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Young and underwater, homeowners face tough decisions

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Underwater mortgage
Minneapolis residents Kristi and Zeke McKinney, photographed in their backyard on Wednesday, March 28, 2012, bought their home in 2006 at the height of the housing boom. Now they are tens of thousands of dollars underwater and feel "stuck."
MPR Photo/Jennifer Simonson

Call it the underwater generation.

People in their 30s tend to be more mobile than older Americans, but many who bought homes in 2006 — at the height of the real-estate market — feel stuck. Falling home prices mean many of these young homeowners now owe tens of thousands more than what their houses are worth.

As they ponder career choices or start families, they are sinking under the weight of so-called negative equity.

A recent Pew Research study found that Generation X is more likely than older generations to feel the pinch of underwater mortgages, meaning they owe more than their houses could sell for. Gen Xers are now in their 30s and 40s.

Unlike homebuyers who signed subprime mortgages or purchased more house than they could afford, many of them simply bought at the wrong time.

"Everyone seemed they were buying houses," said Kristi McKinney, of Minneapolis, who became a homebuyer in 2006. "When we told our families, they were like, 'Yeah you should definitely do that. It's only going to go up. It's going to be great!'"

McKinney and her husband, Zeke, were in their mid-20s when they snatched up a modest home in northeast Minneapolis for $209,000. They couldn't have known they were sitting on the peak of the housing bubble.

Six years later, they figure their home value has dropped by about $50,000. If they wanted to move today, they would have to write a huge check just to cover the loss.

That thought began to gnaw at Zeke McKinney, a resident doctor, as he considered applying for out-of-state programs in his specialty.

"Even my brother, who's here in town and established, he says, 'You need to go get a job as a physician wherever you can get it.' But to me, thinking, hey, suddenly I'm going to be $50,000 more in debt, on top of whatever I already owe for medical school, and whatever my wife owes for grad school," he said. "All these things get be significant at some point."

In the end, Zeke McKinney decided to put off applying for his residency. With their first child on the way, he plans to stay put and find a job until he and his wife can figure out how to best manage their debt.

Both lucky to have steady paychecks, the McKinneys know they're much better off than others in this country, and yet they're still disillusioned.

"The idea of the American Dream, where you own your own home, and have financial independence, it's kind of crumbling right now," Kristy McKinney said.

FINANCIAL CONSEQUENCES

Economists say people who are young and underwater aren't financially doomed forever, but there are ripple effects. They're a drag on the housing-market recovery. They may not spend as much.

Chris Farrell, economics editor of American Public Media's "Marketplace Money," said for anyone who loses their job in the harsh labor market and is stuck in an upside-down mortgage, the house becomes even more of a dead weight.

"When you're in your 30s, that's when traditionally we've been fairly mobile. This is when you're building your career," Farrell said. "There's a lot of people who maybe aren't in bad circumstances, but they're locked into their homes. From an economic point of view, that's not a good thing. You want people and money to be going where it gets the best use."

About 18 percent of home mortgages in Minnesota are underwater, which is below the national average of 23 percent, according to the most recent figures from CoreLogic. Younger homeowners have been hit hard because many of them were first-time homebuyers, meaning they couldn't roll over equity from previous properties.

"Thirty-somethings just happen to be unlucky enough to come of home-buying age before the market came apart," Twin Cities mortgage banker Alex Stenback said.

Stenback, who works with a lot of young clients with upside-down mortgages, sounds more like a therapist when giving them advice. "You did nothing wrong," he tells them.

He said the couples did not sign predatory loans or buy houses outside of their reach and are in no danger of losing their homes to foreclosure.

"What we're seeing now is a generation of buyers that certainly could afford their home they're in, still can today and still making the payments, haven't missed a payment," he said. "But when they're thinking about that next stage — whether it's a larger home, or they're trying to relocate to a different part of town or part of the country, that's when the negative equity becomes a problem."

WALKING AWAY

Stenback has been busy helping some clients refinance through new federal relief programs, but not everybody qualifies for those. Some homeowners who feel compelled to move have become accidental landlords. They rent out their houses and move into new homes. But in some situations, he said walking away is a rational financial move.

That's the conclusion Kelly Maloney, 32, and her partner, D Cadreau, reached about six months after she gave birth to their first child, Arlo.

"We just felt trapped — literally by the size of the home, and just what it meant for our future," Maloney said.

The couple bought a 600-square-foot shotgun-style, one-bedroom house in the suburb of Crystal in 2005, near the height of the market. They thought they'd live there for five years, tops, and then move into something roomier when it came time to start a family. But their home value kept plummeting.

For the longest time, they never thought they'd be the type to mail in their keys and move into another house.

"We thought, 'We could never do that,' " Maloney said. "Ethically, that's not how we function."

But after Arlo was born, their thoughts drifted to their son, and the money that would be better spent on his future. Meanwhile, their little starter home seemed to shrink. D Cadreau, 34, recalls setting up their son's crib in a closet because it was the only place it fit.

"We had put his crib in there, which was in the middle of the hallway, which was basically right next to the couch, which was in the living room," she said.

Dee Cadreau, Kelly Maloney and son Arlo
D Cadreau, 34, and Kelly Maloney, 32, and their son Arlo recently moved into a new home they purchased in north Minneapolis. After they started a family, the couple decided to walk away from the cramped shotgun house they bought in 2005 in Crystal, which they estimated fell in value by tens of thousand of dollars and left them severely underwater on their mortgage.
MPR Photo/Laura Yuen

This year the county assessed their home at $79,000, but the couple believes it would sell for far less than that. They still owe nearly $140,000.

In December, they did what was once unthinkable: They bought a second house in north Minneapolis. At $42,000, the simple fixer-upper, a foreclosure, was a steal. Then they stopped their monthly payments on the Crystal home.

But they're not getting off unscathed. After the bank reclaims their home, the couple's once-pristine credit will be shredded for years.

Still, they won't look back.

"I remember the evening when we decided we were going to let the other house go," Maloney said. "We both just breathed a sigh of relief, and we just sort of felt free."