Housing market collapse warning: Mortgages that are “seriously underwater” are on the rise

New data shows that about one in 37 mortgages in the United States are “seriously underwater,” fueling fears of a housing market collapse.

This begs the question: What does it mean for a house to be under water?

Well, a mortgage is underwater if the loan on the property exceeds its estimated market value. A “serious” underwater mortgage refers to a loan that is 25% or more of its market value.

Across the U.S., 2.7% of homes had loan balances at least 25% above their respective market values ​​in the first quarter of 2024. This represents an increase of 0.1% from the 2.6% level in the fourth quarter of 2023. However, the percentage has fallen sharply. According to the ATTOM Q1 Home Equity & Underwater report, the share of home ownership is still less than half its share before the pandemic.

Interestingly, the share of high-equity mortgages also fell in most states in the first quarter, typically by less than 2%.

The largest quarterly decline in mortgage principal came from the South, particularly in states like Kentucky, South Carolina and Georgia, as well as Indiana. These states recorded some of the largest losses.

What does the rise in underwater mortgages mean for a housing market collapse?

An underwater mortgage usually occurs when people pay too much for their home or make too little of a down payment on the property. Therefore, if the value of the home falls, the mortgage can easily come under pressure.

Underwater mortgages are generally undesirable by both homeowners and lending banks for a variety of reasons. If the homeowner needs to move for any reason, selling the home alone will not be enough to cover the mortgage costs. Additionally, underwater mortgages have a higher default rate. During the infamous real estate market crash of 2008, many homeowners quietly stopped making payments on their underwater properties.

However, there is always the possibility that the property will later increase in value and will only be temporarily under water.

Despite the increase in underwater mortgages, real estate financing remains solid overall.

“Homeowners’ balance sheets continue to benefit enormously from the boom times in the form of increased equity that can be used to finance everything from home renovations to starting a business.” Still, the gains are beginning to fade as evidence mounts. that the market is no longer so overheated,” said Rob Barber, CEO of ATTOM. “It is still too early to make general statements about market direction, particularly after the typically slower fall and winter months.”

At the time of publication, Shrey Dua did not hold, directly or indirectly, any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publication policies.