The housing crash trapped a generation in their starter homes

Trapped in houses worth less than their mortgages, many loan owners are unable to move to take jobs or accommodate their growing families.

Irvine Home Address … 134 ECHO Run #48 Irvine, CA 92614

Resale Home Price …… $199,900

Trapped in a box of tremendous size

It distorts my vision, it closes my eyes

Attracts filthy flies and pollutes in the skies

Sucks up our lives and proliferates lies

Trapped in a box

No Doubt — Trapped in a Box

The people who have endured foreclosure, sold in a short sale, or walked away from their mortgage debt are the lucky ones. For them, the ordeal is over. They still have ramifications with bad credit, but they now enjoy the freedom of renting — and lower housing costs to boot. The underwater loan owners who stay in their homes are the ones living in quiet desperation trapped in a stucco box.

Generation of homeowners stuck in first houses

By Rick Daysog

Published: Monday, Aug. 29, 2011 – 12:00 am

They're trapped, like so many members of their generation.

Steve and Tasha McLaughlin have had two kids since they bought their two-bedroom “Brady Bunch”-style house in South Natomas seven years ago. They need more room, but they can't move: The house they bought for $256,000 is worth just $90,000, and an attempt to sell it failed.

This family would be foolish to remain. The shortest path to equity is through strategic default. It will be 25 years or more before a $90,000 home triples in price to the $270,000 it would need to sell for in order for them to cover their closing costs and get out at breakeven.

“We are literally stuck,” said Tasha McLaughlin, 33. “There's no light ahead.”

The McLaughlins and tens of thousands of others like them in the Sacramento region are unable to take the traditional second step on the American home ownership ladder. They are captive to outsized mortgages born in a real estate bubble, which have balances much higher than the homes are now worth.

During the boom years, young families could sell their first homes to buy larger ones, using the equity they built up in their starter models. But for those who bought at the height of the market, plunging prices have wiped out their equity and then some.

Many of these people haven't lost their jobs and aren't behind on their mortgage payments, so they don't qualify for a loan modification that could shave off big chunks from their monthly housing payments.

“If you bought in the last few years, you're not going to have a lot equity, and you're going to be stuck for a while,” said Andy Thielen, a Realtor with Lyon Real Estate's downtown office.

That's an optimistic assessment. Unless borrowers put 20% or more down, nearly all buyers from the last decade cannot sell their house for enough money to pay off their loan and their realtor. If people feel they have to move, they can either attempt a short sale, or they can strategically default.

Or course, in our culture of entitlement, borrowers who consider short selling believe lenders should approve the short sale and simply eat the loss. Lenders in California now have no recourse after a short sale, so very few will be approved unless borrowers agree to repay what they can. Or course, most borrowers believe they shouldn't repay anything. They liked keeping the upside, but borrowers don't want to take the pain of the downside they didn't think was possible (real estate always goes up, right?) Most borrowers would be far better of strategically defaulting then declaring bankruptcy.

One of the only ways to move with intact credit is to rent out the first house and buy a second, bigger one to live in. But only those owners with enough money for a second down payment can afford to pursue that course.

The forced absence of so many young adults from the homebuying market has eroded demand for move-up houses, a crucial piece of the local real estate economy.

This doesn't only trap young adults. It traps the older adults who went Ponzi and spent their equity in anticipation of ever-increasing home prices.

Andrew LePage is an analyst with DataQuick, a San Diego real estate information firm. He said the lack of move-up buyers can easily be detected by looking at what's happened to sales of homes in the $250,000-to-$600,000 range.

In 2006-07, when the local market was near its peak, that segment accounted for 70 percent to 80 percent of all sales in the Sacramento region, according to DataQuick. These days, homes in that price range account for less than 19 percent.

