An excerpt from the WSJ:
But Diane Saatchi, senior vice president at Saunders & Associates, a real-estate firm in Bridgehampton, N.Y., says downsizing nowadays “costs more than people have in mind.” In her area, she says, total transaction costs easily exceed 10% to sell and buy simultaneously. When you add in the possibility of capital-gains taxes and moving costs, she says, “you need a big spread to make it worth the effort, and sellers often think they’re going to get more than they can for the sale.”
Kay Carpenter, 59 years old, and her husband Robert, 58, wanted to sell their 5,900-square-foot, seven-bedroom house in Windsor, Colo., and buy a home about half that size in Denver, where Mr. Carpenter currently commutes to his job as a hospital laboratory director.
But their current home, which they purchased for $810,000 in 2003, has received only one offer, for $575,000. “It is difficult to sell because it is a large home,” Ms. Carpenter says. The couple, whose last child left the nest in 2005, are finding that they will have to spend about $450,000 for a suitable house. Throw in the transaction costs, and the financial benefit of downsizing basically disappears.
Trading down is a bit easier in some parts of the country, like the Chicago suburbs, where there is a mix of housing types and lower-tax communities co-exist with higher ones. “It’s actually very typical, a classic scenario here,” says Richard C. Gloor, a real-estate broker/owner in Oak Park, Ill. “More traditionally, people wait until the last kid is out of the house, five or 10 years. But now the last child is in college still and people say they don’t need the space and especially don’t need the taxes.”
In pricey coastal cities like New York, Washington and San Francisco, desirable lower-cost housing is often hard to find in neighborhoods of upscale homes, real-estate experts say. In many affluent neighborhoods where aspiring retirees want to be, the supply of smaller homes is limited, due to zoning restrictions and high land prices. As a result, many homeowners find they would have to move a considerable distance to reduce their housing costs significantly.
Other hurdles beyond the slumping real-estate market are getting in empty-nesters’ way, too. Many people of retirement age are still working, for example, and need to stay near their jobs, meaning out-of-state moves are out of the question. Some are in two-income households, complicating the decision to relocate even more.
What’s more, adult children are becoming more of an issue than they used to be. In the aftermath of the Great Recession, “more and more kids are moving in with parents and grandparents,” says Jim Gillespie, president and chief executive of Coldwell Banker Real Estate LLC.
Some adult children object to their parents’ selling the home they grew up in because they are afraid it will cut their inheritance, says Prof. Kotlikoff. One way to address that problem: Give the children some of the sales proceeds right away.
Other strategies for living better in retirement might include paying off the mortgage, working longer or postponing taking Social Security, or increasing taxable contributions to a Roth individual retirement account, some financial planners say.
Charlie Horne, 71, a semiretired real-estate broker, and his wife, Barbara, 61, may have to use one of those strategies now that their downsizing move has turned out to be less advantageous than they had hoped. The couple recently sold their 3,000-square-foot, three-level house in Holliston, Mass., to move into a 2,200-square-foot condominium in a nearby development restricted to people 55 and older.
Their mistake: making a down payment on the new place before selling the old one. It took 11 months for the Hornes, who had owned their house for five years, to sell it, and it fetched just $540,000, far less than the $730,000 at which it was appraised the year before. The condo cost about the same with upgrades. “We thought it would be no problem [to sell]. I’ve been a Realtor for 52 years, and I’ve seen six recessions already,” Mr. Horne says.
The couple’s mortgage is about $380,000, or $3,900 a month. That, along with common charges of $310 per month, add up to just about as much as their old first and second mortgages and taxes. On the plus side, “the taxes were higher on the house than the condo,” says Mr. Horne, who adds that he is saving money on maintenance.
Still, Mr. Horne says, if he had it to do over, he would sell the house first. “My timing was wrong,” he says.