Many retirees count on the equity they have built in their homes to help fund their retirement. People often plan to sell a larger home and purchase a smaller one in retirement to cash in on this equity. If you are in this position now, you may need to be cautious as home values decline, inflation rises, and interest rates continue to increase.
Unfortunately, you may end up with less money than you expected for your property and still be in a position of paying more than fair market value for your retirement home. Rather than make this move, you may want to speak to a financial advisor about other options.
The Unfortunate State of the Current Real Estate Market
The Federal Reserve has raised interest rates quickly and aggressively, and as of this writing, a 30-year mortgage averages more than 6.5 percent. That is more than double the rate from this time last year. If the Fed continues to raise rates, new mortgages may easily top 7 percent before the end of the year. Because interest rates are rising at such an unprecedented rate, the price of homes is falling to compensate. Between June and July, the median home price fell by nearly 1 percent, the largest single-month drop in over a decade.
The price of property is dropping in nearly every American market, with some seeing declines as high as 4 percent. Unfortunately, this means that homeowners are losing equity in their investments. Overall equity in homes fell by about 5 percent during the summer. The fourth quarter of the year is expected to record the first decline in available equity since 2019. Several experts were predicting 15-25% drops from their highs, in several large markets.
This market puts retirees in a very difficult bind. People may have significantly less equity to roll into a new home, yet the overall price of housing is likely still much higher than when their original home was purchased. In the past year, the price of housing increased by about 14 percent in the United States. All of this is compounded by the fact that interest rates have risen recently, and you may actually have a higher mortgage payment than you did for your last home. This could put a wrench in your retirement plans.
The Options Available to Retirees Wanting to Sell
The best way to understand the severity of the situation is to consider a hypothetical situation. Consider a homeowner who has $200,000 in equity and only needs to borrow $100,000 to purchase a $300,000 retirement home. At an interest rate of 2.88 percent, the monthly payment on that $100,000 mortgage would be $415. This is typical of where things were in the fall of 2021.
In fall 2022, the same move would look a lot different. The homeowner would probably net $190,000 in equity on that same original house and end up paying $342,000 for the same retirement home. Borrowing 50 percent more money—$152,000 rather than $100,000—at double the interest rate—6.26 percent rather than 2.88 percent—means that the monthly payment for the same exact house is also now more than double, at $937 rather than $415. With this difference in mind, you may want to consider other available options.
The most obvious option to consider is not selling your current home at all. The rise in inflation will slow eventually and increase what you can afford. You may end up waiting a decade or more for this drop to occur, however. This could put a wrench in other retirement plans and force you to rethink your entire strategy. Another point to consider is that Fed hikes to mortgage rates may continue in the near term, so locking in now will help you avoid higher rates. This may be advisable if you know you need to buy and sell in the coming few years. If you can wait out the market, though, the interest rates will also come down eventually.
The other option you could consider is purchasing a new home and the refinancing to a lower mortgage rate as you are able in the future. You may consider an adjustable-rate mortgage (ARM), which are considered risky if you think interest rates could rise, but could be beneficial in this situation. With an ARM, the rate is locked for the first years of the loan and thereafter adjusts every year. ARMs tend to have lower interest rates than traditional, fixed loans, so they can carry you through until the market improves.
The Bottom Line on Buying and Selling Homes in Retirement
The current financial situation of the United States makes buying and selling real estate complicated, especially during retirement when people exist on a more-or-less fixed income. You should consider all the options and weigh them against your retirement plans and the flexibility of those plans.
In addition, you should consider enlisting a financial advisor to help you figure out the ideal solution. This person can crunch all the numbers and give you an outline of all the options. Having hard data can make it easier to choose the option that makes the most sense for you. Plus, a financial planner can give you a sense of what the market will look like moving forward into the coming years.