When the Allen children wanted a hamster, their parents put it in the home’s only open spot: a cubby in the living room, to the left of the television and above the bin holding school supplies.
“It’s the silliest place to put a hamster, but that was the only place,” Michelle Allen said. “We measured before we bought everything.”
The Allens — Michelle, David, children Daniel, Jonathan and Megan, plus Gingersnap the hamster — share a 936-square-foot three-bedroom home on East 57th Street in Tacoma. They’re ready for the next step in the life of their family. David works in Renton, and the kids are getting bigger.
But the Allens, like about 54,000 other homeowners in Pierce County, are stuck. They owe more than their home is worth, and there is no good way out.
“We have done everything right, and no one has an answer,” Michelle Allen said in an interview last month. “We don’t qualify for principal reduction. We’re current on our mortgage, and we can pay it, so the only way we could get help is if we walk away. And we’re not going to do that.
“We have good credit, and we don’t want to ruin it. We are Christian, and we like to keep our word. And if we signed a paper saying we’ll pay for our house, we’re going to keep up our end of the deal,” she said.
Pierce County leads Washington state in the percentage of seriously underwater mortgages, according to data from real estate tracking firm RealtyTrac. The company defines “seriously underwater” as the loan amount being at least 25 percent higher than the home’s market value. Some people refer to this situation as being “upside down” on a loan or having negative equity.
In absolute numbers of underwater loans, Pierce is second to King County by just a fraction. Pierce County’s 53,838 underwater loans are slightly fewer than King County’s 55,468, but King County has more than twice as many mortgages overall. That makes its underwater slice a smaller piece of the mortgage pie — 10 percent compared with 24 percent for Pierce.
Seven years after the real estate bust began, people understand how plummeting home prices affect the economy. Homeowners spend less, which leads to job losses in a consumption-based economy. Job losses lead to mortgage defaults and foreclosures. Foreclosed homes sell at a discount, hurting potential sale prices of all the homes around it.
In this way, almost no one escaped the effects of the real estate crash, even those fortunate enough to keep their jobs and homes.
Now, the localized economic effects of underwater mortgages are murkier. Some economists have theorized that underwater mortgages hold people in place, so they can’t move to take a better job, which stifles economic innovation.
Others believe people with underwater mortgages cut back on spending even more than everyone else does — and that the more underwater you are, the more you cut back. Researchers at Princeton and the University of Chicago did an analysis last year on this theory and found compelling evidence to support it.
The idea works like this: If a person is making a mortgage payment that’s higher than it might be if the loan reflected the home’s actual value, that person is spending money on debt that otherwise would flow into the economy and help it grow.
“Some people are taking $20,000 of their own money to the closing to pay the mortgage and sell their home,” said Mike Konczal, a fellow at the New York-based Roosevelt Institute who focuses on financial reform and the larger economy. That money could have been their next house down payment, or “a car, or going out to eat and on vacation — activities that would employ people.”
For people like the Allens, being underwater also means feeling tired of treading water. Michelle Allen home-schools their children at a small dining table tucked into the corner of the living room. School supplies are stored in organizational bins and stacked portable drawers. What was a walled-off chimney is now a hall closet full of books, games and other learning material. The Allens use every nook and cranny.
“I love this house,” Michelle Allen said. “The only problem is the size.”
If the Allens could move, what would they want? More bedrooms? A second floor with a play room or a larger kitchen?
“A second toilet,” David Allen said. “Not necessarily two full bathrooms, but just two toilets. With five people, one is pretty tight.”
“I would only move if we could get a second toilet and a dining area,” Michelle Allen said.
FEW OPTIONS FOR HELP
If a homeowner is underwater but able to make the mortgage payment, there are few options other than to wait for home prices to rise. In other words, stay and pay.
Prices have been going up, month to month and year over year, for some time. That so many people still are underwater is another indicator of how far the market fell.
“King County is definitely recovering faster,” said Michael Robinson, owner and managing broker of Windermere Professional Partners in Tacoma. Seattle is the economic epicenter of the state, with business giants such as Amazon and Microsoft consistently hiring. But even in the Seattle metro area, which includes parts of Pierce County, median home sale prices are still 17 percent down from the peak, according to the Seattle Bubble blog.
