Summary:

Over a decade ago, the government’s strategic decision to artificially lower interest rates had a profound impact on the homeownership landscape.  This policy, a significant driver in the rise of home values, also led to a price surge. The direct influence of the government’s actions on affordability has become a substantial barrier for many taxpayers.

As manipulations are common, the government’s attempt to curb inflation by increasing interest rates has had a significant impact on the housing market.  The lack of demand, primarily driven by affordability issues, has led to stagnation in home values.  This underscores the pivotal role of affordability in the market dynamics and the impact of government policy.

The same applies to income-producing properties, where low interest rates lead to increased prices and rents.  Stagnation has set in due to increased interest rates, which reflect higher property payments.  Inflationary pressures and high rents stress tenants, and higher debt service payments stress property owners.

https://www.forbes.com/advisor/investing/fed-funds-rate-history/

Article:

As homeowners age, they often confront unique financial challenges. The affordability of their homes, once suitable for a large family, can become a burden as the family size shrinks. The unused space in their large homes, often referred to as McMansions, can exacerbate the financial strain.

The situation can be further complicated by the need for the most burdensome hangers-on (adult children who rely on their parents’ financial support) to eventually leave the comfort of their parents’ home, which adds to the financial strain.

The days of bigger, better, faster, and more expensive upward mobility can become a burden when all excesses are no longer desired; the desire for simplicity and frugality can surface as a liberating necessity, inspiring a more manageable and fulfilling lifestyle.

Homeownership is more than just the pride of owning a property; it’s a sense of security and stability. It comes with substantial financial and physical obligations.  The capital expenditure outlays for enhancements, such as heating, air conditioning, electricity, lawn and tree maintenance, home upkeep, and general maintenance, can be significant and often underestimated. These expenses contribute to the overall financial load of homeownership, a reality that homeowners must be fully aware of and that property investors must carefully consider.

Consider a scenario where a couple bought a home approximately 40 years ago. The property was a four-bedroom, three-bathroom house with a spacious family room, a den, and a three-car garage on a half-acre land parcel.  They anticipated having two to three children and required ample space to install a pool aa nd a jacuzzi.  The home was purchased for $200,000, with 80% financing, and an equity line of credit of $100,000 was used for all the upgrades.

Over the next 20 years, they improved and remodeled the home as needed.  The kids grew up spoiled and demanded to attend USC after attending elite private grade schools, rather than a state university, of course, paid for by their parents.

Eventually, their children graduated from college. Two of their children got married and put pressure on their parents for handouts to pay for their own growing families.  Their oldest daughter had a nasty divorce and moved back in for a while with her children, causing an even more significant burden on her parents.  Soon, the parents were forced to refinance their home to $400,000 to cover the costs of their ever-growing extended family.  Forty years flew by in a blink.

Opting to downsize to a more manageable home with a significantly reduced monthly financial burden can be a beacon of economic relief.  This move could save a couple of thousand dollars monthly, providing a clear path to financial stability.  The money saved and their social security could be redirected towards other financial goals or used to enhance a retirement lifestyle. Imagine the freedom and peace of mind that comes with such a decision. On the other hand, not downsizing could lead to continued financial strain and a less comfortable retirement. 

Family discussions followed about selling and downsizing:

Age restrictions on climbing the stairs to access the bedrooms.

Maintaining the home and exterior yards costs about $3,000 per month.

Everything is more expensive due to inflation, which erodes the dollar’s purchasing power.

Creeping property taxes.

Excess space sits idle.

Keeping up with pool maintenance.

Being able to sustain the house payments.

The home is worth about $1,700,000, and the monthly costs to maintain are:

The house payment is $2,000 on the $350,000 loan.

Property taxes are $500.

Utilities are $400.

The exteriors’ maintenance and upkeep cost approximately $ 2,000, for a total monthly obligation of $4,900.

The couple, now in their late 60s, discussed their options for moving:

Sell and downsize to another home.

Rent out their home; they could rent a much smaller place.

They could wind up with a parasitic tenant who defaults on rent and is protected by government regulations, allowing them to manipulate the situation and stay rent-free for a year or two while the owners make the payments.

They may end up with a squatter who has more possession and equitable occupancy rights, while the owners pay lawyers to remove them.  That could take one or two years through the ideologically collectivist court system.  

