One of the most alarming aspects of the housing bubble crash was the staggering number of Americans who were underwater on their homes. In 2010, CoreLogic’s national data in the fourth quarter revealed that a shocking 23.1% of homes with mortgages were underwater, totaling just over 11 million homes.

However, the situation has significantly improved since then, thanks to the Qualified Mortgage rule (QM) that was implemented in 2010. Today, we see a much more manageable figure, with approximately 1 million homes underwater, representing a significant and reassuring reduction to roughly 1.8% of homes that have a mortgage.

What a difference a cycle makes, right? We only have 1.8% of homes with underwater mortgages, and roughly 40% of homes in America don’t even have a mortgage. The nested equity level of U.S. households who own homes is massive. However, that isn’t even the best housing data line: The truth is that American homeowners’ cash flow has never looked this great.

Not being underwater is a plus — having enough equity to sell and cover the transaction cost is even more significant if you’re financially stressed and need to sell. But, we don’t have large numbers of American homeowners that are financially stressed right now.

Most homeowners aren’t in financial distress as their cash flow has been solid since 2010, thanks to that QM rule. This, combined with the 2005 Bankruptcy Reform law and the most prolonged economic and job expansion in our nation’s history before COVID-19, has created a favorable financial environment for American homeowners. It was an excellent setup for American homeowners to have a fixed debt cost (that 30-year mortgage) with their wages rising yearly. As we can see in the FICO score data below, household cash flow data looks excellent.

It’s good to remember that U.S. homeowners are living in their homes longer and longer. For example, from 1985-2007, housing tenure was five to seven years; from 2008-2024, it grew to 11-13 years.

Also, since 2012, we have had three refinance waves: 2012, 2016 and 2021-2022. Not only have Americans benefited from fixed debt costs, but their wages have risen and they have been able to refinance at lower mortgage rates. This is a significant advantage of the U.S. housing market, which offers a 30-year fixed mortgage, especially compared to countries like Canada that have had to try 90-year loan modifications.

So, what are some risks with current underwater mortgages? Well, we have people who bought homes in 2022, when home prices peaked in certain cities. If they had a low down payment and needed to move or sell, they must bring cash to the closing to make the difference.

While I am not a mortgage rate lockdown person, equity lockdowns are real, and when you’re underwater or barely positive, this limits your options to sell and move without needing more cash to close. Also, many homeowners count on their equity growth to help them with a down payment for their next home.

The most significant risk from being underwater is that if you’re experiencing financial stress, you’re a foreclosure risk. When you don’t have enough selling equity, if you lose your job and have minimal assets, you could have few other options than to go into the foreclosure process. This is the risk of late-cycle lending in the U.S., especially with anyone with a low or zero down payment loan. With all that said, you can see the U.S. foreclosure data looks very healthy right now, especially compared to the terrible period of 2005-2008, all before the job loss recession 2008 happened.

What’s the takeaway from this data? The housing market doesn’t have an underwater home problem, but that doesn’t mean there isn’t risk for homeowners. So, when the next job loss recession happens, will the government enact another forbearance program like they did in 2020? Or, will they allow the marketplace to handle the distressed homeowners since it looks like we don’t have the same credit markets that led to the housing bubble crash of 2008?

Time will tell on that question. However, we can say without a doubt that most homeowners are well above water with their homes, and that’s not counting the nearly 40% of homes that don’t even have a mortgage, which is a very positive story for the United States of America.