21 Feb 2020 Maybe You Will Downsize
Last week, Ryan did a great job in his Brief titled Your Home is Not an Investment (You Probably Won’t Downsize), explaining how a home is a lifestyle or ‘use’ investment, behaving differently than stocks, bonds or other impersonal investments that produce income or can be easily sold to fund goals.
Ryan’s Brief was aimed at readers considering the purchase of a larger home; to inform a wiser and more practical financial decision. This week’s Brief is for our readers who have spent many years in larger homes and are considering the merits of downsizing. My wife, Sharon and I are in the midst of doing exactly that, so this is not a theoretical topic for us.
The largest impediment to downsizing is emotional. A home is full of echoes of large family gatherings, happy and sad memories, dated height marks for each child etched onto the kitchen door frame, pictures and family treasures that have occupied their special places for years and years, wonderful neighbors, familiar tracks to stores, and on and on.
Once you’ve made the mental decision to seriously consider a downsize, you will encounter the full force of one of the greatest powers in the universe – INERTIA. Open any closet and the full weight of its contents will come figuratively crashing down on you, crushing your spirits as you realize how little of this stuff is going to fit into your new, vastly smaller home. And speaking of inertia, what about that ATTIC? What in the world will you do with all that stuff? Most of it long forgotten by kids who are states away. Just when you are ready to throw up your hands and forget the whole thing it dawns on you that you are likely going to lose your two-car garage too!
Then there’s the economic reality. We downsizers are competing with our kids for the same houses, especially in fast-growing cities like Raleigh. The reality of our country’s demographics is that as baby-boomers vacate their large homes, there are fewer buyers available for those homes. Increasing appreciation for ‘green homes,’ reducing carbon footprints, and energy-efficiency have also reduced demand for larger homes.
These dynamics mean that larger homes bring less and they will sell more slowly. On the other hand 2,200 to 2,800 square foot homes in Raleigh often sell within a day or two, with multiple buyers bidding, and at prices that exceed their asking prices. To avoid the risk of owning two houses for a time (and paying two mortgages if still financed) downsizers in hot markets, be prepared to rent temporarily between the sale of your primary home and the ultimate purchase of your new home.
If you’ve made it this far and managed to overcome the emotional and practical hurdles of downsizing, congratulations. Real benefits, financial, practical, and psychological can be achieved with a well conceived downsize, even if you have to pay more than you thought you would.
Here’s an example using Raleigh prices for a downsize from a 3,700 square foot home selling for $1 million to a 2,500 square foot home costing $750,000. I’ve included a mortgage in this example. If you don’t have a mortgage, remove $10,000 from the savings number at the bottom.
As you can see, there’s real savings to be had in a downsize, even if the amount paid seems relatively high. In this case the reduction in square footage was 32% while the price fell only 25%. However, the annual savings is 38%, making the effort well-worth the short-term pain for this couple.
Instead of heating and cooling those rarely-used extra bedrooms and closets every year, they could spend an extra few weeks traveling, increase their generosity to a favorite charity, pay down debt faster, or invest for future needs. The savings in this example generates $300,000 if invested for the next 15 years at 6%.
Downsizing may just make more sense for you than you imagined. If you think it’s worth a look, please give us a call. Maybe you just might downsize after all.