Here's Why Downsizing Is Tempting for Empty Nest Boomers

A condominium neighborhood.
Marje Cannon | E+ | Getty Images
A condominium neighborhood.

When Barbara and Mark Gomperts became empty nesters a few years ago, they found themselves using just a fraction of the 3,000-square-foot, five-bedroom house where they had raised their children in Vienna, Va.

They bought a townhouse in nearby Burke that was a third the size of the house they sold. "We just didn't need as much space to be happy," Barbara Gomperts said. She is using some of their monthly savings to retrain for a second career.

The couple may be on the leading edge of a movement some real estate and aging experts have been predicting for a while: a massive sell-off of big homes by baby boomers seeking smaller quarters.

The expected downsizing trend has yet to show up in national housing data, and some experts doubt it will become large enough to affect home prices. But there are solid reasons why boomers may seek to downsize.

Despite the housing crisis that started in 2006, many older Americans have considerable home equity that can be tapped to bolster retirement. The AARP Public Policy Institute reports that 80 percent of Americans over age 50 are homeowners, and more than 80 percent of those 50 to 64 have home equity. The median home equity for households in the 55-to-64 age range in 2010 was $100,000; it was $135,000 for those 65 and over.

For many, that equity will be an important resource. Just 17 percent of Americans over 55 say they are confident they'll have enough to live on in retirement, according to the 2013 Retirement Confidence Survey released last month by the Employee Benefits Research Institute.

Housing is a major expense ripe for trimming. The AARP Public Policy Institute reports that 29 percent of middle-class households over age 50 were spending more than 30 percent of their income on housing in 2009, up from 20 percent as recently as 2000. The portion of households spending 50 percent or more of their income on housing nearly doubled during that period, to 9 percent.

Downsizing on Hold

Thus far, the generation that delayed marriage and child rearing hasn't been in a hurry to post those "For Sale" signs; perhaps the five-year rout in housing prices kept them in place longer than they otherwise might have stayed.

The housing crash has frozen many parts of the housing market, said Dowell Myers, a demographer and urban planner at the University of Southern California. "Mobility has been on pause. Boomers can't move because young people can't buy."

Not all boomers want to move. Just 29 percent of Americans ages 50 to 64 plan to move in the next five years, and only a minority intend to move to a smaller home, according to the Conference Board's 2012 Consumer Confidence Survey. Only 14 percent of Americans over 65 say they will move within five years, although 67 percent of them intend to downsize.

Even that relatively small percentage could put as many as 4.75 million additional houses on the market over the next five years.

"Lots of boomers will be moving, and lots of them want to age in place," said Louise Keely, chief research officer at the Demand Institute. "But among those who do move, many will downsize—and it's a big demographic group."

An age-driven wave of sellers could put significant downward pressure on home prices, especially in suburban markets far from city centers that are less attractive to younger buyers, Myers said.

Keely entertains another possibility, however. "We could see a significant uptick as the economy improves," she said. "And if immigration is strong, there actually could be a supply shortage."

More multi-generational living could also keep older people in their bigger houses longer, along with their relatives.

An Extra Retirement Fund

The Gompertses got out early—she's 47 and still employed as the office manager for the English department at George Mason University; Mark, 53, is a counselor at a high school.

The two are spending roughly $1,000 a month less on mortgage payments, utilities, property taxes and insurance. That plus some of the extra cash they netted when they sold their house for $525,000 (bought for about $240,000 in 1999) will pay for Barbara's training as a licensed massage therapist. More will go toward starting her own business sometime in the next five years, when she plans to take early retirement from the university.

Fred Brock, author of "Retire on Less Than You Think," said saving on housing can fund retirement. Along with his wife, Evelyn, the former New York Times columnist has twice moved to cheaper homes and now lives in Tucson, Ariz.

"Let's say you've lived in San Francisco all your life, and you live in a house that you bought 30 years ago for $30,000," Brock said. "You can probably sell it today and pocket a half-million dollars. Good grief, sell it! If you banked that and just withdraw 4 percent a year, you've got $20,000 a year in retirement income."

Brock tells homeowners who plan to eventually downsize to pay down their mortgages as quickly as possible. That enables them to save on interest and build additional equity that they can cash out when they sell their homes.

Boomers who worry about how they would do in a smaller home can follow the Gombertses' lead and try it out first. For years before they sold, they rented out part of their house to other families and spent extended times living in smaller quarters while they traveled in Europe.

That convinced them of another advantage to downsizing: Spending less on housing leaves more for vacations.