The concept of downsizing has been seen as a practical solution for retirees seeking to simplify their lives and save money. However, the current economic climate is challenging this notion, with soaring house prices and elevated mortgage rates making downsizing an increasingly expensive proposition.
The cost of smaller properties has skyrocketed by over 50% since 2019, making it difficult for retirees to afford to move. The average 30-year fixed-rate mortgage has risen to a staggering 7.49%, according to recent data.
This is a significant increase compared to the 2 or 3 percent deals many homeowners are currently locked into.
In other news, this is bad. Real bad. It’s why interest payments on our national debt will soon surpass our (massive) defense budget. And why mortgage rates won’t be going down anytime soon. And why commercial real estate and bond markets are getting hairy. And worse. (1/2) https://t.co/PZIEj5Jm4Y
— Peter Meijer (@RepMeijer) October 4, 2023
The availability of smaller homes has also dwindled in recent years, leading to a surge in prices due to limited inventory.
The number of properties for sale that fall within the size range typically sought by those looking to downsize has dropped by more than half since 2016. This scarcity has driven up the price of these homes, further complicating the downsizing process.
The impact of the pandemic has been particularly harsh, with the sharpest drop in listings for smaller homes occurring since 2019. The median listing price for these homes has jumped from $199,250 in September 2019 to $299,908 in the same month this year.
This price growth, coupled with high mortgage rates, means that the typical housing payment is now more than double the amount it was two years ago.
Downsizing is proving to be most costly for those who are locked into historically low mortgage rates and would need to take out a loan on a smaller home. For these individuals, moving could result in larger monthly home payments, putting a strain on the budgets of retirees living on a fixed income.
84% of Americans polled in Fannie Mae's National Housing Survey said it was a bad time to buy a home & most weren't expecting mortgage rates to come down anytime soon. Often popular sentiment is a great barometer to do the exact opposite?
— Alexa Grant (@AlexaGrantttt) October 11, 2023
However, not all homeowners who downsize would need to take out a mortgage on their next home. Even for these individuals, rising home insurance and maintenance costs could pose a significant financial burden.
The average cover on a $250,000 home has increased by 20% from 2022 to $1,428 a year, with homeowners in disaster-prone areas facing even higher rates.
Despite these challenges, just over a quarter of sellers traded down for a smaller home in the last year, according to a 2023 report. Those who downsized the most were Americans aged 77 to 97, who scaled back by an average of 220 square feet.
While downsizing may have once been a viable strategy for retirees looking to save money, the current market conditions are making it an increasingly expensive option. This trend underscores the need for careful financial planning and consideration before making such a significant decision.