Why this article is important: As home prices have remained level over the past few years, homeowners with low down payments are increasingly falling underwater.
Equity rich properties no longer the norm
Homeowners who owe more on their mortgages than the fair market value (FMV) of their homes are weighed down by a financial condition called negative equity. The opposite is positive equity, which permits a conventional sale with net proceeds for the seller on closing — necessary for sellers who want to purchase replacement property, and essential for continued turnover.
In 2026, the share of seriously underwater homes has increased. Nationwide in Q2 2026, 3.2% of mortgaged homes owe 125% or more of their FMV on their mortgage balance(s), up from 2.7% a year earlier, according to Attom.
As equity evaporates, the share of equity rich homes has dropped across the U.S. An equity rich home is a mortgaged home with mortgage balances equal to no more than 50% of its FMV.
The share of homes with at least 50% equity dropped to the lowest level in five years, with California’s share of equity rich homes plummeting from 56% in Q2 2025 to 45% in Q2 2026. The most likely culprit is the extensive use of additional borrowing to fund spending by households — the home equity mortgage situation — since home prices have not yet dropped with rare exception by mid-2026.
The rise and fall of equity
Home equity naturally increases with a homeowner’s longevity in the home, all else being equal, with no price drop, no refinancing and no equity financing. As the mortgaged homeowner pays down principal, they build up the equity in their home as a store of their wealth.
However, this dynamic is complicated by the rise — and fall — of home values.
For example, during 2021-2022, home values skyrocketed, lifting even highly leveraged homeowners into positive equity immediately following their 2018 or 2019 purchases.
But since 2022, home values have become slower to show a rise in dollar amount (or haven’t increased at all since peaking in early 2022). Now, homeowners who made a small down payment are more susceptible to taking on negative equity with even small market fluctuations.
A seller typically needs at least 10% equity to be in a position to sell and cover broker fees as well as pay for any necessary repairs, improvements, other transactional costs and seller concessions demanded in a buyer’s market, as experienced in the second half of the 2020s.
The underwater home problem
Conventional wisdom holds that foreclosures are triggered when homeowners owe more on their mortgages than the FMV of their homes.
However, the main culprit is a financial shock the underwater homeowner undergoes. Unable to make payments, and unable to sell without a positive equity, their primary option is to do nothing and force the lender to foreclose.
Editor’s note — Sometimes, the lender allows an industrious homeowner to pursue a buyer in a short sale. Here, the mortgage debt is declared satisfied in a discounted payoff on the lender’s acceptance of the owner’s net proceeds on a sale of the property at its market value.
The more consistent problem caused by a negative equity for an owner who has a job is the owner’s inability to relocate by disposing of their ownership. Stuck in what is termed a black hole asset, the homeowner is going nowhere, imprisoned in their own home.
For agents and other real estate professionals, this leads to reduced turnover, lower sales numbers and stunted incomes.
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The solution? Homeowners who make full 20% down payments will rarely find themselves underwater in a normal business variety recession. With more flexibility to make future moves, even an unpredictable market won’t imprison these positive equity homeowners.
My personal experience shows that this trend is much more pronounced in the San Francisco Bay Area.