Personal Finance

Older Americans planning to downsize should brace for sticker shock

Key Points
  • Homeowners age 65 to 74 who downsize sell a $270,000 home and purchase one for $250,000, on average.
  • Home values have gone up 8.7 percent over the past year and are expected to rise another 6.5 percent within the next 12 months.

If your future retirement plans include relocating to a smaller home, don't assume the move will mean downsizing your costs, as well.

With housing inventory tight and competition fierce for smaller homes, retirees who hope to reduce their housing expenses could be in for a surprise.

"Downsizing in both cost and square feet … doesn't necessarily happen," said certified financial planner Michele Clark, founder and managing principal of Clark Hourly Financial Planning and Investment Management in Chesterfield, Missouri.

"Clients are very surprised when they find this out," Clark said.

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Due largely to increasing demand and limited inventory, the median sale price for a home nationwide has reached $238,700, according to Zillow. Values have gone up 8.7 percent over the past year and are expected to rise another 6.5 percent within the next year.

Much of the competition is for lower-priced houses, which means retirees looking to downsize are pitted against first-time homebuyers.

"With smaller-sized homes, there's a lot of competition," said Jessica Lautz, managing director of survey research and communication for the National Association of Realtors. "All generations are purchasing similar types and sizes of homes."

On average, homeowners age 65 to 74 who downsize sell a $270,000 home and purchase one for $250,000, according to the realtors' group.

Since the housing market crashed a decade ago and millions of homeowners saw their home values plummet, prices generally have regained those losses. And fueled by a strong labor market and economic growth, demand for houses now has outpaced supply.

"In the past, we saw downsizing on a significant scale and we don't see it as much anymore," Lautz said. "It could be a personal preference or that homeowners are taking care of other adults in the home."

Additionally, many retirees are discovering that downsizing wouldn't bring the cost-cutting they anticipated. As such, they end up staying put.

Mortgage rates also have been ticking up, making a home purchase more expensive. (See chart.)

While moving to a smaller home can make sense for many people, it's important to plan for all the expenses that come with the purchase.

"People forget that there are additional costs to buying a house," said Peter Lazaroff, a CFP and chief investment officer at Plancorp in St. Louis. "There are closing costs, agent fees, moving expenses, repairs and furnishings."

Lazaroff also said he is seeing retirees more frequently take a lump sum from their retirement account to fund the purchase of their downsized home.

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"They say it's not that big of a deal to make a one-time withdrawal," Lazaroff said. "But they have to take enough to cover the taxes due.

"And the distribution could push them into a higher tax bracket."

Beyond the costs associated with moving and buying a new home, it's important to think long-term.

"I think you should never downsize to somewhere you can't imagine living for the rest of your life," Lazaroff said.

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