While homeowners are witnessing a dramatic reversal in the home equity trend—which had previously shown three quarters of declines in a row—homeowner equity is increasing following notable price surges throughout the spring 2024 buying season. A new ATTOM report examines the present trends in underwater mortgages and homeowner equity, the underlying causes of these trends, and the states most affected.
However, there is good news for mortgages that are significantly underwater. Serious underwater mortgages are profiting nationwide from economic factors including rising property values and increased demand as a result of low supply. But certain states are still having trouble, especially those in the Midwest and South.
More U.S. Homeowners Remain Equity-Rich
In Q2 of 2024, ATTOM’s U.S. Home Equity & Underwater Report indicated that a larger number of mortgaged residential properties in the country were deemed equity-rich. A property is considered equity-rich if the total estimated loan sums secured by it do not exceed 50% of its estimated market value. At the national level, the share of severely underwater mortgages in the U.S. fell in Q2 and reached its lowest point since at least 2019.
Gains in home equity during Q2 coincided with a surge in home prices during the spring 2024 purchasing season, with the median national price rising by 9% on a quarterly basis to a record $360,000. The difference between the estimated worth of properties and what homeowners owe on their loans grows as property prices rise—now owning more stock.
Over the previous three quarters, equity had appeared to be stagnating, but rising prices along with low inventory and strong demand had increased equity-rich levels. Other economic factors included the nation’s unemployment rate dropping below 4%, relatively stable house mortgage rates that fluctuated about 7% for a 30-year fixed loan, and record highs in the financial markets.
When examined annually, equity-rich levels increased in an estimated 31 states. From a quarterly standpoint, lower-priced markets, primarily in the Midwest and South, saw the largest rises.
In Kentucky, from 28.7% in Q1 of 2024 to 37.4% in Q2 of 2024, the percentage of mortgaged properties deemed equity-rich grew. In Illinois, the percentage of residences with high equity increased from 28.3% to 36.1%. Oklahoma had an increase from 28.1 to 34.5%, Alabama from 35.7 to 41.9%, and Missouri from 38.3 to 45.5%.
Although equity-rich levels have increased significantly in the South and Midwest, these same regions also have large percentages of dangerously underwater mortgage levels.
Southern States, Severe Underwater Mortgage Levels and Worsening Factors
Loan sums for seriously underwater mortgages exceed the estimated market value of the property by at least 25%. While the number of underwater mortgages is declining nationally, many states—especially those in the Midwest and South—continue to face difficulties. According to Realtor.com’s Fred Goncher of Backyard Mortgage Corp. in Garnerville, New York, the issue of underwater mortgage levels is closely linked to job rates.
According to Goncher, the rate of substantially underwater mortgage levels is often higher in southern areas. The causes are frequently a confluence of demographic shifts and economic factors like employment rates.
“Declining population leads to declining real estate prices,” Goncher said. “Declining real estate prices leads to underwater mortgages.”
Oklahoma, Kentucky, and Louisiana are states that produce energy from fossil fuels. Because of U.S. policy, the output of fossil fuels has decreased, which has decreased jobs and economic activity in several states. If consumers can’t afford to buy a home, house prices decline and more homeowners default on their mortgages. Another driving factor contributing to the rise in underwater mortgages is population reduction.
Now that economic trends and the recent reduction in interest rates are pushing homeowner equity higher, homeowners in states with high percentages of underwater mortgages should begin to enjoy some reprieve.
In Q2 of 2024, the percentage of substantially underwater mortgaged properties fell to one in 42 nationwide. In Q1 of 2024, that percentage was one in 37, and in Q2 of 2023, it was one in 36. In 37 states per year and 47 states on a quarterly basis, the rate declined.
The top 10 states with underwater mortgages by count as of Q2 2024:
- Texas (number of seriously underwater mortgages: 109,254)
- Illinois (102,825)
- Ohio (91,125)
- Pennsylvania (88,811)
- California (85,412)
- Louisiana (67,840)
- Florida (61,830)
- Georgia (49,149)
- Michigan (47,045)
- Missouri (46,556)
The top 10 states with underwater mortgages by percentage as of Q2 2024:
- Louisiana (10.5%)
- Mississippi (6.8%)
- Kentucky (6.3%)
- Arkansas (5.4%)
- Iowa (5.2%)
- North Dakota (5.0%)
- Oklahoma (5.0%)
- West Virginia (4.7%)
- Illinois (4.0%)
- Missouri (3.9%)
From the first to the second quarter of 2024, the percentage of substantially submerged properties increased in only two states, and even then, it increased very little. South Dakota increased from 3% to 3.1%, and Utah increased from 2.1% to 2.2%.
Conversely, the states with the lowest percentages of mortgages that are substantially underwater were California (1.2%), Rhode Island (0.9%), New Hampshire (1%) Massachusetts (1.1%), and Vermont (0.7%) all having mortgages that are seriously underwater.
How Do Underwater Mortgages Look in Q4 of 2024?
In Q2 2024, homeowner equity increases outpaced gains over the previous five years, and underwater mortgages are also benefiting. However, what is ahead? Will these patterns hold up?
The CEO of ATTOM, Rob Barber, predicts that increased buyer demand over the summer will have driven prices further higher. For mortgages that are underwater, this is good news. This, along with the recent decline in interest rates, should cause demand for homes to increase even more, raising property values in the process and lowering the quantity of underwater mortgages, especially in states in the Midwest and South.
To read the full report, including more data, charts, and methodology, click here.
The post Which States Have the Most Underwater Mortgages? first appeared on The MortgagePoint.
