How there could be unforeseen ‘pitfalls’ in retirement downsizing

From inflated costs to a potential emotional toll, retirees are asked to consider the possibilities in a new column

Older homeowners who have larger homes may see downsizing into a smaller, more manageable home as a viable path to greater comfort, and potentially even partial financing of life in retirement. However, downsizing is not always smooth sailing for retirees when considering inflated housing costs, fees associated with moving and storage, mortgage rates and even the emotional toll such a move could take.

This is according to a new column by syndicated financial columnist Andrew Lisa in GOBankingRates, and distributed by Yahoo Finance.

One of the reasons that downsizing could be burdensome is due to the explosion of home price appreciation over the past several years, and exacerbated by the COVID-19 coronavirus pandemic. While an appreciation rate of 5-6% per year was considered “normal,” the column said, the pandemic created a new, more expensive normal for home prices.

“According to Freddie Mac, prices rose by 11.3% in 2020, 17.8% in 2021 and 6.7% in 2022,” the column said. “It’s good to sell when prices are high, but retirees looking to downsize will then have to buy in an under-inventoried housing market with a median sale price of $416,100, according to the St. Louis Fed.”

Mortgage rates also factor into the affordability and feasibility of downsizing, with rates hovering around levels that have not previously been seen since 2002, the column explained. On top of that, the new level of home prices could also come with a burdensome tax bill.

“Profits of up to $250,000 for individuals and $500,000 for joint filers are exempt from capital gains taxes,” the column said. “Those are fairly easy thresholds to meet in a normal housing market, but today’s downsizers are selling near the market’s peak, and if they breach those limits, they could owe as much as 20% on the profit.”

Beyond that are the fees associated with entering and completing a real estate transaction, which Rocket Homes previously estimated to be around 10% of the home’s sale price. With today’s median sale price of $416,100, that comes out to more than $40,000 just in transaction costs for the seller.

Moving and storage costs can also be burdensome, but the column also encourages consideration of the emotional costs of selling a home, especially if the potential seller has a significant emotional attachment to the property.

Specifically for seniors, many have seen their home values rise significantly in the past few years. According to data from the National Reverse Mortgage Lenders Association (NRMLA) and data analytics firm RiskSpan, senior-held home equity levels stand at $11.62 trillion as of the end of Q1 2023.

While those levels have fallen over the past two quarters, senior-held home equity and home price appreciation have seen historic gains in recent years. The same senior-held equity measurement in 2011 stood at roughly $3 trillion, while ten years later it topped $10 trillion for the first time.

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