When it came to buying their first home, the Comos did just about everything right.

After medical school, Dr. Jason Como and his wife, Lisa, paid $165,000 for a modest two-bedroom starter home -- just big enough for the couple and their two young boys. It was May 2005.

Three years, a new job and another child later, they needed to move. But by then, the national real estate bubble had burst. Their house was quickly devalued by a flood of bargain-priced foreclosures that swept through their north Minneapolis neighborhood. Even after dropping the price to $99,000, their Realtor finally told them they'd be lucky to offload the house for $50,000 -- $100,000 less than they owe.

"We had acted as responsibly as we could have," said Lisa Como. But for them, the American dream of homeownership became a nightmare given the name "negative equity.'' The Comos and thousands of Minnesota homeowners in the same situation were not flippers, speculators or victims of a mortgage scam. They just bought at the wrong time.

How wrong? When the Twin Cities housing market peaked in June 2006, the median sales price of a single-family home was $236,850. Last month, the median price was $175,000, a drop of 26 percent and about where home values sat in March 2002, according to area Realtor groups.

Nearly 17 percent of Minnesotans and a quarter of all Americans with mortgages owe the bank more than their house is currently worth, according to data from housing research firm CoreLogic. Many more homeowners aren't underwater, but have little or no equity for Realtor fees or a down payment on another property.

Negative ripple effects

Economists say the consequences of negative equity can be felt far beyond these doorsteps. Upside-down home values are hampering the housing market recovery, said Chris Galler, chief operating officer for the Minnesota Association of Realtors. There are plenty of families like the Comos who want to move but can't trade up, downsize or build a home for lack of equity.

With so many homeowners held hostage by underwater mortgages, demand for new construction has fallen so you can't put plumbers, framers and other tradespeople back on the job.

Workers saddled with an unsellable house are reluctant to move to take a new job. Homeowners with evaporating equity lack the confidence to buy cars or spend the day shopping. And underwater homeowners tend to behave like renters.

"With little to gain, negative equity homeowners will be much less likely to pursue improvements in their homes or communities," New York Federal Reserve economists Andrew Haughwout, Richard Peach and Joseph Tracy wrote in a recent paper.

Negative equity is a common subject at Twin Cities Habitat for Humanity these days. Cheryl Peterson, who manages the nonprofit's foreclosure counseling program, said they are getting more calls from current homeowners who want to know if there are other options besides waiting for values to rise. The counselors inform them about the government loan modification, short sale and refinancing programs. Then they suggest calling their lender. But if the loan is affordable and their payment is current, the options narrow. Peterson said mortgage servicers give troubled homeowners priority over those with on-time payments.

"I hope this isn't true, but we hear it so much. The homeowners are saying the mortgage company will tell them to fall behind," she said.

Walking away

Take the Comos. Before the housing meltdown, they had planned to sell their home and buy a bigger house in an area closer to Jason's permanent job at a community clinic in east St. Paul.

Instead they found themselves shopping around for a bank that would lend them money to make up the shortfall between the amount they owed and their home's sale price. They eventually scrapped that plan.

"It didn't make sense to take on $100,000 in debt to sell the house and have no house," said Lisa Como, an adjunct professor at Bethel University.

They tried to stay put, but "it was so wearing on us as a family," she said. A two-hour commute to Jason's work, their young daughter sleeping in a closet-turned-bedroom and the need for quality schools pushed the family to rent a St. Paul duplex that better met their needs. With $200,000 in student loans and a $150,000 mortgage, they couldn't qualify to buy again.

And there was still the problem of the house. For a while, they rented to an unemployed friend, who paid what she could. But now she's moving out and the Comos don't want to be landlords. "We can barely change the light bulb in our own house that we are living in, let alone being caretakers of a property," Lisa said.

Discouraged by the lack of options presented by their lender, Wells Fargo & Co., and angry that irresponsible lending helped cause the foreclosure crisis that put them in this boat, the Comos have stopped paying their mortgage and are walking away from a situation they never imagined they'd be in.

"We can't bear this burden anymore. We have to move on as a family. We don't live on credit so we don't care if our credit score is bad," she said. "It's a small price to pay."

Jason had just returned from Haiti, where he was working in a makeshift hospital helping victims of January's devastating earthquake.

Wells Fargo wouldn't comment on the Comos' situation but provided a statement. "While the loss of equity is a difficult situation, loan workout options including modifications and short sales are in place to assist struggling homeowners facing true financial hardships, such as loss of income or employment."

Hanging in there

Steve and Robin Marty paid $205,000 for their two-bedroom bungalow in 2005. Tax records suggest their 1928 Minneapolis fixer-upper is worth $168,500 today. "Is it even worth putting money into your house to try to fix it up when you know that at best it's going to get you maybe to where you started?" Robin asked.

If they decide to make improvements, they can't tap home equity to pay for them, once a common source of funds when homes were appreciating. The Martys would love to benefit from today's low interest rates and refinance, or move and lock in a 4.5 percent interest rate on their forever home. But they plan to stay put for as long as it takes for prices to recover, and they consider themselves luckier than many in this economy, with jobs and the rest of their finances in good shape.

Despite their home's shrunken value, they intend to keep paying on what they owe.

"Walking away is for people who lost jobs, who are really hurting. ... We're just unlucky," she said.

While he agrees with his wife, Steve has mixed feelings: "We're suckers. If we were a business ..."

Robin finished his thought: "We'd cut and run."

Kara McGuire • 612-673-7293