Downsizing? Why rising interest rates are your friend


Mortgage rates above 7% froze the housing market, with affordability issues putting off many buyers. Newer, younger homeowners who have locked in their mortgage at a low interest rate — and whose next move would likely be to negotiate higher — are content to stay where they are until mortgage rates drop .

But there is one group of homeowners for whom high interest rates are arguably good news as they consider their next move in the housing market: the downsizing of baby boomers. For them, real estate and financial market conditions are more attractive than a year ago.

Take the example of a homeowner in his 60s who has just retired or is planning to retire soon and is considering moving. This housing market transaction could be selling a four to five bedroom home for something smaller and more manageable, or moving from a high-cost state like New York or California to a lower-cost state. like Florida or Arizona (or both). Their new house will be less expensive than their current house, which means they will get money out of this transaction – potentially hundreds of thousands of dollars.

This is partly because of the difference between older owners and younger owners. While the average home price in the United States is around $400,000, it stands to reason that older homeowners on average have more valuable homes than younger homeowners who have only recently bought into the market. And older homeowners in many cases benefit from decades of house price appreciation. They are also more likely to have paid off all of their home or have relatively small mortgages relative to the equity in their home.

If someone sells a house that’s fully paid off for $800,000 and buys a cheaper retirement home for $500,000, they’re not giving up a low mortgage rate because they don’t even have a mortgage, and since he pays all the money he has regardless of whether mortgage rates are 7% or higher. With interest rates soaring this year, there’s actually a decent return they can earn on the extra equity in the property that’s been achieved through the transaction, which wasn’t the case for most of it. of the previous decade. With 10-year Treasury yields around 4%, it is possible to buy relatively low-risk investment-grade corporate bonds with a yield of 5% to 6%. If more income is needed in retirement, it wouldn’t matter much if interest rates continue to rise – they can rely on that interest income no matter where bond prices go from from here.

It’s true that house prices are now falling across most of the country, but outside of a few markets that have boomed the most during the pandemic, prices are still up year over year. The S&P/Case-Shiller National Home Price Index in the US is up 9% year-to-date through July, and more real-time data from Redfin suggests asking prices and selling prices are still close to those from one year to the next. base. Meanwhile, the Vanguard Intermediate-Term Corporate Bond ETF is down 20% over the past year, with longer-term bonds and stocks falling more than that. In a way, choosing to downsize now and invest the proceeds in financial assets plays a kind of trade-off that has been happening between the housing market and financial markets over the past year.

The situation we find ourselves in right now – with house prices still rising significantly over the past few years while bond prices have come down significantly given rising interest rates – is decidedly not which happened in the aftermath of the 2008 financial crisis. Then house prices plunged, crushing the equity balances of older homeowners, and interest rates also plunged in response to rate cuts of the Federal Reserve. The economics of downsizing are much more attractive in late 2022 than they were in the late 2000s to early 2010s.

I am skeptical that changes in house prices and interest rates will lead to a sharp increase in opportunistic downsizing over the next year, as homes are emotional as well as financial assets for many owners. If I’m wrong and there’s suddenly a glut of bigger, more expensive homes on the market with few interested younger buyers, prices could drop significantly from where they are now, reducing the appeal of the downsizing decision.

But if you’re already considering downsizing, or have relatives who find themselves in this situation, you should be encouraged – higher interest rates can cause a lot of pain for some, but for someone considering to downsize, current conditions help more than they hurt.

More other writers at Bloomberg Opinion:

Consumers shocked by stickers are nearing breaking point: Jonathan Levin

Buying a house now wouldn’t be a bad idea: Teresa Ghilarducci

Variable mortgages may never come back: Stephen Mihm

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have an interest in the areas he writes about.

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Leslie M. Gill