In Propositions 60 and 90 in California, the couple could transfer their old property taxes to the new home, so their monthly outflow would be as follows   With the first option, they would sell their home for $1,700,0,00 less the closing costs of, 6% net, an 1,600,000000 less the outstanding balance on the home loan of $350,, which000 would give them $1,250,000.  With the $500,000 exemption for two-party families, capital gains would be calculated at $750,000 at 20% ($150,000), payable to the government, which leaves a net gain on the sale of $1,100,000.  If the couple purchased an $800,000 replacement house and paid cash, they would still have $300,000. This means they would have no house payment. However, they would still have to cover property taxes, association dues, utilities, and home upkeep, totaling $2,200 or about 40% of their prior monthly expenses.  An option would provide a smaller home, cash in the bank, and lower the monthly costs. 

No house payments.

Property taxes are $500.

Association dues are $700.

Utilities and home upkeep cost $1,000, totaling $2,200, which is about 40% of their prior monthly expenses: a smaller home, cash in the bank, and less than the monthly costs.

The second option, selling their home and renting another, may not be as financially beneficial as it seems.  The couple discovered they would have to pay around $4,500 in monthly rent for a lovely Condo in a safe area.  They would pay a high association fee if they wanted one with all the amenities.  The monthly savings were little compared to keeping their existing home.  This highlights the importance of considering all financial aspects before making a decision, ensuring you are fully informed and prepared for the financial implications. It’s crucial to calculate the total monthly costs of each option, including all associated fees and expenses, to make an informed decision.

They could invest their $1,100,000 at 5% per annum, generating a monthly income of $4,583.  The two will receive approximately $2,000 per month, for a total of $4,000.  Their out-of-pocket monthly housing expense would be significantly less. However, rents could rise, neighbors could be bothersome, the homeowner’s committee may interfere, or the property owner could sell the Condo, highlighting the potential risks of this option and the need for caution.

With option three, they could rent their large house out for $7,000 to $10,000 per month to strangers and then rent a much smaller home for $4,000.  This option, however, would involve being a landlord and possibly dealing with unreliable tenants who might damage the property, forcing them to spend money on repairs.  Converting into a rental is rarely a good idea unless compelled to do so because of one of the parties’ diminished health or death.

With all the above options comes the grim reality of downsizing and ridding themselves of a lifetime’s worth of stuff that the couple felt were valuable collectibles, antiques, and heirlooms.  The kids looked at all their stuff as old-fashioned and out of step with the times; their kids preferred the modern classic look. They quickly discovered that style preferences had changed. The collection the parents valued had no value to them and was considered a burden by the children. 

The cold, hard cash they received from their parents on their birthdays and holidays was not a burden to the kids and grandkids.  I look forward to the inheritance of cold, hard cash, which is not a burden.

Remaining in the home becomes a better decision.  n   The monthly cost, including home expenses, is $4,9approximatelylyut $3,000 for medical, car, and food expenses, totaling $7. 0   Social security would provide $4,00. The need for $3,900 per month may require tapping into the IRA for  (k)01K distributions or continuing to work for a few years, albeit at a less stressful pace.

In many cases, independent contract work in the same field offers significantly more freedom.  Continuing to work at some productive enterprise helps maintain one’s sharp intellect.

Recap:

• Stay put: Housing costs $4,900 per month, expenses are $3,000 per month, and from social security income, $4,000 is available. An additional $3,900 is needed to maintain the lifestyle.
• Sell and move to a smaller home: cost $2,200, expenses $3,000 per month, a total outlay of $5,200.  The income from Social Security is $4,000, and the income from a $300,000 investment at 7% per annum equals $ 1,000.  Could maintain a lifestyle without having to continue working.
• Sell and rent: Rental costs $4,500 per month, expenses $3,000, total cost $7,500 per month. Social Security income is  00—pleased with my investment income. The couple would still need a couple of thousand per month to maintain their lifestyle.

Now, sit at a barstool or in the mancave in your McMansion and open a bottle of fine Cabernet Sauvignon.  Or, sit down on your traditional furniture and celebrate your best decision.  Stay put!  Perhaps the grandkids would like to come over for a few days to swim in the pool and have a barbecue.  Maybe they won’t, but you can live with the satisfaction of being independent and owning an appreciating asset.