I Downsized for Retirement and Regret It: Be Aware of These 6 Pitfalls

Andrew Lisa  Updated Thu, July 27, 2023

Generations of Americans have leveraged their homes to fulfill their retirement dreams by downsizing.

Buy a house fit for a family when you have one and build equity over the years. When the nest empties and retirement nears, sell it to buy something smaller, cheaper and more manageable, and use the difference to finance your glorious golden years.  Downsizing can come with hidden financial and emotional costs, however. It can also diminish both your nest egg and your peace of mind. Here are some examples of downsizing regrets and how to avoid them.

In the Post-Pandemic Era, Even Small Houses Come With Big Price Tags

In the 2010s, annual home appreciation reached a high of 8.9% in 2013 but typically hovered around 5% to 6% per year. Then, COVID ushered in the era of unaffordability.

According to Freddie Mac, prices rose by 11.3% in 2020, 17.8% in 2021 and 6.7% in 2022.

It’s good to sell when prices are high, but retirees looking to downsize will then have to buy in an under-inventoried housing market with a median sale price of $416,100, according to the St. Louis Fed. According to Money.com, prices rose fastest and highest in the Sun Belt, where retirees have flocked for generations.

Borrowing Is Burdensome

Some retirees might earn enough from the sale to buy their smaller home outright, but because of today’s sky-high prices, many will have to take out mortgages to avoid being house rich and cash poor. With rates near 7%, home loans haven’t been this expensive since 2002.

High Prices Could Mean High Taxes

Profits of up to $250,000 for individuals and $500,000 for joint filers are exempt from capital gains taxes. Those are fairly easy thresholds to meet in a normal housing market, but today’s downsizers are selling near the market’s peak, and if they breach those limits, they could owe as much as 20% on the profit.

Real Estate Transactions Aren’t Cheap

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