Is this a Good Time for Baby Boomers to Downsize?

Many baby boomers have downsizing on their mind.  Mrs. GoTo and I do.  Some of that downsize thinking may have been interrupted by all of the bad news about the stock market and the economy.  But has all of this bad economic news created favorable conditions for downsizing to a smaller, less expensive home?

First, residential property values have fallen over the past 12-24 months.  In some locations home prices have fallen dramatically, including in some prime retirement destinations.  As one example, sales prices in Las Vegas have dropped to August 2003 levels.   November 2008 home values in Las Vegas were 33% lower than they were in November 2007.  Home prices in Phoenix declined 33% and are down over 25% in Miami in the past year.  Overall, home prices have dropped 23.4% nationwide since the 2006 peak and are now at March 2004 levels.  (Source: Standard & Poor’s/Case-Shiller home-price index.)  Bargains in foreclosed homes are plentiful almost everywhere.

Second, mortgage rates are also extremely low.  According to Bankrate.com, the national average 15 year fixed-rate loan this week is at 4.97%, down from 5.05% the previous week. 

So even though the home you live in may also have fallen in value, if you are truly going to downsize to a less expensive home, now is a golden opportunity to pick up something at true bargain prices.  If you own your present home or have substantial equity, this gives you a chance to become mortgage-free and perhaps pull some cash out of the downsize transaction to save or invest for retirement.  (Indeed, this cash might enable you to also build your retirement emergency fund.)  Even if you have to finance some of the purchase price of your downsized home, it could be many years for we will see mortgage interest rates this low.  In fact, as soon as the economy begins to recover and/or inflation ramps up, interest rates will likely move quickly upward.   Then this window of opportunity will have closed forever. 

Keep in mind that in a normal real estate environment, property values move inversely with mortgage interest rates.  This is because lower interest rates create more demand for home purchases, driving prices up.  In this unique environment, we concurrently have low interest rates and depressed home values.

If you are an empty-nester (or are about to be) and have thought about downsizing in the past, now would be a good time to think about it again.  Homes and loans are on sale and, in combination, this may be the sale of the century.

Photo credit:  Stig-Espen Soleng

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3. Boomer and Retiree Downsizing on the Extended First Time Homebuyer Credit