Part of this reduction in volume is because fewer homes are priced in that range due to the crash, but his point is well taken: there is no move up market because there are so few with any equity to make the move. This has been exacerbated by the way lenders have chosen to foreclose at the bottom of the market first. Lenders have crushed the segment of the market they needed to support in order for borrowers to have equity to afford the more expensive homes to come later. When lenders finally get around to liquidating their high-end properties, the buyers they need will be trapped in their starter homes.

Sacramento-area home sales have picked up lately, but they tend to be for rock-bottom deals in neighborhoods thoroughly scoured by foreclosures and short sales.

Traditional move-up neighborhoods, such as Sacramento's Land Park and Greenhaven-Pocket, are seeing less activity. In the ZIP code that includes Land Park and Curtis Park, for instance, sales volume today is 36 percent below the neighborhood's 10-year average, according to DataQuick. Sales in the Greenhaven-Pocket area are down 31.7 percent.

David Moultrie, 31, a painter who lives in the Pocket, said the sluggish housing market has prevented him and his wife, Emily, from moving into a bigger home. The couple paid about $350,000 six years ago for a two-bedroom, which Moultrie said is now worth about $200,000.

They looked at several homes in the $280,000-to- $325,000 range last spring, but all of them were either “backed up against a freeway or were fixer-uppers,” said Moultrie, who needs the extra space for his growing business and his 2 1/2-year-old daughter.

He's now in the process of adding a bedroom and bathroom to his existing home, paying for the renovations through savings. A home equity loan, he said, is out of the question given his house's loss of value.

“It's just a bad situation,” Moultrie said.

Prior to the housing bubble, people used to fund home improvements from their own savings. It's only the rampant HELOC abuse of the 00s that convinced people houses self-fund their own improvements. Many now view HELOC funding from appreciation as an entitlement.

For Julia Himovitz, the reality check came in June when she and her husband, Gregory Ries, put their two-bedroom, one-bathroom house in Tahoe Park on the market.

They listed it at $269,000, only to discover that a similar house across the street had sold for less than half of that.

LOL! I wonder if they listed it with a realtor who told them they could actually get their asking price? It should be an embarrassment to both the sellers and the realtor to put an asking price in the market so clearly delusional that buyers ask, “WTF?”

They later dropped the price to $240,000 – about what they paid eight years ago – before pulling the house off the market altogether.

Himovitz, 32, an attorney, said she and her husband have decided to rent out their Tahoe Park home and use their savings to help buy one that's big enough to accommodate their family, which now includes a 2-year-old son and a 70-pound golden retriever.

“We love our house and I love the location. It's a wonderful place,” she said of her current house.”But if we want to have more children, it would be hard.”

Tasha McLaughlin, the South Natomas homeowner, says her situation is already hard, and she doesn't know what to do about it. The market fall has left her stuck with a house that's too small and a mortgage that's too big. She and her husband pay $2,000 on their interest-only loan; that payment will rise to $2,400 a month in 2017.

McLaughlin, who runs a small business that organizes lacrosse tournaments and clinics, said she tried to get her loan modified in recent years. The first time, she waited months before receiving preliminary approval, only to find out that her loan was sold to another bank before the modification could be completed. Earlier this year, she approached the new lender for a loan modification but was rejected because she hasn't missed a mortgage payment.

McLaughlin said she and her husband, Steve, also tried to sell their home last fall when he took a job in New Jersey as ticket sales manager for Rutgers University.

But nobody bought. Her husband opted to quit his job after nine months, and the family returned to Sacramento. He now works as an alumni director for a local high school.

How much longer will this family continue to struggle? They will not have any equity in that home in their adult working lives. How much longer will they continue to pay the price for that mistake? How long should they?

I believe they should default. Lenders created this problem, and strategic default is moral imperative to prevent future housing bubbles. The fear of strategic default is a necessary deterrent to foolish lending. Without it, lenders are emboldened to make all manner of bad loans because they believe they will get paid back. Lenders will make nearly any loan if they believe they will get their money back with interest. It's only when they feel they won't get repaid are they prompted to loan responsibly.

