McMansions and Retirement
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An article at RealEstateJournal.com (Slowing Sales, Baby Boomers Spur a Glut of McMansions), speaks to the growing trend away from “[tag]McMansion[/tag]-style” homes and toward smaller, more [tag]efficient homes[/tag]. The article cites problems faced by several families in selling their large homes recently and paints a rather bleak picture of the factors coming together that could put a serious dent in [tag]baby-boomers[/tag] plans for [tag]retirement[/tag]:
Now, some boomers in their late 50s are counting on selling their huge houses to help fund retirement. Yet a number of factors are weighing down demand. With the rise in home heating and cooling costs, McMansions are increasingly expensive to maintain. Nationwide, electricity rates have risen 12% over the past three years, while the price of natural gas for heating has risen 43% in the same period, according to the U.S. Energy Information Administration. That means it can cost $5,000 a year or more to heat and cool a 5,000-square-foot house in a city such as Farmington, Conn., according to Connecticut Light & Power Co.
The overall slump in the housing market also is crimping big-home sales. The volume of newly built homes sold fell 11.2% in the first four months of the year from a year ago, while sales of existing houses fell 5.7%, says the National Association of Home Builders and the National Association of Realtors. Yesterday, one of the biggest home builders, KB Home, cut its earnings outlook for the year, citing declining demand. Bruce Karatz, chairman and chief executive, said demand has fallen “largely due to a sharp reduction of speculative purchases and an oversupply in new and resale inventory.”
Meantime, the jump in interest rates has put the cost of a big house out of more people’s reach. With 30-year mortgages at 6.2% yesterday, a $700,000 loan costs about $4,300 a month, up from $3,900 when rates were 5.28% in June 2003, according to Bankrate.com.
Downsizing is the old-fashioned way to tap into home equity to help fund retirement. During the recent housing boom, many families stretched their budgets to buy the biggest home possible, partly in hopes of capturing big equity gains for retirement.
Last week, the Wall Street Journal’s Jonathan Clements wrote an excellent column challenging the wisdom of this strategy. He noted that while household spending on food, clothing and many other items had fallen steadily over the last several decades, Americans still had a negative [tag]savings rate[/tag] due largely to sharply higher spending in two areas: [tag]transportation[/tag] and [tag]housing[/tag]. Again, the notion of buying the biggest and best, rather than what is actually needed:
Social tagging: Reality Retirement PlanningBut houses appreciate over time, so shouldn’t you buy the largest home possible?
That might have been true during the recent housing boom — but it isn’t likely to be true over the long run. Since 1975, home-price appreciation has been modest, averaging just two percentage points a year above inflation.
Admittedly, you could goose your home’s return with the leverage from a [tag]mortgage[/tag]. You also, however, have to factor in the mortgage’s cost, plus all the other [tag]expenses of homeownership[/tag], including maintenance, property taxes and insurance. The bottom line: Once you deduct those costs, you could probably amass far more wealth by purchasing a smaller home and then sinking the extra money into your [tag]401(k) plan[/tag].
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