When To Sell The Empty Nest

By Daniel Kadlec

If you're an empty nester looking to downsize, don't let the weak housing market stop you. You may be working with less equity today than you had a year ago--but it could be more than you will have a year from now. And swapping your McMansion for something smaller today leaves you less exposed in a falling market.

Say you sell your big home for $600,000 and immediately buy a condo for $300,000, and housing prices drop 10% over the next 12 months, as some economists forecast. In the condo, you would lose just $30,000 on paper; in the house, you would lose $60,000. The condo savings, however, don't include expenses, which you incur whenever you move.

Even so, things are rarely this simple. If you need to take on debt to complete the swap, you may be better off sitting tight because mortgage rates have risen. Moreover, home prices move unevenly. In many markets, big homes are holding up better than small ones--another reason to consider delaying. But not too long. Ultimately, the high and low ends track. By downsizing now, you could sell your McMansion before the decline hits that end of the market.

Price movements can also vary from region to region. Be careful if you're leaving the city for a smaller home in Florida, Arizona or Nevada. Properties in those areas--condominiums especially--have been ground zero for real estate speculation over the past five years. Prices there may drop faster than the national average next year, says Zoltan Pozsar, an economist at Moody's Economy.com

On the other hand, says Pozsar, if you're contemplating a move from either coast to the low-cost Midwest, "it could be a total home run." Home prices have risen just 35% throughout the Midwest since 2000, compared with 90% in the West, 80% in the Northeast and 70% in the South. Having missed the big run-up, the Midwest will probably miss the slump, Pozsar says.

Pulling the trigger on a real estate deal hasn't felt this dicey in a decade. The inventory of unsold homes on the market is at its highest level since the last bust. New homes are selling at a slower pace, and prices have fallen. Buyers are walking away from signed deals (and their deposits) at twice last year's rate.

But the market isn't necessarily as troubled as all that suggests. Interest rates, though up, remain near 40-year lows. The backlog of unsold homes seems to have peaked over the summer. The economy is growing, and the National Association of Realtors boldly predicts that home prices will rebound next year.

Independent economists take a dimmer view, but even if housing prices edge lower over the next few years, the most important question you need to answer is this: Are you truly ready to downsize? It's not easy giving up the place where your kids grew up. "But it's always a profitable decision in a strict financial sense," says Phil Storm, a financial planner in Denver. He argues that living in a house that's too big ties up capital and imposes unnecessary taxes and upkeep costs. "I advise making the move as soon as those bedrooms are empty," Storm says.

Your decision should have little to do with an up or down market. The right time to downsize is whenever you are emotionally ready.

Kadlec's latest book is The Power Years: A User's Guide to the Rest of Your Life