Financial planners have always advised their clients about the benefits of downsizing their home as they get closer to retiring. The concept of reducing a borrower’s financial obligation while lowering their cost of living requirements makes financial sense. However, many pre-retirees are finding that downsizing in this current housing market is not as easy as they thought it was.
Retiree trade downs have gone from 12% of total homes sales in 2008 to just 8% in March. One of the main reasons for the lull in downsizing sales is the drop in property values. The gap between upper and middle class homes has all but closed closed. A prime example of the extreme loss in property value, which many retirees are facing, is a Colorado couple that purchased their home in 2003 for $810,000. Their plan was to sell this home and downsize to a small home which was selling for $450,000. The profit of that sale would only have added $360,000 towards their retirement and would have cut their monthly costs in half. Their plans came to an abrupt end when they were only offered $575,000 for their home. By the time they figured in capital gains, the cost of moving and closing costs there was not much left to retire on.
The destruction of this countries housing market has proven to have far more ramifications than anyone could have imagined. Millions of Americans have used their homes as a vehicle toward retirement. The equity that is acquired over the length of the loan has always outpaced the original cost of the home and the interest that was paid over the life of the loan. Since the floor fell out of the housing market that premise is in jeopardy. Retirees are in a desperate situation because they cannot wait another 10 years for the housing market to stabilize and reinstate the equity that was lost.
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I feel bad for seniors these days. They are getting hit hard by not only the real estate market but also the stock market. They don’t have the time to wait for either market to recover. Many retirees are caught in a difficult situation.
Very good points Paul. It is hard also because a lot of these seniors have been in their homes so long and they bought when prices were really low, sometimes 20 years ago. The problem is that now to down size the may have the same mortgage payment as before but be in a much smaller home. That does not sound like fun to me.
We are still getting a lot of retirees coming to Las Vegas to retire. Our market was hit so hard their dollar is going a lot further than in other markets.
Hi Paul,
To speculation over a short time (1-5 years) for the pension or retirement in homes, share, gold and other thing is a big risk. But to financial plan for the retirement in homes over a long time, 15 years or more is a good investment.
What a terrible thing that is happening to retirees in the current market. It’s a shame that people work their whole lives and then the market crashes and they lose almost all of their equity. To think the government is bailing out companies and handing money to other countries when they should be helping our people, especially the elderly.
My husband and I are upside down $110,000 in our home. I am 61 years old, and we figured when we bought our home nine years ago, that when we hit retirement age, we would sell our home and downsize. Now, it is getting to the point where it is difficult for my husband to climb the stairs or even to keep up the landscaping. We need to get into a smaller one-story home. But, we are trapped. We can’t sell this house bc it’s not worth what we owe, and we can’t buy something smaller and then let this one go into foreclosure bc of the buy and bail rules. Any ideas on what people like us can do?