Should Older Americans Roll Their Equity Into a Purchase or Rent and Invest?

Homeownership in the United States has been the cornerstone of personal finance for the better part of 50 years.  As the Baby Boomer generation faces choices about downsizing their living quarters with the prospect of either full or partial retirement on the horizon, the decision to re-invest the proceeds of a McMansion to purchase a smaller residence may not be the wisest.  Should the concept of homeownership be diminished or eliminated when planning for retirement living?

Looking at the past 30 years of the value of a single family home in California from 1980 to 2010, the average price appreciation over that time was 3.6% per year according to public data.  If timed correctly to sell the home at the peak of the market before 2007, the annualized average price growth would be just over 6.5%.  Timing is everything, isn’t it?

If a Boomer downsizes and invests their equity into the down payment or entire purchase price, does the investment alternative of that capital make more sense in the market and alternatively choose to rent?  If you look at the down payment of 20% invested invested in the Dow Jones Index, the value of the portfolio would far exceed the numeric value of the house during the same time.  While returns in the stock market and housing market may have vascillated greatly over the last 5 or 6 years, the 20+ year investment return prospects on appreciation have historically been better in the stock market.


Even taking a shorter-term view,  Baby Boomers can lock in today roughly 3% on a ten year US Treasury Bond that provides a triple A (AAA) rated investment.  While it is possible that this rating maybe in jeopardy with the debt ceiling debate drama, the yield on treasuries is bound to rise over time and still provide one of the safest investments in the world.  Captial preservation in retirement is at the top of everyone’s agenda.

If an average investor wants corporate bonds or a stock with a higher dividend, it’s possible to find that in today’s market along with an elevated risk profile for that investment.  Given the current economic outlook, it’s reasonable to also expect that interest rates are going to rise providing higher returns on both certificates of deposit and bonds depending on the duration.  The best part about these investments rather than housing is that they provide instant liquidity and provide varying degrees of principal protection unlike a home.  Between mortgage fees and closing costs, there are substantial upfront costs to access home equity versus more liquid investments in the market place.

Besides rolling the net equity from the sale of their homes, Boomers may choose to invest some or all of the proceeds from the sale of their home into new business ventures.  That investment not only may rovide a greater return that home ownership but maybe the catalyst for continued or new personal wealth along with benefits to community economic development.


Does this logic mean that Boomers should not roll their equity into a smaller residence and enjoy the similar, albeit smaller benefits of homeownership?   No.  The choice for owning a home is highly personal and individualized.  Many people that have been homeowners for many years may not like to relinquish control to a landlord while others may relish at the prospect that they don’t have to deal with issues that they may have dealt with for many years.  Others may continue to reap benefits from the deduction on property taxes and the home mortgage interest expense deduction well into their latter year through homeownership.   It’s too early to tell whether the discussions on tax policy will play into this decision but there are some compelling tax benefits for owning a home today.

While the own or rent decision is driven highly by emotion, retiring Boomers should consider taking a hard look at the black and white economics before making a re-investment decision on a smaller home.

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