Should I Downsize to a Smaller House in This Market?

Everyone is affected by the current real estate market, and empty-nesters are no exception. 

This week I have spoken to three empty-nester couples trying to decide if they should downsize now.  There are some common elements to the decision I would like to share. 

The answer depends on two things.  First, when and how much the value of your home will go back up. Secondly, the cost per year to live in your current home versus the cost per year for where you would live if you sold your south-of-the-river home.

Minnesota homes appreciated 3-5% during the 100 years from 1900 to 2000, according to Case-Schiller data. This reflects the rate of inflation and rate of wage increases. 

The excess appreciation of homes from 2001-2006 far outpaced increases in wages. For a while, buyers could still afford homes because new loans like zero-down or interest-only programs allowed buyers to stretch their incomes.  Eventually even creative mortgage products could not close the gap between home prices and wages.

When your Apple Valley home begins to appreciate again, odds are it will appreciate at this historic rate, following inflation and wage increases. 

Homes south of the river have not yet begun to appreciate and might not start for another year or two.  On average. prices have fallen a little more than 30% in the Twin Cities.  If we begin to appreciate in 2012, and the rate of appreciation is 3% it will take nearly 8 years for homes to appreciate to the highest level of value from 2006.  (Each year the value goes up and the new 3% of appreciation will be based on the higher value; this is why it is 8 years, not 10.)

Ask yourself: Do you want to stay in your home until 2020? 

Let’s do an example analysis:  You are waiting for your home to rebound from its current value of $300,000 to the highest value of 2006, about $420,000. The extra $120,000 seems worth the wait. Your current cost per year in your home is $36,000, including your mortgage payment, taxes, utilities, association fees and lawn care, plus updating and replacements needed in the next 10 years.

Selling your home, you would move into a townhouse with a new mortgage payment of $1,350, including property taxes (based on a $250,000 townhome with 20% downpayment).  The payment is low because of our current low interest rates.  Your association fees and utilities will equal $350 per month. You total yearly cost is $20,400, the difference in costs is nearly $16,000 per year.

During the 10 years of waiting, you will spend an extra $16,000 per year because you are still in your house. Total excess expenses of living in your home will be $160,000, substantially exceeding the $120,000 you are hoping to recoup. How is that possible?

It is possible because of low interest rates and low appreciation rates.  Interest rates are very low, so the new house payment is better leveraged, meaning a lower payment, even on a fixed 30-year loan.  Also the appreciation rate of just 3% per year means the value your home goes up each year is less than the cost of staying in your house. 

Of course this is just one example and each situation is different.  My hope is this example helps you broaden the scope of your considerations as you decide about downsizing.  For a full analysis of your situation, simply request a Home Evaluation.