Irresponsible lending has trapped the generation of bubble buyers in their homes. These people will not be rescued by rising prices unless we inflate another harmful housing bubble. Lenders must pay a heavy price for the foolish lending of the 00s.

Borrowers must pay a price too or moral hazard will encourage more irresponsible borrowing. Loss of the home through foreclosure, short sale, or strategic default, and damaged credit are appropriate consequences.

Both lenders and borrowers have been soliciting government bailouts to avoid the consequences of what they have done. Moral hazard makes in imperative that politicians do not give in to either side.

How would you like to be stuck in 715 SF?

The former owner of today's featured property had a choice to make: (1) stay in her tiny debtor's prison she couldn't afford, (2) walk away from her debt and escape to renter's freedom. She walked.

This property was purchased on 6/14/2005 for $319,000. The owner used a $255,200 Option ARM with a 1% teaser rate, a $31,900 HELOC, and a $31,900 down payment. The use of the Option ARM strongly suggests she really couldn't afford the property.

On 5/19/2006 she obtained a $55,000 stand-alone second. She quit paying in May 2010 or perhaps earlier.

Foreclosure Record

Recording Date: 12/07/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/24/2010

Document Type: Notice of Default

The bank didn't waste any time once they issued the NOD. This is an instance where the borrower's circumstances were improved by foreclosure. Her payments would have greatly exceeded the cost of a rental, and it would have been quite some time before the value of this property gets back above $319,000. She was spared a decade of renting from the bank.


This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707


Irvine House Address … 134 ECHO Run #48 Irvine, CA 92614

Resale House Price …… $199,900

Beds: 1

Baths: 1

Sq. Ft.: 715


Property Type: Residential, Condominium

Style: One Level, Contemporary

Year Built: 1980

Community: Woodbridge

County: Orange

MLS#: S655443

Source: SoCalMLS

Status: Active

On Redfin: 126 days


Desirable Woodbridge condo with Huge balcony. Nice sized 1 bed 1 bath condo with laundry hook laundry closet!! Recently painted & new carpet installed!! All you have to do is unpack your stuff!! Be in before summer and enjoy all the amenities that Park Vista HOA has to offer. Why wait on a short sale when this great condo is ready for you now!!


Proprietary IHB commentary and analysis

All you have to do is unpack your stuff!! And you better not have much if it must fit in 715 square feet.

Resale Home Price …… $199,900

House Purchase Price … $319,000

House Purchase Date …. 6/14/2005

Net Gain (Loss) ………. ($131,094)

Percent Change ………. -41.1%

Annual Appreciation … -7.4%

Cost of Home Ownership


$199,900 ………. Asking Price

$6,997 ………. 3.5% Down FHA Financing

4.26% …………… Mortgage Interest Rate

$192,904 ………. 30-Year Mortgage

$68,045 ………. Income Requirement

$0,950 ………. Monthly Mortgage Payment

$173 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$42 ………. Homeowners Insurance (@ 0.25%)

$222 ………. Private Mortgage Insurance

$371 ………. Homeowners Association Fees


$1,758 ………. Monthly Cash Outlays

-$150 ………. Tax Savings (% of Interest and Property Tax)

-$265 ………. Equity Hidden in Payment (Amortization)

$11 ………. Lost Income to Down Payment (net of taxes)

$45 ………. Maintenance and Replacement Reserves


$1,398 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$1,999 ………. Furnishing and Move In @1%

$1,999 ………. Closing Costs @1%

$1,929 ………… Interest Points @1% of Loan

$6,997 ………. Down Payment


$12,924 ………. Total Cash Costs

$21,400 ………… Emergency Cash Reserves


$34,324 ………. Total Savings Needed


39 thoughts on “The housing crash trapped a generation in their starter homes

  1. Yogi

    If I bought this $199,000 Condo for cash and could rent it out for $1,500/mo, then I calculate just 5.5% return on my investment and that assumes it stays rented and no maintenance costs.
    $1,500 – $173 property tax – $371 HOA – $42 Insurance is a +$914 gain. So ($914/$199,000)*12 months = just 5.5% return.

