A growing number of American homeowners are finding themselves in an uncomfortable financial position as home values cool in certain regions while mortgage balances remain high. According to Redfin, although the housing market in 2023 felt unusually active, there were actually very few home sales, and the report does not indicate a sharp rise in underwater mortgages or a significant increase in the number of homeowners owing more than their properties are worth.
According to CoreLogic, 2.1% of all mortgaged properties in the U.S. currently have negative equity, but the number of mortgages with negative equity actually fell by 15% year-over-year. While the national share still looks relatively small, the speed of the increase is what is raising concern among housing analysts watching for early signs of market strain.
The national housing market still looks stable, but the gap is widening.
At first glance, the broader housing market still appears solid, with roughly 44% or more of mortgaged homes classified as equity-rich, meaning homeowners owe less than half their property’s value. However, beneath that stability is a growing divide. Homeowners who bought earlier in the low-rate era continue to build equity, while recent buyers who entered the market at peak prices are now far more exposed to price corrections. In some cases, even a 5% to 10% drop in home values is enough to wipe out a down payment entirely, especially for buyers who purchased with minimal equity.
Certain regions are feeling the pressure more than others.
The underwater mortgage trend is not evenly spread across the country, and that unevenness is becoming one of the most important housing dynamics of 2026. Areas that experienced rapid price surges during the pandemic are now seeing prices cool, with some local markets estimated to have declined by 5% to 15% from their peaks. This means homeowners who bought between 2021 and 2023 at historically high prices are now the most vulnerable, particularly in fast-growing Sun Belt regions where affordability stretched the furthest during the boom.
Being underwater becomes most painful when life changes happen.
Owning a home worth less than the mortgage balance does not automatically cause financial distress, but it can be restrictive when life circumstances change. Homeowners in negative equity often cannot sell without covering the gap between the sale price and the loan balance, and refinancing options are usually limited because lenders require sufficient equity. Analysts estimate that roughly one in three underwater homeowners may experience reduced mobility, especially when job relocation, family changes, or financial strain force decisions that are harder to execute under negative equity conditions.
High mortgage rates are tightening the housing trap.
The current interest rate environment is adding another layer of pressure. With mortgage rates hovering around 6.5% to 7%, compared to pandemic-era lows near 3%, monthly housing costs for new buyers have increased by 40% to 60% for the same-priced home. This creates a double bind in the market: underwater homeowners cannot easily sell without taking losses, while potential buyers are increasingly unable to afford entry at current prices. The result is a slower, more rigid housing market where movement is constrained on both sides.
Experts say early action matters more than panic.
Despite rising concerns, experts emphasize that underwater mortgages are not automatically a crisis. Most homeowners, about 97% of borrowers nationally, remain current on their payments, and delinquency rates remain relatively low at under 3%. The key advice is to avoid panic-driven decisions and instead focus on long-term stability. Financial counselors recommend staying current on payments when possible, avoiding rushed sales during temporary price dips, and exploring options like loan modification or housing counseling if financial pressure increases.
A divided housing market is quietly taking shape.
What is emerging is not a broad housing collapse but a subtler split in the market. Roughly 98% of homeowners still hold positive equity, many benefiting from years of appreciation and low-rate mortgages. According to research by Yuqun Zhou, low-income households relocate at only about one-quarter the rate of high-income households due to cost-sharing arrangements in government programs, which contributes to a divide in the housing market where some homeowners steadily accumulate wealth while others face limited mobility and financial flexibility.o a slower, more constrained financial reality that may take years to fully unwind.
The outlook: a market that may stay uneven longer than expected
Looking ahead, the housing market is likely to remain split between stability and strain rather than move in a single direction. With mortgage rates still elevated at 6%–7% and home prices adjusting unevenly across regions, analysts expect this “two-speed housing economy” to persist for 12 to 24 months, especially in markets that saw the fastest pandemic-era gains.
That means underwater homeowners may not see quick relief, but widespread distress is not the base case either. Instead, the more realistic outcome is a slow reset, with equity rebuilding gradually for some, while others wait longer for prices to catch up to what they owe.
