Is it Time to Sell Your Home? Will it Help You Get the Retirement You Want?

The real estate market is white hot right now. In some areas of the country homes are selling for millions of dollars over the asking price. Yes, millions over. So, is it time to sell your home and cash out? How will relocating impact your retirement?

Home equity and your retirement

Your home is a pivotal aspect of your retirement – for lifestyle as well as financial reasons.

You want to live in a locale and domicile that suits what you want to be doing in retirement and with whom.

However, your home is also likely one of your most financially valuable assets. And, thinking through how to tap your home equity for retirement and when is critically important.

Popular strategies for housing and using home equity as part of a retirement plan include:

  • Cash out your home equity now to help fund retirement
  • Stay where you are and preserve home equity as a back up plan in case you require long term care
  • Move somewhere that is a better fit for what you want to be doing in retirement
  • Stay put and hope to leave your home to heirs
  • And more…

There are a lot of considerations covered below. However, you can always run scenarios for your home in the NewRetirement Planner. Compare selling now to what you think selling might look like at some point in the future. What happens if you stay put forever?

Or, use the long term care section to see how using home equity to cover a possible long term care need impacts your net worth at your longevity.

How crazy is the real estate market right now?

Homes are selling at record prices – breaking all kinds of records. At least one home recently sold for double the asking price. The house, a modest three bedroom in the Berkeley Hills of California, went on the market for just over $1 million. It sold two weeks later for $2.3 million in cash.

In other areas, it is not uncommon for $2 million homes to go for an extra million and the competition and price increases are as strong for starter homes too. Buyers are offering NBA tickets, cryptocurrency, personal loans, and more to get sellers to choose their offer. It is all bonkers.

According to the S&P Case-Shiller index:

  • The 10-city composite annual increase was 16.4% in May (up from 14.5% in April)
  • The 20-city composite gained 17%, up from 15% last year
  • Phoenix, San Diego and Seattle reported the highest year-over-year gains among the 20 cities in May
  • And, 5 cities in the index (Cleveland, Dallas, Denver, Seattle and Charlotte, North Carolina) saw their all-time highest gains

Why the housing market is so hot right now

Home prices are so high due to various factors. However, the myriad reasons all add up to an economics 101 lesson: strong demand (lots of home buyers) meets weak supply (not many homes for sale).

About the weak supply:

The reasons that the supply of homes has remained low – 40% lower in 2020 than 2019 – include:

New home building has slowed: Home building slowed throughout the pandemic. Some experts estimate that we are short about 3 million homes in the United States and it will take a while for inventory to catch up.

People are staying put: People are staying in their homes – not moving – perhaps due to the pandemic.  

Additionally, older people are staying in their homes longer. Currently, the average length of time people spend in a home is 10 years. It used to be only 7.

Backlog of foreclosures: Another factor may be the federal government’s moratorium on foreclosures. (Homeowners who could not afford to pay their mortgage could request an extended forbearance that has been extended.)

About the strong demand:

The millennials – the largest generation  – are moving into their home buying years.

6 Considerations for selling your home

The allure of selling your home at a record high is strong. However, there are other factors at play.

1. Where do you want to live? Now and in the future?

Many people salivate at the idea of selling their home at a premium. Just remember, you have to live somewhere. And, depending on where you want to live, selling and then re-buying may be too expensive.

That being said, if you want to move and can afford it, then verify the financials, but go for it.

However, try to think not just about where you want to live this year and next, consider the rest of your life.

Here are 15 tips for downsizing for retirement.

2. Your local real estate market

National trends are interesting, but they don’t always reflect what is happening in your current community or where you might want to live.

So, start by understanding the market where you are now and where you want to move.

Zillow, Redfin and Trulia are all good sources for real estate information.

3. Low, but perhaps rising interest rates

Low interest rates are another driver of higher real estate prices. People can afford to pay more for a home if they are paying a lower interest rate on their mortgage.

If interest rates rise, it could depress home prices — an argument for selling now.

4. Taxes

There are a lot of considerations when it comes to taxes and selling your home.

State and local taxes: Every state has some form of property tax, but it varies a lot. If you are moving, it is worthwhile to understand the state and local tax consequences. rates Louisiana as being the best state for property taxes and New Jersey being the worst.

Your tax basis: In many areas, taxes are assessed based on the value of your home when you bought it. In California, if you bought your home for $300,000 25 years ago, your taxes are based on the $300,000 value, not the $2 million it might be valued at now.

Selling your home and giving up your tax basis might be costly.

Taxes on gains from sale of a home: According to TurboTax: “If you owned and lived in the place for 2 of the 5 years before the sale, then up to  $250,000 of the profit is tax-free ($500,000 if you are married and file a joint return).

Anything in excess of this amount is reported as a capital gain on Schedule D of your tax filing.

Mortgage interest deductions: According to Investopedia, very few homeowners actually benefit from mortgage interest deductions and, if they do, the benefit is minimal.

5. More housing inventory may soon be available

The lack of housing inventory that is helping to boost home values may be coming to end for the following reasons. If these trends hold, then housing prices may fall.

The pricing trend may impact your desire to sell now or wait.

A building boom is coming?  Data from the U.S.  Census Bureau indicates that builders are trying to catch up with demand.

Baby boomers may soon age out of the market: Baby boomers currently own about one third of homes in the United States. Over the next decade, millions of boomers will be aging out of their homes. This will result in thousands of additional homes entering the market each year.

Are we at the end of the pandemic? Coronavirus has caused some degree of uncertainty in everyone’s lives. If we can emerge from the pandemic, then more people may begin to relocate.

6. Do you live in (or are you trying to move to) an exurb? A city?

Not all local areas have seen or will see the same kind of price increases.

Exurbs are in: Right now, the “exurbs” are desirable. The Oxford English Dictionary defines exurbs as “a district outside a city, especially in a prosperous area beyond the suburbs.”  These areas have become popular due to lower housing costs and because work from home trends mean that people are no longer needing to report to the office on a daily basis.

Cities are out: We are seeing a rebound back to cities, but during the pandemic people were fleeing metropolitan areas.

So, if you want to maximize cashing out your home, ideally you are moving from an exurb to a city.

Not sure if you should sell? Run what if scenarios!

The NewRetirement Planner is a great way to run scenarios to see the financial implications of buying and selling homes. You can model downsizing, upsizing, second homes, using equity to fund retirement expenses or long term care and more…

You can see the impact of housing scenarios on your net worth, estate value at your longevity, cash flow, tax liabilities and other key metrics.

And, running these types of “what if” scenarios helps you imagine various future possibilities – which may help you determine what you want out of life.

Happy planning!

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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