During the COVID-19 pandemic, the real estate market reached historic heights as low-interest rates and changing lifestyles fueled unprecedented housing price inflation across the US. However, the recent decline in home values in certain areas has left some buyers owing more on their mortgages than their homes are currently worth.
When a homeowner is "underwater", their borrowed amount surpasses the current market value of the property. If they decide to sell, they would be unable to fully repay their mortgage with the sale proceeds. Factors such as overpayment and low down payments may contribute to homeowners ending up in this situation, potentially limiting their financial flexibility and causing emotional distress.
COVID-19 pandemic conditions led to a scenario where many buyers paid inflated prices. Low-interest rates offered by the Federal Reserve acted as a catalyst, enhancing buyers' purchasing power. Coupled with the imbalance between demand and supply and the boom in remote work that fired up home searches in certain suburbs, prices skyrocketed.
In some major markets, a slide in housing prices of over 10% has been observed after peaking in 2022-2023. Yet, in some regions, housing markets continue to ascend, lessening the chances of homeowners there going underwater.
Being underwater is generally uncommon, with the percentage of seriously underwater properties in the US remaining at 2.8% in Q1 2025. However, for homeowners who find themselves in this predicament or fear of sliding into it, some options are available, including short sales with their lenders' approval.
Experts suggest patience, maintaining a financial buffer, and tracking property values as potential ways of avoiding such a scenario. Retrofitting the mortgage to a shorter loan term with fewer rates could also be strategic.
Historically, asset prices tend to rise over time. This implies that, in case homeowners can hold on without panicking and keep paying their mortgages, they may regain positive equity as their home value increases. By understanding their options and making informed choices, homeowners can navigate and potentially overcome the current dip in housing prices.