The more expensive your location, the more you stand to save by downsizing.
As they approach retirement, many wonder whether they should downsize. It could, they assume, save them a bundle. But, said The New York Times on Dec. 18, downsizers can save hundreds of thousands in some cities and lose thousands of dollars in others.
The Times based its report on a study by StorageCafe that was published earlier in the month. Researchers collected data on 90 large urban areas, building models for each that revealed some of the major savings or losses downsizing could bring. They assumed someone was moving from a four-bedroom home to a two-bedroom one.
Where Downsizing Works Well
"Among the cities studied, downsizing was found to save homeowners a median of $177,000 over 10 years," said The Times. "The gains were significantly higher in some areas, particularly in expensive areas. In Irvine, Calif., net savings would be $901,000 over 10 years. In San Jose, Calif., it was $715,000."
The biggest savings were in cities where the gap between the prices of four-bedroom homes and two-bedroom ones was widest. Here are StorageCafe's top-10 cities for high dollar savings over a decade — but be sure to read the caveats and methodology section (below) before jumping to any conclusions:
- Irvine, CA — $900,939
- San Jose, CA — $714,951
- Honolulu, HI — $670,001
- Oakland, CA — $595,957
- San Francisco, CA — $594,647
- San Diego, CA — $479,664
- Seattle, WA — $418,377
- Dallas, TX — $372,796
- Washington, DC — $329,473
- Long Beach, CA — $323,604
California dominates when it comes to big dollar savings. However, StorageCafe has developed a "downsizing gains index," based on percentage gains. And Texas wins out on that basis, with Dallas and Lubbock heading the rankings.
Where Downsizing May Cost Homeowners
To downsize with a worthwhile return, the local property market must provide a big gap between the prices of two-bedroom and four-bedroom homes.
"In Cleveland, four-bedroom homes weren’t much more expensive than two-bedroom homes, nor were the respective property taxes, the analysis
showed," reported The Times. "Closing costs and self-storage unit fees ended up outweighing the savings, meaning downsizers there could actually lose nearly $25,000."
A good first step for anyone contemplating downsizing is to consult resources such as Realtor.com and Zillow to gauge how much equity moving to a smaller home might release. Of course, those with the flexibility to relocate to less expensive cities or counties could make much bigger savings than those who stay put.
Caveats and Methodology
The researchers counted the release of equity as the major downsizing gain, but also allowed for savings in property taxes over 10 years. They deducted from those savings the closing costs of the property sale and purchase. And they recognized that many downsizers struggle to part with their accumulated belongings by also deducting a decade of self-storage rentals.
Looking at their methodology, they did not seem to take into account lower bills for heating, cooling and lighting a smaller space. Someone choosing a small, energy-efficient home could make significant savings on those bills.
And homeowners who have domestic help with cleaning and yardwork might need to pay for fewer hours in a smaller place. Similarly, maintenance and repairs tend to be less costly the lower the square footage. Buyers should be sure to note homeowners' association fees (if any) before selecting a home.
It's also important to note that StorageCafe did not take into account any capital gains tax liabilities. It's worth remembering that, back in July, the president said he was thinking about abolishing capital gains tax on sales of principal residences. However, a House bill to do so has so far made little progress.
Meanwhile, a less costly home tends to appreciate at a lower level than a more expensive one. If home prices rise 5% in a city in one year, a million-dollar home will increase in value by $50,000, while a $330,000 one will gain $16,500.
Someone who can make high returns on investments can perhaps earn even more from the cash they free up when they downsize than they could through their more expensive home's appreciation. However, remember that there's a strong correlation between high returns and high risks.
Still, without active management, putting the cash into a safe but ironically named high-interest savings account may see the value of the nest egg eaten away by inflation. On the day this was written, it was possible to find annual yields on such accounts of 4% or even 5%. But "the average of rates paid by all insured depository institutions and credit unions for which data is available" was 0.39%, according to the Federal Deposit Insurance Corporation (FDIC).
Of course, the StorageCafe study deals in averages. And people and homes are often far from average.
However, the report gives important insights that provide individual wannabe downsizers with the basis on which to model their own potential gains or losses. The math isn't too hard, but consult a professional, if necessary, before committing.
