Acton Real Estate Blog – Downsizing – Waiting Can be Costly

By Victor Normand
Published: May 2012

Since 2005, single family home prices in Acton have declined by an average of 9.6%.  A typical home assessed at $500,000 in 2005 would today be valued at $452,000.

No one likes to see their net worth decline so significantly, and since the loss is only on paper until you sell, the inclination is to wait for prices to return to their previous levels.  For many, like those with children in school, waiting for the housing market to improve coincides with other long term plans.  But, if the need and desire to downsize exists today, waiting can be costly.

Housing appreciation over the past 40 years has increased at a rate higher than the rate of inflation.  The appreciation of home values in Massachusetts over the past 40 years has been approximately 2.3% annually, above the general rate of inflation.  This percentage increase is tied to the rate of income growth in the economy.

It is generally assumed that with higher incomes homebuyer’s are willing to pay more for housing.  This relationship has been altered during certain periods, most recently during the “sub-prime lending” induced housing bubble and at other times when assumptions about ever increasing home values uncoupled prices from income.

Nationally, inflation over the past three years has averaged 1.4%. In Massachusetts, personal income growth over the past three years has averages less than 1%. While it is likely that inflation will rise and incomes will increase, the short term outlook is for only moderate appreciation in home values over the next three years.

Assuming that home prices have bottomed out and using the recent trend in inflation and income, the $452,000 home in our example will appreciate to approximately $483,000 in three years, an increase of $31,000.   But the incremental costs of owning that un-needed larger home would have been $26,250, off-setting most of the gain.

Also, the price of that condo you would have downsized to will appreciate from $225,000 to $240,000.  By waiting three years from now to downsize, you will have to pay $15,000 more for your downsized home.  And, you will have lost out on about $10,000 in interest income on the excess proceeds from the sale of the big house ($227,000 invested in CD’s at 1.5%).

So, in the end, by deferring plans to downsize, you would have had a small gain on the delayed sale of the big house, but lost out when purchasing the downsized home and forgone some interest income, all to the net cost of about $20,000. No one can predict the future with certainty, but a look to the past can inform today’s decisions.