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Negative Equity Surge: 900,000 Homeowners Underwater

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  Published in House and Home on Tuesday, February 17th 2026 at 3:16 GMT by MarketWatch
      Locale: UNITED STATES

A Rapid Rise in Negative Equity

The number of underwater homeowners has surged dramatically. In the first quarter of 2022, approximately 193,000 homeowners found themselves in this precarious position. Now, that number has skyrocketed to nearly 900,000, representing 3.5% of all active mortgages. The average loan amount for those currently underwater sits around $371,000. This rapid increase underscores the fragility of recent home purchases, particularly those made at the peak of the market boom.

The Perfect Storm: Pandemic Boom, Rising Rates, and Cooling Prices

Several converging factors have created this concerning situation. The initial spark was the unprecedented surge in home prices during the COVID-19 pandemic. Driven by historically low interest rates, remote work opportunities, and limited housing supply, demand far exceeded availability, pushing prices to record highs. This created a bubble, with many buyers competing for limited properties and often stretching their budgets to secure a home.

Then came the Federal Reserve's response to escalating inflation. Beginning in early 2022, the Fed embarked on a series of aggressive interest rate hikes to curb rising prices. While successful in cooling inflation to some extent, these hikes dramatically increased mortgage rates, significantly impacting affordability. Monthly mortgage payments became substantially higher, squeezing household budgets and making it difficult for some homeowners to keep up with their obligations.

Adding to this pressure, home price growth has begun to slow, and in some markets, prices are actively declining. This correction, while a natural part of the market cycle, is particularly damaging for recent homebuyers who purchased at inflated prices. When prices fall, the gap between the loan amount and the home's value widens, pushing more homeowners into negative equity.

Implications Beyond Individual Homeowners

The implications of this trend extend far beyond individual homeowners. A significant increase in underwater mortgages raises the specter of rising mortgage delinquencies and foreclosures. As homeowners struggle to meet their payments on homes worth less than their loans, the risk of default increases. Foreclosures, in turn, add to housing supply, potentially further depressing prices and creating a vicious cycle.

Rick Sharga, president of RealtyTrac, cautions that while a repeat of the 2008 crisis is unlikely due to stricter lending standards and a stronger economy overall, the situation warrants close monitoring. "This is a concerning sign for the housing market," Sharga states. "While foreclosures are not expected to reach the levels seen during the 2008 financial crisis, this trend is something to watch closely."

Who is Most Vulnerable?

Homeowners who purchased properties in the last two years, particularly those who stretched their finances to enter the market, are the most vulnerable. Those who utilized adjustable-rate mortgages or made minimal down payments are also at higher risk. Areas that experienced the most significant price appreciation during the pandemic - such as parts of the Sun Belt and Mountain West - are likely to see a higher concentration of underwater homeowners as prices normalize.

Looking Ahead: Key Indicators to Watch

Several key indicators will provide insight into the future trajectory of this situation. Monitoring further declines in home prices is crucial. Tracking the number of mortgage delinquencies and foreclosure filings will reveal the extent to which homeowners are struggling to meet their obligations. Finally, paying close attention to the Federal Reserve's monetary policy decisions and their impact on interest rates will be essential. A continued tightening of monetary policy could exacerbate the problem, while a shift towards easing could provide some relief. The housing market is navigating a complex landscape, and the coming months will be critical in determining whether this growing number of underwater homeowners represents a temporary setback or a harbinger of more significant challenges.