    VZ (Verizon) has a 5.6% yield and none of the problems of real estate. Am I missing something on thinking this isn’t a good investment as a rental unit? The problem is that huge HOA fee.

      1. Yogi

        Yes, VZ dividend yield is 5.6%, which is really strong for a company doing so well. It is my bench mark for investments. Irvine rentals should remain strong for units for small families that want their kids to go to great free public schools. However a 1bd unit isn’t the strongest candidate for such people.

  2. architectdave

    Average American house size in 1950: 983 square feet. Average American house size in 2004: 2,349 square feet. I sense stories like these are part of a larger overall reversing trend in lifestyles of Americans to live beyond their means. Families in the 1950’s somehow had multiple kids and made life work for a long time in 1,000-1,200 square foot homes. And they didn’t have the technology we have now that shrink the physical size of the TV or other appliances, or specialty stores that help people organize and maximize the usage of the space they do have in their homes!

    1. architectdave

      I make the comment above as someone who lives in an IAC-owned 1 bed, 1 bath unit that is less than 800 s.f. with a wife and young baby. You wouldn’t believe the pressure we got from friends/acquaintances about moving to a bigger place (thus much higher rent) because our family was “expanding”. We’re holding out as long as possible before forcing ourselves into a larger living situation, and even then, we have to keep our standard of living in check, so maybe it won’t be an IAC property. We’re such oddballs in O.C., I’m sure my son will grow up traumatized that he didn’t have his own nursery to play and sleep in as a child…

      1. PasadenaGal

        Good for you for not caving in. You guys will be fine. I get so sick of the consumer mentality of ‘buy more and bigger!’

      2. Anonymous

        You’ll be fine. We squeezed 4 kids into our IAC 2 bd townhouse rental (yeah, know you aren’t supposed to do that, but rental office at that time said it was ok to leave one off the lease who moved in later). Worked out just fine.

        Kids need love, time, and attention, not a big place.

        My parents were hassling us about a bigger place when my father’s brother visited and reminded my dad that our place was a palace compared to the 3rd world hut with 3 kids in one bed that they grew up in when they were kids :).

        It’s all relative.

  3. winstongator

    I am less sympathetic to some of these bubble buyers than some might be. First, are Sacramento prices really down 65% from 2004? Possibly from peak, but probably not. The family quoting a 43% drop from 2005 is a lot more realistic.

    I Zillow’d a house for sale for $85k in the Sacramento neighborhood of the first family. Sales history:
    5/2002: $147k
    11/2003: $190k
    2/2006: $259k
    8/2011: $85k – Listing

    Say what you will for that 2006 buyer, they paid nearly double what someone just 4 years earlier paid. Doing that involves a serious expectation about future prices, or a complete ignorance of the price history.

    1. gepetoh

      It was unrealistic expectation on future prices due to the complete ignorance of price technicals. That was (is) the vast majority of home buyers.

  4. architectdave

    WTF, I just re-read today’s article about the PAINTER who is bitching about how his $350K home that’s only worth $200K now isn’t good enough for his needs. I’m older than him and even on an architect’s salary I’d never have considered buying a property that expensive 5-6 years ago. What is wrong with this picture. Walk away and rent the bigger house you “need”, idiot.

    1. Misstrial

      Yeah, I saw that too and went, “Whaaat?” –

      Here’s a link to an L.A. Times article about a grip and lighting technician (they turn the lights on and off) in the film industry who bought a house in North Hollywood for $575,000:

      And of course, there’s always the famous strawberry picker couple in Hollister who bought a $750k house back during the run-up:

      A whole lot of entitled idiots out there….


