Homeownership can be a significant financial decision. And it's one that should be made in context and economic awareness. Unsurprisingly, the mortgage and housing industry assesses “affordability” within a vacuum without considering an individual or couple’s values regarding spending, leading to widespread misconceptions of the actual cost of homeownership.
Buying a home is not always a smart investment despite conventional wisdom. This was starkly on display in 2008 when the housing market collapsed after years of banks handing out garbage loans that enabled people to buy houses they couldn’t afford. No asset has been more distorted by governmental support than single family homes. Housing is not an investment unless it’s a rental property that turns a profit and, even then, it usually requires excess capital to mitigate risk in one’s personal balance sheet.
Older generations are not immune to false impressions about the value of homeownership. When the question of renting or buying in retirement arises, it’s wise to pause and find the right housing solution for your unique retirement needs, wants and goals.
Renting Not Uncommon
One of the primary predicaments that buyers face is the competition among different generations for the same type of home. Younger first-time and older buyers are competing for the same modest homes. The opulent McMansions of the 90s and early 2000s are out of favor. Demand for smaller homes has pushed up home prices, making what was once affordable less so.
What does that mean? You may have a harder time downsizing than you expected. That shift in demand is changing the way older generations plan for retirement. In March 2020, The New York Times reported that “Close to 80% of people 65 and older own their homes though renting appears to be on the rise. The number of renter households where the primary resident was 60 or older grew 43% from 2007 to 2017.” Many have come to realize that renting is the most economical approach to retirement housing.
Finding the Right Housing
When it is time to downsize, evaluate the risks and benefits of renting versus buying before making a decision. Careful planning and consideration are necessary to find the right housing for your retirement goals. It’s a choice one shouldn’t make lightly, as it can greatly affect the chances of a successful retirement.
First, there’s the matter of where to live in retirement. Take a look at the housing market to see what’s available and within your price range. Relocation may be desirable, but do you know whether you like the area you’re planning to live in? Renting gives retirees the ability to try new places without a long-term commitment.
Next, consider how long you’re planning to live in a particular area. Renting may make sense for a short-term move, whereas buying may be more economical for a permanent relocation. Think about health care needs, proximity to family and friends, and your ability to take public transportation.
Then consider cash flow. Did you wait until later in life to actually save for retirement? Is your nest egg less sizable than required to support your desired lifestyle? In this instance, selling your current home and renting in retirement could free up equity, potentially increasing your annual cash flow.
Tom Sedoric is partner, executive managing director and wealth manager at The Sedoric Group of Steward Partners in Portsmouth. Casey Snyder is partner, senior vice president and wealth manager with the firm. They can be reached at 603-427-8870 or by visiting thesedoricgroup.com.
Current Issue - April 2024