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Looking to shed some square footage? Read on to see why this may not be the best year to do it.
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You may be at a point in life when you’re ready to downsize your home. Perhaps your kids have grown up and abandoned the nest, leaving you with lots of extra space you don’t need. Or it could be that you’re struggling to keep up with the costs of a larger home and need a dose of financial relief.
Generally speaking, there’s a lot to be gained by downsizing. But you may find that buying another home in 2023 is a pretty big challenge. Here’s why.
1. You might have to compromise on your new space
These days, the U.S. housing market is sorely lacking in inventory. As of the end of March, there were only 980,000 available homes for sale, according to the National Association of Realtors. That represents a mere 2.6-month supply of homes, which is well below the four- to six-month supply a more typical housing market might have.
Because there just aren’t a lot of homes for sale right now, you might end up struggling to find a suitable living space if you downsize. You might, for example, want to buy a condo in a housing community with a swimming pool, gym, and tennis court. But there may not be such a home available in your target price range right now.
2. You might get stuck with a higher mortgage rate
You may be able to sell your home and walk away with enough money to cover the cost of a smaller one in full, thereby avoiding a mortgage. But that’s not guaranteed to happen.
You may end up having to borrow money to finance a smaller home. And that could mean getting stuck with a higher mortgage rate than what you’re paying now.
As of late April, the average interest rate on a 30-year mortgage was 6.39%, according to Freddie Mac. But what if your current mortgage has you paying just 3.75%? While you might save some money by virtue of signing a smaller mortgage, your savings might be limited due to signing that loan at a much higher interest rate.
Should you downsize in 2023?
If you think you’ll be able to buy a smaller home outright based on the profits from the sale of your current home, then you may want to move forward with plans to downsize. Say your home has appreciated a lot in value and could reasonably sell for $850,000. If you owe $400,000 on your mortgage but are looking at homes in the $250,000 to $300,000 range, then you might easily manage to buy a home in cash once your sale is complete.
Otherwise, crunch the numbers to make sure downsizing makes sense right now given today’s mortgage rates. Also, try scoping out the market to make sure there are at least some properties available that appeal to you. If that’s not the case, then you may want to wait to downsize until housing inventory picks up.
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