What does "underwater" mean in real estate?

"Underwater" in real estate refers to a condition where the homeowner owes more on their mortgage than the current market value of the property. This typically happens during economic downturns or market declines when property values drop significantly. Homeowners in this situation may face challenges if they wish to sell their home, as they would have to bring additional funds to the closing table to pay off the mortgage balance.

This concept is essential to understand because it has implications for both the homeowner's financial situation and the broader real estate market. When many properties become underwater, it can lead to increased foreclosures, negatively impacting property values in the surrounding area.

The other options describe different real estate scenarios but do not capture the specific meaning of "underwater" in financial terms. For example, being in a flood zone pertains to environmental risk, a significant increase in property value describes market growth, and an adjustable interest rate refers to mortgage terms rather than property valuation.