There has been a lot of discussion about Baby Boomers and empty nesters who would normally be listing their homes hesitating to pull the trigger and list. The fact is selling and downsizing isn’t so simple, and may not make financial sense.
Boomers who bought their homes 20-30 years ago see huge growth in the value of their homes, and are looking at a massive capital gains tax when they sell. There is an exclusion of $250,000 per person when selling your home. So if your profit is around $500,000 you will be fine. If you have owned your home for 25-30 years, and your home has appreciated by more than $500,000 you will be taxed on this, and the amount is seen as income.
The next issue for boomers and empty nesters is if they sell where do they go? If they want to stay in the same area there is very little inventory of smaller homes or condos available to buy. Affordable rentals are rare as well. With current prices and mortgage rates so high, there is often a small cost difference between their current home and a smaller one.
So its a bit of a catch 22 as older homeowners hesitate to sell, the inventory of homes for sale remains low which in turn gives us higher home prices. This is basic supply and demand economics.
Older homeowners who want to downsize have been scared into staying put by how expensive a smaller home would be in the current market. Often there is no real savings when downsizing. A homeowner who keeps all the profit of a home that sells for $500,000, for example, may find that a condo in their same area, where they can age in place, is $450,000. After calculating realtor fees and closing costs, the profit hardly covers the new purchase, let alone provides any extra income for retirement.
Interest rates are coming down, and this will bring more buyers into our market which should bring more homes onto the market for sale – fingers crossed.