged properties thought-about severely underwater rose in 35 states quarter over quarter and in 46 states 12 months over 12 months, in keeping with the most recent Dwelling Fairness and Underwater report from actual property knowledge agency ATTOM.

A severely underwater mortgage is outlined as having a loan-to-value ratio of 125% or above, which means the property proprietor owes at the least 25% greater than the estimated market worth of the property.

After fairness development peaked in 2022, now 2.8% of mortgaged residential properties within the U.S. are thought-about severely underwater within the third quarter of 2025, which means the mixed estimated stability of loans secured by the properties have been at the least 25% greater than the properties’ estimated market worth.

That was up from 2.7 % within the second quarter and a pair of.5% within the third quarter of 2024.

A severely underwater mortgage is a purple flag that the house could possibly be on its method to foreclosures, as it might probably make extra monetary sense to stroll away from a property that’s underwater than to proceed to repay the mortgage.

“Rising shares of underwater houses are a warning signal, not a disaster but, however they sign potential for slower value development, extra distressed gross sales, and larger threat if native economies weaken additional,” says Hannah Jones, senior financial analysis analyst at Realtor.com®.

Why are severely underwater mortgages on the rise?

There are lots of elements that may trigger a home-owner to grow to be severely underwater on their mortgage.

“Falling residence costs, stagnant property values, or buying with little down cost can cut back fairness,” Rob Barber, CEO of ATTOM, tells Realtor.com. “Refinancing, taking up extra loans, or native financial declines can even push mortgage balances above market worth, leaving householders owing greater than their houses are value.”

Markets with the biggest annual will increase of their proportion of severely underwater houses have been the District of Columbia (up from 3.3% within the third quarter of 2024 to five.1% in the identical quarter of 2025); Maryland (up from 2.4% to three.5%); Louisiana (up from 10.1% to 11.2%); Georgia (up from 2.6% to three.6%); and Oklahoma (up from 4.8% to five.4%).

“These markets could also be inching up on account of a mixture of rising homeownership prices, slower value appreciation, and affordability challenges that make it tougher for some householders to construct or preserve fairness,” says Barber.

With three of the highest 5 states within the South, it’s clear that one thing is amiss.

“Southern states noticed huge value positive factors through the pandemic as consumers sought inexpensive houses and distant work expanded,” explains Jones. “Now, with increased mortgage charges and weaker affordability, these markets are extra weak to cost declines. Even small drops can push current consumers with little fairness underwater.”

Then there may be DC and Maryland. Sometimes equity-rich areas, these metros at the moment are combating authorities furloughs and a large mortgage fraud scheme.

“The area has been hit with two large-scale housing impacts,” says Doug Perry, a strategic financing adviser at Actual Property Bees and mortgage knowledgeable who’s positioned in Bethesda, MD, a commuter suburb to DC.

“First is the large actual property fraud scheme in Baltimore that ended up placing a whole lot of tens of millions of {dollars} of actual property in foreclosures. Second is the federal government shutdown.

“When individuals do not have paychecks and are confronted with potential layoffs, they do not spend cash and might’t pay their payments. Neither of those financial occasions are going to have a direct turnaround and even when the federal government shutdown ends, the impacts might be felt for a very long time.

“These are uncommon occasions.”

Jones agrees. “Authorities furloughs and job uncertainty are additionally dampening demand and pushing costs down,” the analyst says.

States with essentially the most underwater houses

The states with the biggest shares of severely underwater houses have been Louisiana (11.2% severely underwater); Mississippi (6.6%); Kentucky (6%); Arkansas (5.7%); and Iowa (5.6%).

Louisiana is faring the worst of the underwater states, with 21 of the 30 counties with the bottom proportions of equity-rich houses (outlined because the property proprietor having at the least 50% fairness, which means the house’s estimated value is 50% or greater than the excellent mortgage).

As for hard-hit Florida, that state tops the markets with the biggest year-over-year drops of their shares of equity-rich houses, with The Sunshine State down from 52.5% within the third quarter of 2024 to 46% in the identical quarter of 2025.

But it surely does not seem within the listing of states with essentially the most enhance in severely underwater mortgages. So what provides?

“Whereas Florida has a number of the nation’s worst foreclosures charges, that does not essentially imply householders there lack fairness,” ATTOM tells Realtor.com.