America’s Most Underwater Housing Markets Present a Golden Opportunity For Investors

In This Article

The combination of foreclosures and falling housing prices is like throwing chum into the water for a group of hungry sharks eager for deals. In some states, as mortgages slip into negative equity and banks seize possession of homes, the fins have started to circle.

Underwater Homes Are Clustered in Specific States

It’s not a feeding frenzy yet, however. According to a fourth-quarter 2025 home equity study by real estate data specialists ATTOM, the percentage of homes that are at least 25% underwater—meaning that mortgage balances are at least 25% above market value—has increased to 3% of all mortgages, up from 2.5% a year earlier.

That’s not astounding news in itself, but what is interesting is that the underwater homes are clustered in specific states, each with between about 5% and 11% of mortgaged homes in deep negative equity:

Louisiana

Mississippi

Kentucky

Iowa

Arkansas

Should these homeowners be forced to sell and cannot find a buyer because their debt exceeds the home’s value, they could find themselves handing the keys back to the bank, which would then list the home for sale as an REO. In a declining market, that’s a golden opportunity for investors.

Analyzing the ATTOM data, Homes.com chief economist Brad Case said:

“When homes get into negative equity, there are three typical reasons. One, they used a very low down payment; two, they used a long amortization schedule, meaning that the period during which most of their mortgage payment was interest rather than principal lasted for a long time; and three, the value of the house went down, either because they bought at the top of the market or because they paid more than it was worth even at the time they bought it.”

Case added, “The bigger problem is that some buyers are likely to have assumed that the $100,000 increase they saw over the previous year will continue indefinitely, and they will have been willing to overpay to get in on (not quite) the ground floor.”

That kind of thinking led to the 2008 financial crash. However, we are a long way from that, with only some markets showing increased homes underwater while others, particularly in the Midwest, are in good health.

The same ATTOM data showed that equity-rich properties, where the total secured debt is half of the home’s value, dropped from 46.1% in the third quarter of 2025 to 44.6% in the fourth quarter. However, Case categorizes this as “normalization” rather than a market in free fall.

Stress, Foreclosures, and the Landlord Exodus Narrative

When the decline in home equity and the increase in homes underwater are analyzed alongside the growing issues with household credit, a narrative begins to emerge: The population—especially those with moderate incomes—is under increasing financial strain.

“In lower-income areas and in areas experiencing worsening labor markets or housing market conditions, we are seeing mortgage delinquencies grow at a fast pace,” economists at the Federal Reserve Bank of New York said in a recent report. The states with higher underwater properties and an increase in foreclosures—including default notices, scheduled auctions, and bank repossessions—up 32% from a year ago, according to ATTOM data, hint at a pipeline of motivated sellers and lenders.

A “Landlord Exodus”

Layered on top of these trends is an increasingly worrying one for investors: A “landlord exodus” shows that in certain metros—most prevalently in Florida and Texas—landlords are heading for the hills due to a combination of pricing, rent burden, regulatory friction, and poor landlord-friendliness metrics.

The analysis, a January 2026 report, “Landlord Exodus & Housing Stress Index,” which was published by GigHz and combines Zillow housing and rent indices and state regulatory datasets, shows that low-income households in rent-controlled markets apportion roughly 42% of their income to rent, compared to about 29% in more landlord-friendly states, which shows how tight regulation can coincide with higher rent burdens.

The U.S. housing market has split into four capital zones, according to Dr. Pouyan Golshani, founder of GigHz Capital and developer of RadReport AI. “Investors and landlords aren’t villains or heroes; they’re actors responding rationally to regulation, supply, and affordability,” he added.

Why the Midwest Keeps Coming Out Ahead

Conversely, certain Midwest and Northeast markets remained resilient, according to the landlord exodus report:

The Play for Landlords

Landlords looking for a deal have a few options. The trend line in certain Southern and Sunbelt states is of homeowners under increasing financial strain. If a house has negative equity, a “We Buy Houses—are you facing foreclosure or underwater?” mailer, online ad, or bandit sign will be of little use—if you wish to get a home at a discount—unless you can work out a deal with the lender.

Many lenders are sitting on the sidelines, waiting to see what happens with interest rates and hoping for a rush of buyers. However, when owners have credit card debt, are behind on payments, or landlords are burned out from bad tenants and restrictive municipalities, it might be possible to strike a deal, ask the owner to hold the note, or assume a mortgage if the interest rate is low. Or if there is equity, simply buy it outright.

Final Thoughts

For landlords unable to make a move now, there is plenty to keep an eye on. If the trend for underwater or near-underwater homes in specific markets continues, with declining values and interest rates remaining where they are, motivated sellers and lenders might be open to creative deal structures, including seller financing, rent-to-own arrangements, or purchasing discounted portfolios, especially if the houses are in need of repair.

Pair this information with the fundamentals—jobs, population trends, regulatory climate, and realistic rent projections—and the map of underwater mortgages can double as an early indicator of next investment hot spots.

Source link