How Retirees Are Rescuing the Real-Estate Market

The battered housing market is getting some help from an unlikely source: retirees. Baby boomers on the cusp of collecting Social Security are bringing some much-needed vitality to the real-estate sector as they capitalize on reduced prices and low mortgage rates by lining up their next homes a few years early.

Before the crash, older home-buyers were already big players in the real-estate market, and now their influence is growing. According to the National Association of Realtors, people over 55 bought 21 percent of the homes that were sold in 2008, up from 13 percent in 2001. Now, roughly one out of every four baby boomers owns either a vacation home, land, or a rental property in addition to the home that they live in. And some shoppers are looking for transitional homes that they can vacation in now and settle into when they are ready to retire.

"That's a trend that will continue," says NAR's Walter Molony. While many repeat buyers took a breather to rebuild the savings and home equity they lost over the past couple of years, Molony expects retirees to buy their way back into the market as the economy recovers. "This can be a terrific time to buy that retirement home, but buyers have to have the resources to float [multiple homes] for a while," says Rich Arzaga, a San Ramon, Calif., financial planner. He points out that the carrying costs of holding two properties can be unexpectedly high, and include the costs of finding tenants, making repairs, and managing the property.

Baby-boom retirees and pre-retirees who are in the market seem to be considering the effort and expense involved in managing a property. They are looking for something different their second and third time around. They want single-story houses, smaller floor plans, and some amenities aimed at older home purchasers, such as nonslip floors, larger medicine cabinets, and lower kitchen cabinets, according to recent surveys by the National Association of Home Builders and the MetLife Mature Market Institute. They don't seem to care as much as builders for much-hyped universal design features like lever-handle doorknobs and wider doors and hallways, perhaps because they are concerned about costs, or in typical baby-boomer fashion, they are resistant to seeing themselves as aged or infirm. That may also be why today's newest retirees also seem less likely to prefer age-restricted communities than their already-retired predecessors.

Pre-retirees looking at the housing market face more challenges in financing their purchases than they did a few years ago. Then, many buyers bought second homes with cash-out refinances of their primary homes. Now, with less equity available in their primary homes, they are seeking mortgages for their second homes. Second-home mortgages are more broadly available than they were a decade ago, but do require high credit scores and down payments as high as 20 percent.

People with significant assets in their individual retirement accounts can tap that cash to invest in a retirement home, but there are many complexities involved. They have to establish a self-directed IRA with an independent trust company such as Pensco Trust and the Entrust Group. They have to treat the home as an investment, so they can't use it as a vacation home or rent it out at below-market rates to friends and relatives. When it is time to retire and they want to start using the home, they have to pull it out of the IRA, and if it's been held in a tax-deductible IRA, that would force them to pay income taxes on the entire value of the house. That makes it far preferable to use a Roth IRA (from which withdrawals will not be taxed) to buy real estate.

Older investors who have been buying into the market may turn into net sellers once they actually retire, as it can eat up a lot of that monthly Social Security check to run two homes. Arzaga tells his clients that once they've made the decision to move, they should put their older homes on the market and not wait for better prices that could be years down the road. Selling sooner rather than later could protect their cash flow and provide better housing deals that could pull a younger generation of buyers into the market.