The mixture of foreclosures and falling housing costs is like throwing chum into the water for a bunch of hungry sharks anticipating offers. In some states, as mortgages slip into adverse fairness and banks seize possession of houses, the fins have began to circle.
Underwater Houses Are Clustered in Particular States
It’s not a feeding frenzy but, nevertheless. In response to a fourth-quarter 2025 residence fairness examine by actual property information specialists ATTOM, the proportion of houses which are at the least 25% underwater—which means that mortgage balances are at the least 25% above market worth—has elevated to three% of all mortgages, up from 2.5% a 12 months earlier.
That’s not astounding information in itself, however what’s fascinating is that the underwater houses are clustered in particular states, every with between about 5% and 11% of mortgaged houses in deep adverse fairness:
- Louisiana
- Mississippi
- Kentucky
- Iowa
- Arkansas
Ought to these owners be pressured to promote and can’t discover a purchaser as a result of their debt exceeds the house’s worth, they might discover themselves handing the keys again to the financial institution, which might then checklist the house on the market as an REO. In a declining market, that’s a golden alternative for buyers.
Analyzing the ATTOM information, Houses.com chief economist Brad Case mentioned:
“When houses get into adverse fairness, there are three typical causes. One, they used a really low down cost; two, they used a protracted amortization schedule, which means that the interval throughout which most of their mortgage cost was curiosity moderately than principal lasted for a very long time; and three, the worth of the home went down, both as a result of they purchased on the prime of the market or as a result of they paid greater than it was value even on the time they purchased it.”
Case added, “The larger drawback is that some patrons are prone to have assumed that the $100,000 enhance they noticed over the earlier 12 months will proceed indefinitely, and they’re going to have been keen to overpay to get in on (not fairly) the bottom flooring.”
That form of considering led to the 2008 monetary crash. Nonetheless, we’re a great distance from that, with just some markets displaying elevated houses underwater whereas others, notably within the Midwest, are in good well being.
The identical ATTOM information confirmed that equity-rich properties, the place the entire secured debt is half of the house’s worth, dropped from 46.1% within the third quarter of 2025 to 44.6% within the fourth quarter. Nonetheless, Case categorizes this as “normalization” moderately than a market in free fall.
Stress, Foreclosures, and the Landlord Exodus Narrative
When the decline in residence fairness and the rise in houses underwater are analyzed alongside the rising points with family credit score, a story begins to emerge: The inhabitants—particularly these with reasonable incomes—is underneath rising monetary pressure.
“In lower-income areas and in areas experiencing worsening labor markets or housing market situations, we’re seeing mortgage delinquencies develop at a quick tempo,” economists on the Federal Reserve Financial institution of New York mentioned in a latest report. The states with greater underwater properties and an enhance in foreclosures—together with default notices, scheduled auctions, and financial institution repossessions—up 32% from a 12 months in the past, in response to ATTOM information, trace at a pipeline of motivated sellers and lenders.
A “Landlord Exodus”
Layered on prime of those developments is an more and more worrying one for buyers: A “landlord exodus” reveals that in sure metros—most prevalently in Florida and Texas—landlords are heading for the hills as a result of a mixture of pricing, lease burden, regulatory friction, and poor landlord-friendliness metrics.
The evaluation, a January 2026 report, “Landlord Exodus & Housing Stress Index,” which was revealed by GigHz and combines Zillow housing and lease indices and state regulatory datasets, reveals that low-income households in rent-controlled markets apportion roughly 42% of their revenue to lease, in comparison with about 29% in additional landlord-friendly states, which reveals how tight regulation can coincide with greater lease burdens.
The U.S. housing market has break up into 4 capital zones, in response to Dr. Pouyan Golshani, founding father of GigHz Capital and developer of RadReport AI. “Traders and landlords aren’t villains or heroes; they’re actors responding rationally to regulation, provide, and affordability,” he added.
Why the Midwest Retains Coming Out Forward
Conversely, sure Midwest and Northeast markets remained resilient, in response to the owner exodus report:
- Rockford, Illinois
- Erie, Pennsylvania
- Utica, New York
- St. Joseph, Missouri
- Janesville, Wisconsin
- Canton, Ohio
- Syracuse, New York
- Cleveland, Ohio
In these markets, affordability and job stability have created a positive atmosphere for homebuyers and landlords alike, in stark distinction to speculative spikes seen within the Sunbelt and coastal markets.
This was echoed by the Neighbors Financial institution’s Finest Cities for First-Time Homebuyers in 2026, which was dominated by Midwestern cities.
The Play for Landlords
Landlords searching for a deal have a number of choices. The pattern line in sure Southern and Sunbelt states is of householders underneath rising monetary pressure. If a home has adverse fairness, a “We Purchase Homes—are you dealing with foreclosures or underwater?” mailer, on-line advert, or bandit signal will likely be of little use—in the event you want to get a house at a reduction—except you possibly can work out a cope with the lender.
Many lenders are sitting on the sidelines, ready to see what occurs with rates of interest and hoping for a rush of patrons. Nonetheless, when house owners have bank card debt, are behind on funds, or landlords are burned out from dangerous tenants and restrictive municipalities, it is perhaps potential to strike a deal, ask the proprietor to carry the notice, or assume a mortgage if the rate of interest is low. Or if there’s fairness, merely purchase it outright.
Last Ideas
For landlords unable to make a transfer now, there’s loads to control. If the pattern for underwater or near-underwater houses in particular markets continues, with declining values and rates of interest remaining the place they’re, motivated sellers and lenders is perhaps open to inventive deal constructions, together with vendor financing, rent-to-own preparations, or buying discounted portfolios, particularly if the homes are in want of restore.
Pair this info with the basics—jobs, inhabitants developments, regulatory local weather, and reasonable lease projections—and the map of underwater mortgages can double as an early indicator of subsequent funding sizzling spots.
