The real estate market has rapidly changed. The number of owners who are underwater is small but growing, and they have recently been concentrated in pandemic boomtowns such as Austin, Texas, Cape Coral, Fla and Denver, CO. A rapid rise in prices in these areas has been followed by drops. What does this mean for the real estate market. Why is this cycle radically different than 2008 or is it?
What was in the data on underwater mortgages?
A typical decade’s worth of home-value growth was packed into just five years, starting in 2020, said Kara Ng, a senior economist at Zillow. Housing demand was driven by a perfect blend of low mortgage rates, high consumer savings and more people desiring larger spaces. Just about every major market experienced robust price growth, but the trend was turbocharged in some Sunbelt cities and Western markets where remote workers flocked during the pandemic.
The record-fast growth cooled off around when mortgage rates began to rise in 2022 and affordability became stretched. This has led to price resets in many cities.
Why focus on Underwater mortgages as a market Barometer
If a borrower has little or no equity in a property and values fall 10 % like they already have in many markets like Denver these borrowers are underwater and have a financial incentive to “walk away” from the property since they really have nothing financially to lose.
Remember, the amount of equity or lack thereof is the number one factor in determining if a lender takes a loss. Essentially areas with higher number of underwater mortgages are considerably riskier. These areas are at much greater risk of a correction during the next downturn.
Who is most at risk of being underwater?
The obvious culprit is low down payment loans like FHA loans that require as little as 3.5% down if you have okay credit. Let me debunk a common theory that the most likely underwater mortgages are in lower priced properties. FHA loan limits now range from about 550k all the way up to 1.1m in high cost areas. These loan limits that were raised substantially since 2008 which means that lower and mid/upper price points will be impacted equally. This could also impact many suburban markets, rural markets, etc…
What property types are most at risk of being underwater?
Condos are substantially more likely to be underwater than single family homes. Look at this chart in Denver: both median and average sales prices have declined while inventory has surged. Many condos will lose anywhere from between 10-15% of their value and some will lose substantially more. The most at risk are lower priced older multi story units. These condos have huge deferred maintenance costs that will be passed on to homeowners who can least afford it.
Denver vs Atlanta underwater mortgages
I did two Zillow charts of hot pandemic markets to see how they are holding up with the real estate reset.
Denver: Denver is down around 12% from the peak which means that if someone bought in 22 with an FHA or low downpayment loan they are likely already underwater. This is why we are seeing a surge in inventory in Denver and continuing price pressures.
Atlanta: Atlanta has so far fared better than Denver with prices down around 5% from the peak which means a much smaller percentage of property owners are at risk of being underwater. This should help Atlanta outperform markets like Denver in the near term.
Why is this real estate cycle radically different than 2008
Although 2008 is now “ancient” history, it is important to remember that more often than not according to Mark Twain history rhymes. We saw in 2008 that underwater mortgages were the first loans to go into default and also ultimately lead to losses for lenders, bondholders, etc…
In the utmost wisdom of our federal government, they decided after 2008 that they needed to help more homeowners by expanding the number of properties covered by low downpayment loans. This is radically different than the original intent of FHA to cover low-income homebuyers.
It would be hard to argue that someone now buying a 1.1-million-dollar home is a low income buyer in need of government assistance! But I didn’t make the rules so here we are in 2025 with low downpayment loans covering expensive properties which are now at risk of being underwater
Underwater loans issue much larger than expected
Although we don’t have the “liar loans” like in 08 the huge expansion of low downpayment loans will make this next real estate cycle deeper than most people think. The significance of this expansion in FHA lending means that the government has created a huge problem of low equity homeowners that are at much greater risk with any shift in the economy like we are seeing today.
The percentage of FHA loans has been fluctuating between 15-20% with the VA which also offering low downpayment loans which comprise around 8% of the market. Combined low downpayment loans comprise 20-30% of the market which is a huge red flag. As mentioned above the number one determinant of a loss is equity, with so many low downpayment loans a small hiccup in the market can create a huge wave.
Although I’m not predicting a 2008 rerun, we have some huge downside risk in certain markets due to the large expansion of FHA loan limits that will ultimately lead to big losses for taxpayers and property owners. On a positive note, there will be some buying opportunities as the market resets
Additional Reading/Resources
https://www.wsj.com/economy/housing/underwater-mortgages-negative-equity-charts-4e5978a1
https://www.fairviewlending.com/why-are-mortgage-rates-high-2025/
https://www.fairviewlending.com/have-home-price-already-declined/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends 😊. I would greatly appreciate it.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games). Learn how to find a reputable hard money lender and why Fairview is the best hard money lender for investors.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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