Better with Age: Have the stars aligned for downsizing?

Better with Age: Have the stars aligned for downsizing?

By Peter Crouch

A years-long trend toward fewer houses on the market has only become a more acute shortage. When the COVID-19 pandemic first hit, we all obeyed stay-at-home orders, and even fewer of us were selling our houses than in prior years.

When safety measures became standard protocol, however, buyers and sellers returned to the market. Those homeowners not in the market, meanwhile, refinanced at historically low rates of 3% or less.

The state of the market

Now, a few years later, there remain more buyers than sellers, and the number of homes for sale remains extremely low. The overall effect has been that prices have accelerated and most well-maintained homes are receiving multiple offers when they go to market. It is tough to be a buyer these days, but great to be a seller.

That dynamic can keep a seller from considering a move since they will likely be buyers for their next house. When you look more closely, however, it could be a wonderful time to move to smaller housing. The statistics show that the housing shortage is most acute in the single family arena.

The number of detached houses in particular, is way down over previous years, followed by townhouses. Shortages have been building for several years and have stifled the folks who want to move up to more space. Condominiums have not had as much demand; in fact, the supply of condos on the market overall is up from years past. It is generally less of a seller’s market in the condo world.

There is also a great crop of new senior housing choices in our area as well as luxury rental apartments. All provide considerably less maintenance and the convenience of being able to lock up and travel for as long as you want.

Why downsize now

So what is the opportunity for downsizing? Single family prices have accelerated by as much as 40% in the last three years, depending of course on location and condition. For many existing homeowners, that means their homes are worth much more – often $200,000 to even $500,000.

Plus, condos are generally the softer part of the market, again depending on location and condition. For anyone who was considering downsizing before the pandemic, this could be a wonderful opportunity to sell high and buy low. If the thought is to move away from our high-cost area, the benefit could be even more accentuated.

Another factor is the treatment of capital gains taxation on the sale of a principal residence. Every taxpayer selling a principal residence is entitled to an exclusion of gain of between $250,000 to $500,000 for a couple.

So, if a house has gone up dramatically in recent years, and you are thinking of going smaller, you could have a nice opportunity to go smaller with a great tax benefit. There is, however, a hint that capital gains tax treatment may change, so it could be the best time to take those winnings off the table, so to speak. A couple can take half a million dollars of tax-exempt profit on their house.

It might be time to consider, or reconsider, moving to smaller, less maintenance one-level housing. The opportunity right now is to take advantage of the strength of the single-family market, the choices for “next” housing and the current favorable tax treatment of housing gains.

Dad always told me to buy low and sell high. Have the stars aligned for you?

The writer is an associate broker with McEnearney Associates.