Downsizing Homes: Where It Saves and Where It Costs

Homeowners looking to downsize can achieve substantial financial gains, with the average savings reaching $200,000 over a ten-year period. An analysis of approximately 90 major US cities indicates that the decision to trade a larger home for a smaller one is most profitable in the Southern United States, especially in Texas.

However, the financial outcome is highly dependent on the local real estate market. In some cities, downsizing can lead to a net loss. The study compared the costs of four-bedroom homes against two-bedroom homes, accounting for property tax savings, closing costs, and self-storage fees over a decade. While Southern cities dominate the top rankings for savings relative to home value, specific markets in the Midwest and Rustbelt also show positive returns. In contrast, homeowners in Cleveland and Philadelphia may face financial losses if they choose to shrink their square footage.

The financial benefits of downsizing are calculated by analyzing the difference in cost between a four-bedroom home and a two-bedroom home. The analysis factored in median property tax savings over a ten-year period and subtracted typical closing costs and self-storage fees. This methodology was applied to approximately 90 of the country's largest cities to determine the net financial impact.

Nationally, the average homeowner who downsizes saves more than half the cost of a typical American home. The funds released by moving into a smaller property can represent a significant portion of a local home's value. In many markets, the cash realized from the transaction is enough to completely reset a household's financial footing.

The Southern United States is the premier region for downsizing gains. The report identified that 13 of the top 20 cities for downsizing relative to home value are located in the South. This trend is attributed to rising suburban home values and a rapid pace of new home construction in Southern cities compared to other parts of the country.

Dallas Tops the List

Dallas, Texas, ranked number one on the list for downsizing savings. In this market, a typical four-bedroom home costs approximately $614,000, while a typical two-bedroom home costs about $230,000. When factoring in tax savings, closing costs, and storage over ten years, the total savings from downsizing in Dallas amount to nearly $373,000. This figure represents approximately 120% of the price of an average Dallas home.

Regional Economic Factors

The report highlights that home prices and general living costs in many Southern cities are lower than the national average. This economic environment allows the funds freed by downsizing to have a greater impact on a household's budget.

While downsizing is profitable in many areas, it can result in financial losses in specific markets. The analysis identified cities where the cost of selling a larger home and buying a smaller one does not yield a positive return after accounting for taxes and fees.

Losses in Ohio and Pennsylvania

In Cleveland, Ohio, the average downsizer would lose approximately $25,000 over a decade. In Philadelphia, Pennsylvania, the loss is estimated at about $6,000 over the same period. These figures demonstrate that the local real estate market dynamics can negate the expected savings from reduced square footage.

High-Cost California Markets

Expensive California cities such as Irvine and San Jose also present a complex picture. While downsizing in these areas results in significant cash savings, the report notes that this money does not buy as much house as it would in other markets. The purchasing power of the savings is diminished by the high cost of real estate in the region.

The move toward smaller homes is being driven by multiple generations. As millions of baby boomers approach retirement, many are considering moving into smaller, more accessible, and more affordable homes to accommodate their changing needs.

However, the trend is not limited to older adults. Gen Zers and millennials are also increasingly choosing to downsize. For these younger generations, the motivation is often to save money on housing costs and to simplify their lives by living in smaller abodes, including tiny homes. This shift suggests a broader cultural move toward minimizing living expenses and prioritizing lifestyle flexibility over square footage.