This is an interesting time for baby boomers contemplating downsizing and perhaps relocating to an area having a lower cost of living. Home prices have fallen in general due to difficult economic conditions. Foreclosures and short sales have generated bargains galore in many areas and including the vacation home market. Mortgage rates are at all time lows, although we should strive to avoid mortgages altogether as we prepare for retirement. Still, there is a serious question to be asked as part of the downsizing issue: Rent or buy?
Fortunately, tools have been developed to aid in this decision.
Trulia now has an entire section on its real estate site dedicated to discussion of rent vs. buy issues.
There is also a rent vs. buy online calculator that you can use obtain financial feedback on the decision, taking into account your tax bracket, inflation rates, etc. Sometimes people forget that renting vs. buying should be a compared in the short term and long term.
CNN/Money has also published a map showing twenty major cities with an assessment of whether it makes more sense to buy or rent in that city. Not surprisingly, cities like Fresno, Miami, and Mesa and Phoenix, Arizona made the “buy” list. These are cities where values have fallen the most, creating bargains galore.
If I were contemplating a relocation to an unfamiliar area as part of a retirement downsizing, I would very likely rent first. This provides an environment where you can objectively evaluate the merits of living in that area long term, without being influenced by financial pressures associated with home ownership and having to resell to undo a bad decision. The days when homes would automatically appreciate in value each year are gone. Thus, a purchase of a home to live in retirement should not be looked at as an investment.
Of course, there is a subjective component to the rent vs. buy decision. Some folks are just emotionally attached to home ownership. They cannot picture themselves as retired renters. If you are in that category, make sure you also ask yourself these two questions:
Are you emotionally attached to home maintenance?
Is it likely you will need the equity in your home to supplement your retirement income?
That last question is so important. It is better to know ahead of time if you can afford to stay in owned real estate for an extended period. Having to sell or use a reverse mortgage strategy because of financial pressures may be more stress than you want to take on.
Have any of you considered downsizing into a rental home?