As a retiree, it’s essential to carefully evaluate the financial factors associated with rising costs, increased life expectancy, expensive healthcare, and volatile markets. While doing so, don’t neglect to analyze the numbers tied to your most significant investment: your home.
If you currently own a home in the United States, you might be grappling with a crucial question—should you cash in on your property, invest the funds, and opt for renting?
Presently, the average house price stands at approximately $360,000. This figure represents a staggering one-third increase since just a few years ago, pre-pandemic. Although the lockdowns, panic, government stimulus checks, and historically low mortgage rates are now part of history, the exorbitant pricing still remains—at least for the time being.
According to analysts at Realtor.com (which is owned by News Corp), it is more cost-effective to rent rather than buy an affordable “starter home” in 45 out of the 50 major metropolitan areas in the U.S. The Atlanta Fed adds that national housing affordability for retirees is abysmal, mirroring levels seen during the significant housing bubble of 2006 and 2007.
Data from federal sources also demonstrate a worrisome trend for seniors. The average house price in the country is now nearly 17 times higher than the average annual Social Security benefit. To put this into perspective, this ratio surpasses the levels observed in August 2008, just before the collapse of Lehman Brothers when the ratio was 15 times.
Take a moment to observe our straightforward chart above. It depicts the comparison between average U.S. home prices and average U.S. rents from 1987 to the present day (indexed to 100). It becomes evident that house prices are currently soaring in relation to rents—an echo reminiscent of the housing market conditions in 2006 and 2007.
When it comes to planning for retirement, it is crucial to adapt and consider alternatives—such as renting—as a reasonable and financially viable option. By carefully analyzing the economic landscape and making informed decisions, retirees can align their future housing arrangements with their financial goals and create a stable path forward.
The Value of Owning a Home: A Long-Term Perspective
Owning a house comes with economic benefits, one of which is the freedom from paying rent. However, there may be certain situations where it makes more financial sense for seniors to rent rather than own their homes.
Senior homeowners often believe that high interest rates on new mortgages do not affect them. This is because they either have a mortgage with a lower, older rate or have completely paid off their home loan. However, if they decide to sell their property, chances are they will be selling to someone who requires a mortgage.
It is important to consider that borrowing costs can significantly impact real estate prices. By holding on to their properties now, seniors may miss out on potential gains that may not occur again in the future. For instance, after the housing peak in 2006, it took a full decade for prices to fully recover. Those who sold during the peak were able to take advantage of excellent rates when purchasing lifetime annuities or investing in stocks and bonds, which showed an overall increase of about 80% over the same period.
There is an alternative option for seniors who no longer wish to own a home. In the stock market, there are numerous real estate trusts that act as publicly traded landlords. By selling their homes, seniors can easily invest in these trusts with just a click of a mouse.
(Incidentally, there is also an exchange-traded fund called Armada’s Residential REIT ETF HAUS, -0.33% that specializes in residential REITs. However, it should be noted that this fund also includes investments in companies involved in “manufactured home” parks and senior living facilities, making up about 25% of the overall fund.)
The decision to sell or continue holding onto a property ultimately depends on individual circumstances and financial goals. It is essential to carefully evaluate the options available and make an informed choice.
The Benefits of Owning a Home in Retirement
For each person, the math will be different. And there are countless questions they have to ask.
Retirement is a time filled with decisions and uncertainties. Where do you want to live? How much would you get if you sold your home? How much tax would you have to pay? These are just some of the many questions that retirees face. One of the key decisions is whether to own or rent a home in retirement.
The Case Against Renting
Owning a home in retirement is often seen as the conventional wisdom. Financial planner, Malcolm Ethridge, strongly advises against renting if possible. According to Ethridge, having fixed costs during retirement is crucial to match the fixed income retirees receive. By choosing to rent, individuals surrender control over their housing costs to their landlords. Renters are at the mercy of their landlords, who can increase rent prices every year. This makes it difficult to plan and allocate funds for other expenses in their monthly budget.
