Summary:

Many older folks find themselves stressed over the option of selling, downsizing, transitioning to smaller quarters, preferably single-story, and whether it is an economically wise decision or just an exercise in frustration.  It is both.

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.

Government policies, such as the attempt to curb inflation by keeping interest rates increasing, have significantly influenced the housing market.  The resulting lack of demand, primarily due to affordability issues, has led to stagnation in home values. This underscores the crucial role of affordability in market dynamics and the profound impact of government policy.

The same applies to income-producing properties, where low interest rates bid up 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 and operating costs 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, which was 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 financial strain can be further exacerbated by the need for adult children to leave the comfort of their parents’ home eventually.  This can add significant pressure to the parents’ finances, making the case for downsizing even more compelling.

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, den, and a three-car garage on a half-acre parcel.  They anticipated having two to three children and required ample space to install a pool and a Jacuzzi.  Hee 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 an elite private grade school, 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 pressured 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.

Contemplating the decision:

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 and enhancing their retirement lifestyle.  The freedom and peace of mind that come with such a decision are invaluable. On the other hand, not downsizing could lead to continued financial strain and a less comfortable retirement.

Family discussions followed about selling and downsizing, highlighting the importance of informed decision-making in this process.

The neighborhood and city are experiencing changing demographics; older people seem to be leaving, replaced by younger families.

There are physical limitations to climbing the stairs to 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.

Creep up property taxes and expenses

Excess space sits idle.

Keeping up with pool maintenance.

The goal is to be able to sustain the house payments and other expenses.

The current 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 $600.

The maintenance and upkeep of the interior and exterior come in at about $2,000,

Total monthly obligation of $5,100.

The couple, now in their early 70s, 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 defaulting tenant protected by government regulations who can manipulate themselves into staying rent-free for a year or two while the owners make the payments.

They may end up with a squatter who has more possessions 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 $1,700,000 minus closing costs of 6%, which would be $ 1,600,000. This amount would be reduced by the outstanding balance on the home loan of $ 350,000, resulting in $ 1,250,000. With the $500,000 exemption for two-party families, capital gains would be calculated at $ 750,000 (20% of $ 3,750,000), payable to the government, which leaves a net gain on the sale of $1,100,000. 

Option #1: If the couple purchased an $800,000 replacement small home in a seniors-only community and paid cash, they would still have $300,000.

No house payments.

Property taxes are $500.

Association dues are $700.

Utilities and home upkeep cost $1,200, totaling $2,400, or about 47% of their prior monthly expenses: a smaller home, cash in the bank, and less than half of the monthly costs.

Option #2: 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 minimal compared to keeping their existing home.Hisss highlights the importance of considering all financial aspects before making a decision, ensuring you are fully informed and prepared for the financial implications.

They could invest $1,000,000 at 7% per annum, generating a monthly income of $5,333.  The two will receive approximately $2,000 per month in Social Security, totaling $4,000.  Their out-of-pocket monthly housing expense would be significantly less. However, rents could rise, neighbors could be pesky, the homeowners’ committee may bother them, or the property owner could sell the Condo, highlighting the potential risks of this option and the need for caution.

Option #3: 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 gruesome reality of how to downsize and rid 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 that 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.

Option #4: Remaining in the home becomes a better decision. The monthly cost, including home expenses, is $5.  Additionally, approximately $3,000 is allocated for medical, car, and food expenses, totaling $8,100.  Social security would provide $4,000.  The need for $4,100 per month may require tapping into the IRA for 401 (k) 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 Where You Are: Housing costs $5,100 per month, expenses total $3,000 per month, and income from social security is $4,000.  An additional $4,100 is needed to maintain the lifestyle.

The upside to a smaller home is that it costs $2,200 and has expenses of $3,000 per month, totaling $5,200. Income from Social Security $4,000, and income from a $300,000 investment at 7% per annum equals $1,750.  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 $4,000, plus $1,750 from investment income. The couple would still need a few thousand dollars 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 Merlot.  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.