“Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, “100 percent of the time it was better to rent, rather than own.”
Prof Richard Arzaga from Reuters Article
In a recent Reuters article, the author mused that the “New American Dream is Renting to get Rich.” Comments like that should scare the dickens out of anyone counting on their home equity as their primary retirement asset. And the comment has further merit when the writer interviews a Berkeley (CA) professor and he says stuff like the quote above.
But should future and current retirees really be worried? That depends on your assumptions. Historically, tremendous expanses in asset prices – in this case housing – often take much time to digest leading to sagging prices over a long period of time after. Furthermore, there are tons of surveys and data sources out showing that younger people, the ones whom you count on to buy your home when you sell, are not all intent on buying a home too soon.
For various reasons it is obvious why some younger works won’t buy real estate:
- global job opportunities requiring residential flexibility
- recent history of home prices nationally not encouraging
- m0re stringent loan requirements
- higher unemployment among younger people
- fewer workplace benefits which means more out of pocket costs
“But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it’s probably a bad investment for you. It also depends on your job market. If you’re in a one-company town and the company goes down, there goes your job and there goes your home value.”
~Jed Kolko, chief economist at real estate site Trulia (from Reuters article)
Younger workers have different priorities and requirements – no longer do people typically get a job in town and stay in town. Furthermore, the studies done by Richard Florida, and his research showing that the “creative class” of workers, those with good incomes and mobility, tend to gravitate toward “creative centers” such as San Francisco, New York, DC, Seattle and Boston in the US, and Singapore, Hong Kong, London etc globally.
This is further bad news for marketability of homes in distant suburbs. Many of these homes rose in value during the real estate bonanza in the last decade, but changing demographics and younger people desiring to be near the action has greatly diminished the attractiveness of these homes. Furthermore, many baby boomers would also like to be near the action. The demand therefore for apartments and condos in the city – close to theaters, restaurants, and activities – both from mobile Gen Y and downsizing boomers is strong. For example, Cambridge, MA, has enjoyed a strong real estate market for the last 3 years. Briefly in 2008-09 Cambridge had some softness but since then prices have been firm (see my friend Tamela Roche’s monthly newsletter for Cambridge real estate price data HERE).
In contrast, some of clients living in distant suburbs, are still firmly underwater in their home prices by 10-20%. This trend could continue and it means that those who plan to downsize their home in retirement need to weigh their options. House prices in desirable places could continue to rise as homes in relatively unattractive locations could flounder.
If you are considering downsizing, consider consulting with someone that can help you through that process as part of financial planning in retirement. Give us a call, perhaps we can help – or drop a comment in our comment box. And don’t forget to check out our Downsizing Page.
Note: We recommend you seek professional advice before making any large financial decisions. See our disclosures here: WHA Disclosures