The Rise of Rents
Historical data shows that nationwide rents have consistently increased since the early 1980s. Even during the global financial crisis, rents continued to rise with only a brief 12-month period of decline (0.1%). This statistic highlights the challenge that renters face when it comes to managing their monthly expenses.
The Ideal Scenario
Adam Wojtkowski, an advisor at Copper Beech Wealth Management, believes that owning a home with no mortgage in retirement is the best-case scenario. He explains that housing is typically the highest monthly expense for most individuals. Having no mortgage payments in retirement simplifies retirement income planning and allows everything to “fall into place.”
While there are exceptions to this ideal scenario, entering retirement without a mortgage provides retirees with greater financial stability and freedom.
The Pros and Cons of Renting vs. Owning a Home
Renting or owning a home is a decision that comes with its own set of advantages and disadvantages. While renting provides flexibility and freedom from maintenance responsibilities, owning a home allows you to build equity for your retirement years. Here, we will explore both sides of the coin.
Renting: A Viable Solution at Present
Renting may be a viable solution in today’s housing market, where costs are high and uncertain. It is difficult to predict future housing market trends, so waiting for a crash might leave you waiting indefinitely. Renting allows you to avoid the risks associated with fluctuating real estate prices.
Capturing Equity in Your Home
Selling your home when its value is peaking and choosing to rent can be a smart financial move. The proceeds from the sale can boost your retirement funds significantly. This allows you to enjoy your golden years without the need for a reverse mortgage or selling your property when it might be more challenging.
Flexibility and Freedom
One of the advantages of renting is the flexibility it provides. You have the freedom to move closer to your children or grandchildren without the burden of selling a property. Renting offers you the opportunity to adapt to changes in your personal circumstances more easily.
No Maintenance Hassles
One aspect that experienced property owners appreciate about renting is the alleviation of maintenance responsibilities. When you rent, the landlord becomes responsible for repairs and maintenance tasks. This means that you no longer have to worry about fixing a broken dishwasher or a leaky roof.
While renting comes with its advantages, it’s essential to consider the potential drawbacks as well. Assessing your personal circumstances and financial goals is crucial before making a decision. Ultimately, the choice between renting and homeownership depends on individual preferences and long-term plans.
Retiring Without the Hassles of Homeownership
Retirement brings a new set of priorities for many individuals, and one common concern is the burden of maintaining a home. Avid gardeners no longer want to spend their days mowing lawns and shoveling snow. Instead, they seek a simpler lifestyle that allows them to enjoy their retirement to the fullest.
Planners such as Covington Alsina and Wojtkowski propose a feasible alternative to selling and renting: downsizing. By downsizing, retirees can free up capital, particularly in today’s booming housing market, while avoiding the risks associated with rising rental costs.
It is worth noting that this trend is gaining popularity among baby boomers. Many are opting for smaller properties that require minimal upkeep, providing them with more time and financial freedom in retirement.
The story of Vincent Nobile serves as a prime example. Widowed and in his eighties, he chose to rent a cozy cottage on a peaceful New England sound. He expressed immense gratification for not having to worry about common issues like maintenance, property taxes, or even appliance repairs. Vincent eventually relocated to Boston, where he rented an apartment in the city. This decision brought him great satisfaction, as he no longer had to endure long drives or deal with the responsibilities of homeownership.
When asked if he ever considered owning a home again, Vincent simply shook his head and shared a hearty laugh. The return on his investments provided him and his heirs with financial security without the hassles that come with owning property.
In conclusion, retiring without the burdens of homeownership has become a popular aspiration among retirees. Downsizing offers a practical solution for those looking to simplify their lives and maximize their enjoyment during retirement. By eliminating the responsibilities of maintaining a home, retirees can focus on pursuing their passions and embracing the freedom that comes with this new chapter of life.
