The Baby Boomer cohort has been one of our most active client demographics when it comes to real estate activity. We’ve recently advised a number of clients through downsizes, state migrations, or vacation home planning. In this article, we’ll share some insights on some of the trends we’re seeing and what’s prompting the movement.
Operating from a position of strength
Baby Boomers are in a unique position to take advantage of certain aspects of the real estate market right now. For starters, many of them have very low debt levels. Mortgage balances on primary residences are either low or paid off. They don’t have car loans, student debt, or much credit card debt. In addition, they are benefitting from strong investment performance and increased social security payouts. Lastly, and perhaps most importantly, because they’ve owned their homes for so long, they’re big beneficiaries from the rise in home prices.
So when it comes to the pool of real estate participants, Baby Boomers are in better shape than most. They can sell their existing homes for a pretty penny. And they then have the means to purchase a new home, or a second home if they want. Data last year showed that Baby Boomers made up 39% of home purchases, a record, and a number of them are paying all cash. This lines up with the trends we’re seeing ourselves from our Baby Boomer clientele.
Trends we’re seeing
The biggest trend we’re seeing right now is twofold: first, there is a general downsizing going on where Boomers are selling the primary residence that their kids grew up in. Second, they are migrating to lower cost of living areas, either through reduced state taxes or more affordable housing. In one example a client sold their primary residence in a high tax state and purchased a small condo in Florida.
Florida, a state with no income tax, offers a major incentive to retirees who are living off of interest income and retirement distributions. A couple living in New York and earning $100,000 per year in interest income may pay upwards of $10,000 in state taxes on such income. If those same earnings take place in Florida, they will pay no such state tax (interest is still taxed at the federal level).
The same holds true for Required Minimum Distributions (RMDs) from IRA accounts. A $100,000 RMD from an IRA account in New York may trigger $10,000 worth of taxes. That same distribution occurring for a Florida resident will not result in any state taxes owed. The tax ramifications of a relocation is an important consideration.
HOAs and Insurance headaches
A coastal client loved the vacation home they owned but had grown tired of the ever increasing insurance and HOA costs. Taking advantage of a strong sellers market, they decided to sell the property and move just a few blocks inland. The move resulted in yearly savings of $15,000 after accounting for the reduced HOA and insurance cost. In addition, they were able to buy a bigger place for less money. The difference in the sale price and their new purchase price meant they had funds left over to do renovations and home improvements.
We’re seeing similar trends in Florida, where a couple is deciding to cash out of their vacation home while the market is hot. They don’t know when they’ll buy their next place yet, but they plan to move closer to their grandchildren. In the meantime, they’ll earn 5% in interest on a seven figure sum from treasury bills, resulting in substantial interest income in the months ahead. We’re seeing a lot of mix-matching in Florida. Some clients are migrating there for lower taxes and warm weather. Others, who have been there for a while, are generally thinking its a good time to cash out.
Beating the rush
A common refrain we hear from Baby Boomer clients who are in the real estate market right now is why wait? Most plan to sell their homes at some point in the next five to ten years and feel they might as well do it now. Home prices are very high, benefitting sellers. And the idea of moving and packing up your whole life sounds a lot less daunting at age 65 than 75.
Furthermore, from a fundamental perspective, many Boomers own homes that share similar characteristics: they were built around the same time with the same floor plans and same square footage. So listing your house today could mean you face less competition for the characteristics that make your home unique.
So if you’re considering selling your home or buying a new home, be sure to reach out to us and keep us in the loop.
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