In Pierce County, the median home sale price at the August 2007 peak was $285,000. During the next five years, values fell 41 percent. The bottom of the market hit in February 2012, when the median sale price was $169,450.
Prices had clawed back to $222,950 by March, which is 22 percent off the peak. But there’s variation even among neighborhoods, Robinson said.
“We are in a situation where we have good properties with multiple offers, and other areas where people are doing price reductions just trying to find the market,” he said.
It also matters when the home was purchased. The closer to the peak, the deeper the hole.
‘NEVER OCCURRED TO US THAT EQUITY COULD BE NEGATIVE’
The Allens, now both 32, bought in May of 2007, three months before the top of the Pierce County market. At that time, they had two small boys and came into some money when a relative died.
“We live on one income. We can’t save thousands of dollars,” Michelle Allen said. “This was our ticket to a house.”
“It never occurred to us that equity could go down,” David Allen said.
“No one thought that,” Michelle Allen said. “People who were wiser and older than us were saying, ‘Get in now or you’ll never get in.’ We bought wisely and modestly.”
They were one of three offers for their 1950 home, and it was in bad shape. After the Allens bought it, they installed a new electrical system, insulation, windows and a roof. They also added new kitchen counters and appliances, as well as a 6-foot cedar fence that encloses a large backyard.
Their upgrades cost about $25,000, the Allens estimate conservatively, on top of the purchase price of $157,000. Recently a home one block away sold at a foreclosure auction for $80,000.
In late April, the Allens had a market appraisal done. They wanted to find out where they stood.
They owe about $131,000. The analysis showed they might be able to sell their home as-is for about $129,000. After taxes and fees, that would net them about $118,000 — about $13,000 shy of breaking even.
Michelle Allen calculated that selling at that price would mean they’ve lost about $60,000 during their seven years of homeownership.
“That was as if we threw into the garbage $25 every single day that we’ve owned this house,” she wrote in an email.
The Allens plan to just keep waiting out the market.
“Maybe next spring it will be the time to sell,” Michelle Allen said. “If I can tell myself, it’s just one more year, that’s still more encouraging than a few years ago, when I didn’t see an end in sight.”
RECOVERY DIFFERENT IN EACH NEIGHBORHOOD
Like the factors that put many homeowners underwater, the ones that will help also are out of their control. The sweet spot of recovery will be different for every neighborhood.
“Generally, we’re at levels where we were in 2004,” Robinson said. “Your house may be a little ahead, or behind, but the trend is generally going up.”
Various economic indexes try to forecast what will happen nationally for home prices. MIT’s Center for Real Estate took a look at about 70 census-defined metropolitan areas across the country and predicted that 10 years out, home prices on average will be 60 percent higher than they are now. Another survey of 100 real estate experts and economists conducted by Pulsenomics predicted a 20 percent increase during the next five years.
“If you bought a house in August 2007, these forecasts say that by 2023 there’s a light at the end of the tunnel, and it’s not a gorilla holding a flashlight,” Robinson said.
He knows that’s not comforting. “These are real families with real issues, and it’s affecting their life, their ability to take another job or have enough room for their growing family.”
Just as all politics are local, economies are too. Pierce County’s top employers are the military, the public schools and two private health care systems. Those are less flashy than tech companies, said Bruce Mann, a professor of economics at the University of Puget Sound, but they’re more stable. Even so, he said, it’s not wise to compare Pierce and King counties.
“The comparison is terrible. It’s like comparing turkeys with filet mignon. Both are good, you eat them both, but they’re not in the same league,” he said.
Stephen O’Connor, director of the Runstad Center for Real Estate Studies at the University of Washington, said hanging on may be all Pierce County’s underwater homeowners can do.
“There is no magic number,” he said.
“If you can afford it, and your home is your home, and it’s providing all the benefits of a home, and things seem to be improving, and momentum seems to be that some of the movement in King County will come south, and Tacoma will revitalize, well,” O’Connor said, “that’s a lot of speculation and a lot of hope.”
Kathleen Cooper: 253-597-8546