The combination of foreclosures and falling home prices is like throwing into the water a group of hungry sharks eager to make deals. In some states, mortgages go negative equity and banks foreclose on houses, the fins start circling.
Underwater housings Are clustered in specific states
However, it is not yet a feeding frenzy. This is evident from a study into the equity of houses for the fourth quarter of 2025, conducted by real estate data specialists. ATOMthe percentage of homes that are at least 25% underwater – meaning the mortgage balance is at least 25% above market value –has increased to 3% of all mortgages, compared to 2.5% a year earlier.
That in itself isn’t surprising news, but what’s interesting is that the underwater homes are clustered in specific states, each with between 5% and 11% of homes with deeply negative equity mortgages:
- Louisiana
- Mississippi
- Kentucky
- Iowa
- Arkansas
If these homeowners are forced to sell and cannot find a buyer because their debt exceeds the value of the home, they can return the keys to the bank, which then puts the home up for sale as a REO. In a falling market, this is a golden opportunity for investors.
Analyzing the ATTOM dataHomes.com Chief Economist Brad Case said:
“When homes become negative equity, there are three typical reasons: First, they used very low equity deposit; second, they used a long amortization schedule, meaning the period in which most of their mortgage payments were interest rather than principal was long; and three., the value of the house dropped, 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 have likely assumed that the $100,000 increase they saw over the past year will continue indefinitely, and they will be willing to overpay to (not quite) get in on the ground floor.”
That kind of thinking led to the financial crash of 2008. We’re still a long way from that, though: Only a few markets are seeing an increase in underwater homes, while others, especially in the Midwest, are in good health.
The same ATTOM data showed that equity-heavy properties, where total secured debt is half the home’s value, fell from 46.1% in the third quarter of 2025 to 44.6% in the fourth quarter. However, Case categorizes this as ‘normalisation’ and not as a market in free fall.
Stress, bankruptcies and the landlord’s story
When the decrease in home equity and the increase in the number of homes comes under water are analyzed In addition to the growing problems with household lending, a story is beginning to emerge: the population – especially those with moderate incomes – is under increasing financial pressure.
“In lower-income areas and in areas where labor markets or housing market conditions are deteriorating, we are seeing mortgage delinquencies increasing rapidly.” That’s what economists at the Federal Reserve Bank of New York say in one recent report. The states with higher underwater properties and a increase in bankruptcies– including notices of default, planned auctions and bank repossessions – up 32% from a year ago, according to ATTOM data, point to a pipeline of motivated sellers and lenders.
An “exodus of landlords”
On top of these trends comes an increasingly troubling trend for investors: A “landlord exodus” shows that in certain metros – especially Florida and Texas – landlords are heading for the hills due to a combination of pricing, rent burdens, 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 indexes and state regulation datasets, shows that low-income households in rent-controlled markets spend about 42% of their income on rent, compared to about 29% in more landlord-friendly states, showing how strict regulations can coincide with higher rent costs.
The US housing market is split into four capital zones, according to Dr. Pouyan Golshani, founder of GigHz Capital and developer of RadReport AI. “Investors and landlords are not villains or heroes; they are actors who respond rationally to regulation, supply and affordability,” he added.
Why the Midwest continues to lead the way
Conversely, certain markets in the Midwest and Northeast remained resilient, according to the landowner exodus report:
- Rockford, IL
- Erie, Pa
- Utica, New York
- St. Joseph, Missouri
- Janesville, Wisconsin
- Canton, Ohio
- Syracuse, New York
- Cleveland, OH
In these markets, affordability and employment stability have created a favorable environment for both homebuyers and landlords, in stark contrast to the speculative spikes in the Sunbelt and Coastal markets.
This was repeated by the Neighbors Bank’s best cities for first-time homebuyers in 2026which one was dominated through midwestern cities.
The game for landlords
Landlords looking for a deal have a few options. The trend line in certain Southern and Sunbelt states is that homeowners are under increasing financial pressure. If a home has negative equity, a “We Buy Homes – Are You Facing Foreclosure or Underwater?” A mailer, an online ad or a bandit sign will be of little use – if you want to buy a house at a discount – unless you can make a deal with the lender.
Many lenders are 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 are landlords are burned out from bad tenants and restrictive municipalities it may be possible to make a deal, ask the owner to hold the note, or take a mortgage when interest rates are low. Or if there is equality, Ordinary buy it immediately.
Final thoughts
For landlords who can’t move right now, there’s plenty to keep an eye on. As the trend for As underwater or near-underwater homes in specific markets continue, while declining values and interest rates remain where they are, motivated sellers and lenders could be open to creative deal structures, including seller financingrent-to-own schemes, or purchasing discounted walletsespecially when it comes to houses are in need by repair.
Couple this information with the fundamental data – jobs, population trends, regulatory environment and realistic rent projections – and the map of underwater mortgages can serve as an early indicator of the next investment hotspots.
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