Image: House and money on scales © MOODBOARD, age fotostock

Charlotte Morse, 62, purchased her home in Lincoln, Calif., on the outskirts of Sacramento at the peak of the housing market in 2005. The two-bedroom, 1,531-square-foot house cost $444,323. Now, according to estimates, the value is $257,500, a 42% drop, and Morse still owes $333,206 on the mortgage. Though she and her husband have entertained retirement plans to move to North Carolina, which has a lower cost of living, she knows that won't happen.

"Our mortgage will most likely not be paid off in our lifetime," she says. "We're stuck in this mortgage nightmare."

Morse is not alone. According to the University of Michigan Health and Retirement Study, 61% of homeowners ages 57 to 62 had not paid off their mortgages in 2010. Frank Stafford, a professor of economics at the University of Michigan, has seen a big jump among those ages 50 to 65 still paying a mortgage, from 20% in 1990 to 30% in 2007. They "got themselves into a bad position before the crisis," he said. Many owe far more on their mortgage than their home is worth or find they cannot sell their homes.

The situation is thwarting the American Dream for many retirees, who had longed to cash in on their home's equity and move to a smaller home or retirement community. Instead, they're immobilized in a house that may be too difficult for them to manage as they age. "This creates a real challenge. They can't do what they want in their retirement years," says Rich Arzaga, a certified financial planner and the CEO of Cornerstone Wealth Management.

Many boomers tapped into their home equity at the housing market peak. Among those ages 50 to 62, 30% borrowed against the value of their homes between 2001 and 2004. This means that they could experience a large decline in net worth, as much as 35%, according to Alicia Munnell, the director of the Center for Retirement Research at Boston College, causing them to enter retirement with a "fragile balance sheet in time of depressed home prices," she said.

Many will continue to work well into their retirement years. A November 2011 report by the Pew Research Center found that 66% of boomers ages 50 to 61 said they would likely delay retirement because of economic conditions; 23% said they planned to work until they are 70 or older; and 12% said they do not plan to retire.

This has altered the dream of retirement for many boomers. Arzaga, who practices in California -- a state whose housing market has been hard-hit -- says having to work is a precarious situation that depends not only on being able to find a job in a tough economy but also remaining healthy enough to keep it -- hardly a guarantee. He also says for some boomers, being stuck in their homes means not being able to relocate closer to children and grandchildren.

In 2009, only 55% of those who headed to an active adult community were able to use money from the sale of an existing home to finance the move, said Stephen Melman, the director of economic services for the National Association of Home Builders.

To compound the problem, some boomers feel they must stay in their homes to accommodate their boomerang children -- young adults who move back in with their parents because of economic difficulties. A report released on Feb. 27 by MetLife Mature Market Institute, based on data from the U.S. census, finds that multigenerational households grew 30% over the past decade. The highest growth rate was in Nevada, a state with many foreclosures, where multigenerational families increased 72%.

"You can't move into a one-bedroom condo if you have your kids living with you," says John N. Migliaccio, the director of research and gerontology for MetLife Mature Market Institute.

A house sale is the main source of revenue for people who move to continuing-care communities, where entry fees can range from $50,000 to $1 million. "The tanked housing market did put pressure on our sector, especially independent living," said Jamison Gosselin, a spokesman for the Assisted Living Federation of America. Some communities have reduced entry fees and rental rates to attract customers. Brookdale Senior Living, which has 648 properties throughout the country, has slashed entry fees by as much as 20% in areas where the real-estate market has suffered the most.

But on the plus side, those who do sell their homes may be able to find cheaper retirement properties in hard-hit states. Migliaccio says many in this age bracket bought their homes well before the peak and will at least be able to break even. But he says some may still delay selling in this market, since they feel they won't get anywhere near the full value for their homes.

Melman at the NAHB is hopeful that housing prices will begin to rebound. "If prices would come up just a little bit, a lot of people wouldn't be underwater and things could start to move again."

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