How to Downsize and Save in a Hot Market

As empty nesters in our seventh decade, my wife and I no longer use most of the living space in a four-bedroom home. Like millions in of other older Americans, we're reconsidering our space and accompanying expenses, but we're not seriously contemplating a move. We loathe the idea since we love our neighborhood and have deep roots in our community.

Yet with the national housing market booming and nearly every local retirement option much more costly than it was before the pandemic, we're a little frustrated. How does one save by downsizing living space in retirement without a major relocation?

You can search for bargain locales across the U.S. and abroad, although it is still a challenging process because it involves major moves. I know two couples who relocated to Portugal and a friend who's considering Poland. Yet there are still plenty of lower-cost locales within the U.S. and multiple options to consider before you call a moving company.

The conventional wisdom for retirees considering relocation is to move from Northern or West Coast metropolises to the Sunbelt. Pricewise, that still largely holds true. The median price for all U.S. home listings in May was $442,450, according to Realtor.com. That compares to $395,000 for what the service considers "retiree friendly" homes.

As you might expect, houses in areas that cater to retirees tend to have less square footage, resulting in lower prices.

"Generally, affordable retiree locales are (still) concentrated in Florida, including cities such as Palm Springs, Lauderdale Lakes, West Palm Beach, Sunrise and Lauderhill, all with retiree listings priced more than 60% lower than the national median," notes Hannah Jones, an economic research analyst with Realtor.com.

Of course, there's more to this story than list prices. There's climate risk, skyrocketing homeowners' association fees and insurance premiums in the Sunbelt and elsewhere. Florida's property insurance market is in crisis mode, notes bankrate.com, with more than 30 companies pulling out of the state over the past three years.

Those insurers that are staying in markets most exposed to climate risk are socking policyholders with double-digit premium increases. Insurers cite the higher costs of home repairs after increasingly violent storms and wildfires as the prime reason for premium hikes, which affect policyholders nationwide. You will pay more than $5,000 annually on average for a homeowner's insurance policy in Texas, for example, compared to $2,500 nationally, according to Quadrant Information Services.

So whatever gains you may have made in home equity appreciation in recent years may get eaten up in higher overall ownership costs when relocating to sunnier areas. It may not make financial sense to move when you factor in insurance, higher out-of-pocket deductibles, hostile weather and inflation.

It helps to keep an open mind when it comes to downsizing. You may need to be creative. Here are some options to consider:

• Can you rent out your current home and move to a condo, city apartment or townhouse nearby? "Are you locked into your [present] house?" asks Michael Collins, CEO of WinCap Financial. "Look at renting out your home and using the income to cover a new mortgage on a smaller place."

• Have you looked at alternative housing options such as "Accessory Dwelling Units (ADUs)," also known as "granny flats?" These are essentially smaller structures built behind homes or above garages. Many older adults live in ADU units while their children or grandchildren live in the larger homes. You may be able to do this where you live now or find a nearby area that is zoned for these improvements.

• How about the old-fashioned route of buying a smaller home close by? I talked to a man who bought a fixer-upper near a lake for a bargain price. He and his wife will move in when he retires in a few years.

• If you can stomach the climate-related risk, traditional retirement locales are still priced lower than other areas. "Retiree-friendly homes were priced 10.7% lower than the national median price in May," says Hannah Jones at Realtor.com. However, some of this price difference is due to the relatively small size of retiree listings. Adjusting for difference in home size, retiree listings were priced 2.1% lower per-square-foot than the national median.

• With greatly enhanced real estate search engines and chatbots, you can target a price range, locale and even specific communities that cater to retirees. "Once you decide on a location, 'filter' for 'senior citizen communities,' " advises Jones, "You can even filter for size [of the housing unit], size of county and save multiple searches."

• There are still retirement-friendly communities considered to be bargains relative to most metropolitan areas. They are often lesser-known areas such as Bermuda Run, North Carolina; Green Valley, Arizona; King City, Oregon; and Manchester, New Jersey. College towns outside of major metropolitan areas are also still worth considering.

• One of our neighbors — who has the same model home we do — converted her basement into an apartment, which she rents out. This is something we're considering, especially in light of exorbitant rents in our area. It's a big step for us, however, and we slow-walk the discussion about once a year.

• An increasingly popular option is simply aging in place. It may make more sense to adapt your present home to accommodate your needs as you get older. You may even be able to finance improvements through a home equity loan.

Do you have a financial plan for downsizing? If you haven't already drawn one up, work on doing so with a Certified Financial Planner, who acts as a fiduciary and doesn't earn commissions or other remuneration based on the investments they recommend. They can do a holistic analysis of how downsizing would work with your current and future financial goals.