During our journey through Lafayette real estate sales and in the broader Lamorinda and surrounding real estate communities, we frequently encounter clients who are seeking to “downsize” in order to help fund their retirement. With kids off to college or in the workforce, they’ve decided that they no longer need the large home. In fact, according to an April 2010 study conducted by The Society of Actuaries, approximately 20% of all future retirees plan on utilizing the “trade down” housing strategy as they embark upon retirement. The problem is that it is getting MUCH harder to effectively down-size from larger homes while staying in the same market area.
The Joint Center for Housing Studies at Harvard University released a study showing that while mobility has slowed across all age groups during the real estate bust, “mobility rates among seniors have posted the sharpest drop.” Trade-downs in March comprised about 8% of total home sales. That is down from 12% in October 2008, which was the first year when historical data was tracked for this type of transaction.
The reason for this trend is due to the disparate rates of price decompression in the real estate marketplace, and readily apparent in the Lafayette real estate market, as well as our surrounding communities. The upper end of the market is where many 50-60+ year olds have “graduated” over the long ride up in real estate valuations, yet it is the the hardest hit in the present market. Federal and State housing supports have helped the “lower end”, sub-$1M segment of our market. As a result, demand has been stronger and therefore prices firmer in this segment. Also, it is generally a more affordable price range with greater inherent demand characteristics. It is the segment that many “empty nesters” target for downsizing, yet the price gap has compressed so much that it sometimes does not make sense to make the move without moving out of the market area.
Compounding the issue, people took an enormous amount of money out of their homes during the bubble—$358 billion in the peak year of 2005 alone, according to Goldman Sachs. The “cash-out” refinancings raised mortgage obligations sharply. In combination with the upper-end price decline, literally trillions of dollars in home equity has disintegrated, making it more challenging for empty nesters to downsize.
We have observed this issue with “empty-nesters”, and have often recommended that they consider a move to one of the many nearby communities where there is a much more profound differential to Lafayette or Orinda real estate market valuations. Our clients have found wonderful alternatives to these two communities in Walnut Creek and even by extending their search slightly south to Alamo where there has been more supply than demand, and therefore lower prices. For those who are more adventurous and willing to move to “second home” communities such as Grass Valley, Palm Desert, or even out-of-state to communities such as Bend, OR or Scottsdale, AZ — the differentials to our market are enormous and the values are MUCH more compelling. There are many viable options available for those seeking to trade down.