      1. PasadenaGal

        Ha! I remember reading both those stories in the Times and shaking my head. I love that Money Makeover column. Wonder why they didn’t have one for August?

  5. Perspective

    “…If people feel they have to move, they can either attempt a short sale, or they can strategically default…”

    Or, they can write a large check at closing. Admittedly, a small percentage of underwater home-debtors have enough savings to payoff their negative equity portion, but some do.

  6. lee in irvine

    The 10-year is yielding 1.93%. And the DOW is bouncing around, up triple digits, down triple digits.

    I think we’re on the brink here people. I just can’t believe after everything we saw in 2008, no real reform happened. The TBTF banks are larger today. Glass-Steagall has not been restored. Quant boxes still rip-off equity investors. The Bernank is still in charge of The Fed. No one of significance has gone to jail from the sub-prime/CDO/credit-default-swap ponzi scheme.

    1. Misstrial

      Don’t forget that the Uptick Rule has not been restored either along with Glass-Steagall.

      Makes you wonder, doesn’t it….


      1. lee in irvine

        When they first changed the uptick rule I was in favor of it … but I’m with you now. Especially with all the quant boxes dictating markets. Once the momentum begins on an equity, the machines all heard. They beat stocks down.

        Another one that really pisses me off are these STUPID leveraged ETF’s … erosion.

        I think we should go back to the old ways … market makers, brokers, no quant boxes, etc, etc, etc. Does this make me a Luddite? LoL

      2. Anonymous

        The banks and financial system have bought off all the politicians and the Fed, etc. The politicians make noise about reform (ex. bring in Elizabeth Warren who seems uncorrupted to make the consumer protection agency), then nerf all the reform (ex. didn’t appoint Elizabeth Warren to the consumer protection agency after the big banks complained she wasn’t big bank friendly enough).

        Nothing to do, but keep playing financial defense, and wait for the whole bubble and pop thing to replay, on a larger scale, eventually many years from now.

    2. wheresthebeef

      Lee, what we’re seeing here is the last bit of wealth transfer from everybody else to the uber wealthy.

      Madoff was a mere pick pocket compared to what the real bank robbers got away with. They broke into the vault, took everything and then got a police escort on the way home.


      1. lee in irvine

        What we’re seeing here is a federal legislature and presidency that belongs to the banks and Wall Street. Obama is a liar. A complete slave to the banks! But what should we expect, all of the past presidents of the modern era have been that way too. Once you get under the political veneer of Obama & Bush, you realize these guys are a lot alike … KEYNESIAN spenders.

      2. Charlie Potts

        It’s class warfare and the wealthy are kicking our butts! Look for the wealthy to eliminate social security and medicare and keep tax rates low.

    3. Walter

      What is the big deal, the Fed can just print $$$ in one trillion chunks until the problem is solved.

      And we can throw buckets dollar bills around like the Vegas TV commercials.

      Sounds like a win / win to me :\

  7. Alan

    “Her husband opted to quit his job after nine months, and the family returned to Sacramento. He now works as an alumni director for a local high school.”

    Perhaps a minor distraction, but in very difficult budgetary times, exactly why is a high school paying for an alumni director? I somehow doubt that this means just printing and postage for a volunteer. Exactly how is this salary and overhead (6 figures?) significantly helping students to learn anything?

    1. irvine shadow

      It’s hard for me to understand how alot of people with positions like these get these jobs and keep them.

    2. flyovercountry

      I’m guessing it is a private high school. Alumni director would be a fund raising position. Hitting up Alumni for donations.

      But that is just a guess on my part.

      If it is a public high school, then WTF?

  8. newbie2008

    It never ceases to amaze me the attacker claiming to be the victim. Those that purchased early and took out gobs of money from the ATM house are crying that they are now losing the house. They already got the money out though the refinancing. It was like selling the house with an option to live rent free for a few years.

