Nearly Half of U.S. Mortgaged Homes Are Considered ‘Equity-Rich’ According to Report — Less Than 3% Are Underwater Vermont leads the U.S. in highest share of equity-rich homes. Louisiana holds the most underwater mortgages.

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The U.S. has been experiencing a surge in equity-rich housing, according to the latest report by the real estate data provider ATTOM. The figures for Q2 are impressive. Currently, the number of equity-rich mortgages in the U.S. is sixteen times greater than underwater mortgages.

The U.S. Home Equity & Underwater Report shows that 48.1% of all mortgages in the U.S. are now equity rich, up from 44.9% in the first quarter and 34.4% earlier in the year. To qualify as equity rich, a homeowner must have at least 50% equity in the home.

Equity-Rich Mortgages are Soaring

Equity ownership levels have soared in 2022 as the housing market continues growing. None of the predictions of a housing market downturn following the pandemic have materialized so far. Demand still greatly outpaces supply, and a stagnating economy with higher interest rates has only slightly cooled the housing market thus far. 

Overall, home prices are expected to continue their ascent, with Zillow forecasting growth of 7.8% over the next 12 months.

However, the current rate of appreciation is nothing like the unprecedented appreciation of 2020-2021, when 20%+ YoY increases were commonplace in many markets.

An overheated market with a severe supply-demand imbalance contributed to the home price surge, allowing homeowners to grow their equity shares fast. Appreciation trends are set to continue, but at a slower pace, according to Rick Sharga, executive vice president of market intelligence at ATTOM. Sharga told Bloomberg, “while home price appreciation appears to be slowing down due to higher interest rates on mortgage loans, it seems likely that homeowners will continue to build on the record amount of equity they have for the rest of 2022.”

Of course, when we dig a little deeper into the regional breakdown of markets, we find that not all areas of the U.S. are experiencing the same thing, with several in-demand metro areas contributing the most to overall figures. 

The South had the biggest gains in equity from Q1 to Q2. Florida, in particular, has experienced an unprecedented jump in equity-rich housing levels this year, from 33.4% to 60.4%.

However, the situation is very different in the Midwest, with states like Indiana and Illinois lagging behind. The share of equity-rich homes in these states is still under 35%. Vermont has the highest percentage of equity-rich homes, where over 71% of mortgaged homes are considered equity-rich.

The Status of Underwater Mortgages

Underwater mortgages are also known as negative equity mortgages, meaning a homeowner owes more on their mortgage than the home is worth. The number of underwater mortgages was particularly high following the financial crash of 2008 when it sat at 12% by the second half of the year. 

Housing market crashes are dangerous precisely because they can plunge large numbers of homeowners into a negative equity position. A drastic fall in home prices over a short period of time makes homeowners who have only recently bought their home and haven’t yet built up much equity in it especially vulnerable. 

According to CoreLogic, “borrowers with equity positions near (+/- 5%) the negative equity cutoff are most likely to move out of or into negative equity as prices change.”

Rapidly growing home prices, on the other hand, lift many more homeowners out of the possibility of an underwater mortgage than would be possible under ordinary market conditions, which is what we’ve seen since the start of the pandemic. 

Unfortunately, despite the massive gains in appreciation, underwater mortgages can still be found in many markets, most prominently in the South and Midwest. The states with the highest share of underwater properties were Louisiana (11%), Mississippi (8.1%), and Wyoming (7%).

This means that these markets are most at risk in the event of a housing crisis. The good news is that there isn’t any indication that a major real estate crisis is on the horizon.

How to Take This News As An Investor

An equity-rich mortgage market is good news for real estate investors, particularly those investing for the first time or flippers. A home with an underwater mortgage is always a liability. Plus, they can be difficult to sell and will likely lose you money. 

If you are new to real estate investing and don’t have the appetite for risk, or you simply want to make sure that you are investing responsibly, equity-rich markets come with far fewer risks than markets where appreciation is stagnant or declining. There are deals to be found in both types of markets, so it’s important to run the numbers and do your due diligence.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.