by Daniel Brouse
Abstract
As of late 2025 and early 2026, negative equity—homes worth less than the outstanding mortgage—has reached its highest level since early 2018. While national averages remain relatively modest, localized distress is accelerating in several rapidly expanded Sunbelt markets. The primary drivers are declining property values in high climate-risk regions, surging insurance costs, and the long-term economic consequences of climate science denial.
This paper examines the emerging geographic concentration of underwater mortgages and links it to intensifying physical climate impacts, rising insurance instability, and policy failures at the state level.
1. The Reemergence of Negative Equity
Negative equity surged during the 2008 housing collapse, then steadily declined over the following decade as home prices rose. However, recent data indicate a reversal of that trend in specific metropolitan regions.
Although the national share of underwater mortgages remains contained, several Southern markets now show rates at or near one in ten homes:
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Lakeland, FL: 10.8% of mortgaged homes underwater
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Cape Coral, FL: 10.1%
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Austin, TX: 9.2%
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San Antonio, TX: 8.8%
These figures represent concentrated financial stress rather than a uniform national downturn. The pattern is not random. The affected markets share two characteristics:
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Rapid population growth during 2020–2023.
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Escalating exposure to climate-related risk.
2. Climate Risk as an Economic Variable
In Florida and Texas, property insurance costs have risen at some of the fastest rates in the nation. Insurers have withdrawn from high-risk zip codes, reduced coverage, or sharply increased premiums. In Florida, the state has effectively become the largest insurer of private residential property through public backstopping mechanisms—an implicit socialization of climate risk.
In several high-risk counties, properties are increasingly:
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Difficult to insure
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Expensive to maintain
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Exposed to repeated flood, heat, hurricane, or wildfire events
Certain regions are now experiencing conditions that render them effectively uninhabitable for extended periods—averaging roughly 20 days per year of dangerous heat indices or severe disruption from storms, flooding, or infrastructure failure.
As actuarial risk catches up with political rhetoric, markets are repricing climate exposure. The result is declining home values in precisely those areas where physical risk is rising fastest.
3. The Cost of Climate Science Denial
A notable irony underlies this trend. Many of the states and municipalities experiencing the sharpest housing corrections have historically minimized or denied the economic implications of climate science.
During the COVID-19 pandemic—an event linked in part to ecological disruption and zoonotic spillover intensified by environmental degradation—policy responses varied sharply by state. Some jurisdictions rejected public health guidance and climate science simultaneously, framing both as ideological rather than empirical issues.
This created a migration dynamic: individuals seeking fewer regulations relocated to states publicly downplaying both pandemic and climate risks. In many cases, this influx drove rapid appreciation in real estate values from 2020–2023. Buyers paid premium prices under the assumption of continued growth and minimal regulatory constraint.
However, markets eventually reconcile with physics. As insurance costs soared and climate events intensified, property valuations began correcting downward. Homes purchased at inflated prices are now becoming increasingly difficult to sell, and in some cases effectively illiquid.
Negative equity in these markets is therefore not simply a cyclical housing adjustment—it is an early-stage repricing of climate exposure.
4. Systemic Risk and Forward Outlook
Housing represents the largest asset class in the United States and the primary store of wealth for middle-income households. Concentrated declines in climate-exposed regions pose several systemic risks:
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Mortgage default pressures
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Municipal tax base erosion
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State-level insurance backstop liabilities
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Migration pressures toward lower-risk regions
If insurance markets continue withdrawing from high-risk areas, and if adaptation investments fail to keep pace with intensifying hazards, negative equity may expand geographically beyond current hotspots.
Conclusion
The current rise in negative equity is not a replay of 2008 driven by subprime lending excess. It is an early signal of climate-adjusted asset repricing. Markets in Florida and Texas are illustrating how physical climate risk, insurance instability, and policy denial can converge into measurable financial stress.
Climate change is no longer a distant environmental issue. It is a balance-sheet issue, a mortgage-market issue, and an insurance-solvency issue. As climate impacts accelerate, property values in high-risk regions will increasingly reflect not ideology, but thermodynamics.