That's why a decade ago she invested a $100,000 windfall from a home sale into a bigger house she built in Farmington, only to watch that equity evaporate when the housing market crashed a couple of years later. Today, with her daughter about to go off to college, Gugat's expenses are rising faster than her income. It's a stretch to pay the mortgage every month, so she's ready to sell. Trouble is, although the value of her house has increased and it's now worth more than her mortgage, she still doesn't have enough equity to cover the cost of downsizing to a less-expensive house.

"I'm stuck between a rock and hard place," she said.

By nearly every indication, the housing market in the Twin Cities now is humming along and, in some parts of the metro area, prices are breaking records. But one-third of all Twin Cites-area homeowners are effectively underwater on their mortgage, meaning they have enough equity to cover their mortgage, but not enough to sell their house and move to a different one. That's why so many would-be sellers are staying put.

It's one of the last big issues to stymie the region's housing market — and its impact is broad.

With more buyers than sellers in the market, there's a shortage of house listings in much of the metro area, creating stiff competition among buyers. Homebuilders and apartment owners are also feeling the heat, because so many of the people who might want to buy a new house or rent an apartment are instead staying put.

"The math just doesn't work and people are still feeling stuck in their home," said Svenja Gudell, an economist at Zillow.com, the real estate website. "They're clogging up the entire flow of the market."

Throughout the Twin Cities area, 13 percent of all homeowners with a mortgage still owe more than their house is worth, down from a peak of 39 percent in early 2012 but still well above the normal range of 2 percent to 3 percent. Meanwhile, the rate of households that can't draw enough equity out of their house to buy a new one is nearly 33 percent, according to Zillow.com.

Gudell estimates that typical homeowners need about 20 percent equity to cover the costs of selling and moving, including the down payment on their next house, agent commissions and transaction fees.

The Twin Cities is in line with the average effective negative equity rate nationwide, but some housing markets are reporting negative rates that exceed 40 percent. Though sellers are the ones left in limbo, home buyers are paying the price because the supply of properties is so tight. They've seen house prices post steep gains for 44 consecutive months.

Property listings in the Twin Cities are near all-time lows. By the middle of October there were 15.3 percent fewer properties on the market compared with last year, according to the Minneapolis Area Association of Realtors. By another measure, at the current sales pace, the number of listings available for purchase would last only 3.4 months. That's a 26 percent decline compared with last year.

"We are continuing in a sellers' market," said Herb Tousley, director of real estate programs at the University of St. Thomas, noting that low inventory is putting significant upward pressure on prices.

In the Twin Cities, entry-level and first-time buyers are suffering the most. Homebuilders are focused on custom and move-up houses, so there's no new supply to bolster the limited options that are already on the market.

There's also a psychological component to the situation. Even if sellers have plenty of equity, they're reluctant to list because they know they'll become buyers and the thought of buying in a competitive market can be off-putting to them.

Buying is 'tricky part'

"Buying is the tricky part and that's deterring a lot of people from selling," Gudell said.

Not surprisingly, the situation is most vexing in parts of the region where house prices have been slow to rebound. That includes many exurban areas where there was a glut of houses built before the recession and an abundance of developable land for construction.

Joe Mueller, a sales executive with RE/MAX Results in Apple Valley, said that he regularly meets with many people who would move right now if they could, and that he has little doubt the recovery would be even more robust if those buyers had just a bit more equity.

"Right now, when you look at the economics, it doesn't make sense because when they sell they purchase," he said. "The numbers aren't pleasing to them and they stay put. They're saying, 'If we wait a couple of years, we will be in a better position.' "

In 2006, for example, Michele Whaylen and her husband paid $452,900 for an award-winning Parade of Homes model house in New Prague. Because of a job relocation, they were forced to move. They listed the house in late July for $379,900, a full $73,000 less than they paid for it. Since then, they've had only one showing. Whaylen blames the situation on the availability of inexpensive lots new in the area. This summer alone, two houses have been built on their cul-de-sac.

Because they haven't been able to draw any equity and aren't sure it will be possible, they bought a house in Iowa using a VA loan with low down-payment requirements. Still, the situation was complicated. They wanted to buy a condo but couldn't because it wasn't VA-approved. And to save enough for their 5-percent down payment, Whaylen has picked up several part-time jobs to supplement the income from her full-time job.

"I am not sure what we will do for the long term," she said. "I realize we are in a much better position than most, but the stress is off the chain."

Like many American homeowners, Gugat is still trying to negotiate her next move. She knows that if she waits for higher home prices and more equity, she risks higher mortgage rates by the time she's ready to buy. To move quickly, she could take out a loan to pay closing costs or to help with the down payment, but that option isn't appealing, she said.

"I would love to stay in the house, but I just can't afford it and the house is too big for one person," she said. "So I'm trying to figure out how this will work for me as a buyer and a seller. It's a lot of stress."

Jim Buchta • 612-673-7376