Sherrilynn Palladino lives in a modest three-bedroom home with an affordable mortgage about a mile and a half from the ocean in Grover Beach, Calif.  She’s never missed a mortgage payment during the 10 years she’s lived in the neighborhood. In fact, she says, she’s never late on any bills. At 60, she’d like to retire, downsize and escape spiraling property taxes in the suburb about half-way between Los Angeles and San Francisco.

But she can’t.  The house next door is empty. It’s been vacant and in various states of disrepair for three years.  Palladino is a quiet victim of the housing market crash. Call her collateral damage. 

“I’m stuck,” she said.  “I can’t sell my house for what I paid for it with an empty eyesore next door.  I can’t afford upkeep, maintenance, and property taxes.  And I can’t retire until I downsize … I don’t know what to do. It’s all just a mess and I feel like it’s out of my control.”

Palladino is one of an estimated 14 million homeowners in America who are now under water — they owe more on their mortgage than the value of their homes. 

She has the misfortune of living in California, where one in three mortgage holders are under water.  Things are even worse in other states: In Florida and Arizona, half of mortgaged homes are under water; In Nevada, the number is 70 percent.

While consumers facing foreclosure and banks facing bankruptcy dominate the economic headlines, millions of other Americans are suffering effects of the housing market collapse that, while subtler, are very real.  Homeowners who are under water often can’t move to take advantage of new job opportunities, they can’t refinance and take advantage of low mortgage rates, and they generally feel rotten about their prospects. 

Palladino, who is single, would sell her home if she could, move into a cheaper condo and trim her annual property tax bill of $4,700.  But the house next door means that’s not in the cards.

“I didn’t buy more house than I could afford. I did everything I’m supposed to,” she said. “The mortgage is nothing.  But it’s the taxes that worry me.”

What frustrates Palladino is that as far as she can tell, she’s done everything right. Ten years ago, she owned a condo in San Francisco and sensed that the market had become overheated, so she sold and moved to a more modest neighborhood three hours south.

“I had watched the peak and the Internet bubble break and decided to get out of that,” she said. “I made a killing selling that condo.” 

She wanted to live at the beach, but instead took her hefty down payment and chose a modest single-story home that was a long walk away from the water. 

“I still get the sea air. I can still smell it,” she said.

Following traditional financial advice, she bought as much home as she could afford without stretching too far — a three-bedroom, two-bath home with a fireplace for $419,000. Even with a modest return, she figured she’d be able retire in five to 10 years.

Now, she stares at the overgrown weeds covering the yard of the empty house next door and wonders if she will ever be able to retire — or if property taxes will slowly drain her life savings while she waits for a housing market rebound that may never come.

“Every year I wait for a chance to put my house on the market but no luck as that eyesore continues to exist,” she said.

Things didn’t always look so bleak. At one point, they seemed positively magical.  In April 2005, the house next door was sold to a family for $589,000.  Palladino counted her lucky stars.

“I should have jumped, but I wasn’t ready,” she said. “I remember thinking, ‘Gosh, I can sell for a lot of money and use that for retirement, like you’re supposed to.’ “

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Jim the Realtor
Jim is a long-time local realtor who comments daily here on his blog, which began in September, 2005. Stick around!

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