    The victims are the ones who purchased at the high with cash or large down payments. Other victims are who didn’t Ponzi and paying for the govt bailout and reward programs and high unemployment.

    The worse is the enabler, who allowed and rewarded the banksters with no personal consequences for the bad loans. The govt allowed them to take money off the top, during and at then end without putting their own money at risk. Good loan they win. Bad loan they win and you pay. Both the D and R -rats are modifying/transferring the bad loans to the taxpayers’ liabilities.

    The banksters will not allow the economy to recover until the bad loans are removed from their liability sheet, that is transferred to the taxpayers. How can the common man find a way to prosper in this environment?

    1. Swiller

      “The victims are the ones who purchased at the high with cash or large down payments.”

      Ayup, and the biggest thing is, even if we default, we will *not* recoup our losses. If my name was Chase-Goldman I’d get all my money back from the bubble price.

  9. GreedyKid

    Too true Newbie… Those HELOC-ers from the mid/late 00’s are like the kid who guilted his parents into giving him his inheritance early, but then cried a river when they died and his sister got all the dough…. The nano-violin plays on…

    1. newbie2008

      Reminds me of a neighbor’s kid who was being shaken down or beaten up for his lunch money daily. Mother was at school complaining twice a week. After several months of being hungry, the kid fights back and beats up the other kid. Principal calls in the parents and threaten expulation.

      Punish the innocent and reward the guilty. Let justice roll down.

  10. brother read

    Everone should rent this articule.
    It stated “All kinds of debt held by this age group have risen, but the big problem is mortgages. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20% had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights’ MacroMonitor. That was up from just 22% and 12%, respectively, in 1994.The housing crash has made things worse. A few years ago, homeowners in their 60s with big mortgages could sell their homes for a profit and buy smaller places or rent. But the drop in housing values means that many homeowners have little equity, and some now owe more than their houses are worth.”
    The housing bubble has a lot of victims.

  11. Jen

    I can’t believe you’re condoning and encouraging such a complete lack of integrity. They should walk away??? People who bought houses they could not afford made conscious choices and signed and FULLY participated with the bad bank robbers. They made a horrible life changing decision, and like anyone else, should not be given a free pass. Many of us were not blinded by greed and materialism and chose not to participate in a clearly whacky market. We stood by and lived without the so called american dream. Stop encouraging behavior that ultimately makes us pay the consequences right alongside the fools. Utterly disgusting advice.

    1. Swiller

      It’s called a “contract” Jen. The banks get the home in case of default, it’s in the CONTRACT. Nothing is unlawful here, nothing is being broken, other than YOUR morals and ethics. If you are disgusted, perchance you should not vote for the same two parties.

      Just to make your day Jen, I plan on walking away and living for as long as humanly possible in my home until the sheriff comes to boot me out. This is LAWFUL, as it says for all the religious folks, “obey the governing authorities” but that’s only good for when it agrees with them…right?

  12. Deadbeats, Fraudsters and War Criminals

    “The housing crash trapped a generation in their starter homes”

    Boo-hoo. Most of these DEADBEATS haven’t made a f@cking mortgage payment in MONTHS ..if not YEARS.
    What a “trap” THAT is, huh? I’m surrounded by PENNILESS SWINDLERS that drive around in Escalades and Beemers yet don’t have TWO F@CKING PENNIES TO RUB TOGETHER.

  13. Jen

    Contract. Why not just spit on our hands and shake? If contracts don’t have to be honored, what’s the point?

    most of us consider going back on your word immoral, unethical, lacking integrity, etc.
    I’m sure the other end of the contract sees this quite differently than you do.

    Do what you want Swiller, it neither makes or breaks my day. You will pay for every decision you make. So choose wisely. I don’t have to live with your decision. How funny that you think it matters to me. What matters is preaching for people to make choices that ultimately will harm them, and our society. It’s much bigger than your personal, immoral decision.

Comments are closed.