U.S. Faces Negative Equity Time Bomb: Percentage of Mortgages Considered “Severely Distressed” Rises; These are the most affected states

U.S. homeowners falling into negative equity rose in the first quarter of the year as rising costs of living and a volatile housing market put pressure on households.

The number of mortgages considered “severely underwater” rose from 2.6 percent to 2.7 percent of all residential mortgages, a new report shows.

In Kentucky, the percentage of “severely underwater” mortgage holders rose to 8.3 percent in the first three months of the year, the highest of any U.S. state. To meet the threshold, homeowners must owe at least 25 percent more than the estimated value of their home.

Louisiana, where home prices have fallen 2.8 percent in one year, has the highest proportion of troubled mortgage holders. About 11.3 percent of mortgage loans in the Pelican State are currently severely underwater. according to the latest data from ATTOM.

Wyoming followed, with 8.8 percent of its mortgage holders meeting the threshold.

In Mississippi, 7.1 percent of mortgage holders are considered “severely underwater,” while in Oklahoma they are 6.1 percent.

Negative equity occurs when an individual’s outstanding mortgage balance is greater than the value of their property.

In a strong market, home values ​​should appreciate over time, meaning borrowers have little risk of falling into negative equity.

However, when prices begin to fall and interest rates rise, those with small down payments are at the greatest risk of “going under.”

Falling into negative equity can make it difficult to sell or refinance a home, leaving many feeling trapped in their property. The problem erupted into a crisis during the 2008 financial crisis, when house prices plummeted overnight.

And now borrowers face a similar problem as the red-hot housing market of the last two years begins to cool as mortgage rates sit at 7.09 percent for a 30-year fixed term, according to the latest data from Freddie Mac.

Home lending has been boosted by the Federal Reserve’s aggressive tightening cycle, which has driven interest rates to a 23-year high.

Despite this, house prices have remained surprisingly high, as those with cheaper fixed-rate mortgages have chosen not to move, and housing supply constraints have kept demand high.

But families are facing the highest living costs in recent memory as inflation remains at 3.5 percent, possibly leading to more mortgage defaults.

ATTOM also found a decline in the percentage of mortgage holders considered “equity rich” for the third consecutive quarter.

Homeowners with a loan-to-value ratio of 50 percent or less fell to 45.8 percent in the first quarter of the year, down from 46.1 percent the previous quarter.

The figures represent the lowest level of equity-rich mortgages in two years, according to ATTOM.

“The housing market’s windfall is slowly starting to erode amid growing signs that the market is no longer so overheated,” ATTOM CEO Rob Barber said of the report’s findings.

He added: “It is too early to make general statements about the direction of the market, especially after the typically slower autumn and winter months.”

“But amid recent trends, this year’s spring shopping season will be of great importance in knowing whether a new long-term market pattern is developing.”