Homeowners who owe more on their mortgages than their homes are worth almost never default based on negative equity alone, according to research highlighted in a June 2, 2026 report by firsttuesday Journal. A 2008 Federal Reserve Bank of Boston study found that over 90% of homeowners with negative equity continued to pay their mortgages as long as they kept their jobs and didn't face relocation. The findings challenge the conventional wisdom that underwater mortgages—where debt exceeds home value—are the primary driver of foreclosure waves during real estate busts.

The share of homes with negative equity nationwide stood at 2.20% in the fourth quarter of 2025, up 10% from 2.00% the previous year, according to data updated May 20, 2026. In California's major metros, the numbers remain well below the national average but show diverging trends. Los Angeles saw its negative equity rate climb 25% year-over-year to 1.0%, up from 0.8% in Q4 2024. San Francisco's rate dropped 9.1% to 1.0% from 1.1% the prior year. For perspective, a whopping 37% of mortgaged California homeowners were underwater at the height of the foreclosure crisis in early 2010. During the 2008 Great Recession period through 2012, some 1.1 million households lost their homes in California alone.

The report identifies job loss or other financial shock—not negative equity status—as the main culprit for strategic default, citing a 2016 Federal Reserve Bank of Boston paper. According to the analysis, homeowners face powerful economic disincentives that keep them paying even when deeply underwater: the costs of relocating, the damage done to credit, and the emotional distress associated with failing to keep their home. The report notes that strategic default almost always remains a seldom-used option for homeowners, with families becoming "prisoners in their own home, policed by lenders seeking to keep their mortgages performing."

The real problem surfaces when lenders modify mortgages without reducing the principal balance. The report explains that when lenders do choose to modify a mortgage, they leave the mortgage balance intact and the accrued interest unforgiven—an "extend-and-pretend approach" that keeps loans reportable as performing while the debt increases every month, killing off any opportunity to sell the negative-equity property. Making matters worse, Congress in 2005 eliminated cramdown provisions in the bankruptcy code that would have allowed judges to reduce mortgage debt for homeowners—a relief still available to investors who own rental properties. Without debt restructuring options, underwater homeowners who lose income have only one escape: strategic default and foreclosure, which destroys their credit for a decade.

Looking ahead, the report warns that the share of mortgaged homes with negative equity in California's influential metro areas increased slightly in the years since early 2022, though they remain far below national averages and the devastating 2010 peak. The analysis cautions readers to watch for this number to rise through 2026 and 2027 as the price decline resumes. As home prices continue to contract over the next two-to-three years, the share of underwater homes is expected to rise rapidly, plunging anyone who purchased after 2021 with a minimal down payment deep underwater. The one silver lining: today's mortgaged homeowners have none of the predatory loan features that fueled the 2005 peak and 2007 collapse, thanks to massive lending reforms enacted in 2010.