Rising home prices are generally considered a boon for homeowners, especially long-term owners near or in retirement. But in addition to boosting home equity, higher prices have made the next step for retirees more expensive, leaving some with less ability to pad their nest egg by making a move.
Just a couple of years ago, retirees could more reliably sell a big family home and downsize to something smaller and cheaper, pocketing the difference. But mortgage rates have climbed steadily over the past year, with the average rate on a fixed 30-year mortgage at 7.57%, the highest since 2000. For retirees taking on a new mortgage, that means higher payments. What’s more, rising rates have contributed to tighter inventory of available homes, helping push home prices to their least affordable levels in nearly 40 years.
As a result, the smaller homes retirees want aren’t necessarily cheaper than the larger places they’re leaving behind, especially if buyers are looking to relocate to a particularly desirable location. And baby boomers are finding their options limited—despite sitting on home values worth a collective $18 trillion, according to Redfin.
“I hear that all the time,” says Amanda Mitchell, vice president of Monument Sotheby’s International Realty in Baltimore. “‘We have our big house, we don’t want our big house, but what is our next step?’”
Her retired clients want walkable communities with plenty of amenities. One popular destination for them, Charlottesville, Va., saw median listing home prices rise 15% in September over the same time last year, according to Realtor.com. (During the same period, prices rose 2.2% for the country as a whole, according to Redfin.)
Even affluent retirees who can afford to pay all cash for their next home are frustrated that their money doesn’t go as far as it used to, Mitchell says. Middle-income retirees face higher stakes: If they can’t sell their old home for more than they pay for their new one, they miss out on an important opportunity to add to their retirement savings.
Home equity accounts for almost half of the median net worth of homeowners 60 and older, according to a Vanguard analysis. The average retirement savings, meanwhile, is $223,000. Home equity can provide a meaningful addition to that—provided retirees can make an advantageous move.
To be sure, prices have not risen uniformly across the country, and there are still opportunities for retirees to cash out and buy a cheaper place in a lower-cost area. Alison Hicks Mosley, a real estate advisor at Premiere Sotheby’s International Realty in Winter Park, Fla.., recently had a client sell her Florida home for $900,000 and buy a place in Kentucky for $350,000. While the primary driver of the move was to be closer to family, the woman realized a significant gain to bolster her retirement savings.
What’s more, home prices are not the only component of overall housing costs. Homeowners who paid high property taxes while their children were in school might realize substantial savings going to an area with lower property taxes, even if they’re not paying that much less for the new property itself.
Perhaps those best positioned in this market are homeowners on the coasts, whose homes have generally appreciated the most over the past decades. California homeowners who relocated to lower-cost regions or states extracted an average of 77% of the equity in their previous home with their move, the highest of any state, according to a Vanguard analysis of homeowners 60 and over who moved in 2019.
For some, home equity is actually an obstacle to moving. Terri Kerwin, real estate associate at Golden Gate Sotheby’s International Realty in Menlo Park, says it isn’t uncommon for longtime owners to feel stuck in their homes by the capital-gains taxes they would owe if they moved. The Internal Revenue Service allows homeowners to exempt up to $250,000 of home equity on a primary residence for single homeowners and up to $500,000 for homeowners who are married and file a joint return. For homeowners with equity above those thresholds, planning is key: they could start to tax-loss harvest in the years preceding a sale, realizing capital losses to offset future capital gains, says Kevin Khang, head of active research at Vanguard.
Evan Potash, executive wealth management advisor at TIAA in Philadelphia, has retired clients who sold their home and moved in with their adult children while they search for their next place. This allows them to unlock their equity and avoid making an offer on a new property that’s contingent on the sale of the current one, which sellers are less willing to entertain in a hot market.
Write to Elizabeth O’Brien at [email protected]
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