Is 2022 a Good Year to Downsize?

It may be for one big reason.

In today's real estate market, sellers have the clear upper hand. The reason? There's very limited housing inventory on the market, and so the number of buyers wanting to purchase a home exceeds the available supply. That's caused a massive spike in home prices.

To be clear, home values have been up since late 2020. But recently, mortgage rates have been on the rise. And at this point, they're no longer low enough to compensate for sky-high home prices.

If you're thinking of selling your home and buying a comparable one, that may not benefit you so much financially. But if you're looking to downsize, now may be a great time to do it.

Reap those benefits

Let's imagine you have a home that would normally sell for $400,000 that you can command $500,000 for right now. If you replace that home with another property listed for $500,000 that would normally list for $400,000, you won't be up any money. What you gain from the sale of your home, you'll lose by paying a premium for another home.

That may not happen if you downsize, though. Let's imagine you can get $100,000 more for your home today, only you downsize to a smaller space listed for $300,000. It may be that normally, that smaller home would only sell for $250,000. In that case, you're looking at coming out ahead by selling your home for $100,000 more and only paying $50,000 more for a replacement property.

And that's why now could be a good time to downsize. While smaller property values are up as well, you're likely to see less of a spread between what smaller homes would've previously sold for versus what they're selling for today.

Is downsizing right for you?

Downsizing is a great way to lower your housing costs. First of all, not only might your mortgage payment shrink if you get a smaller home, but you might also pay less property tax for owning that property. Your homeowners insurance costs might also drop, and you're apt to spend less money to heat, cool, and maintain a smaller living space than a larger one, assuming that smaller home is in comparable condition to your original one.

That said, downsizing isn't right for everyone. It's one thing to downsize when your children grow up and move out, and you don't need as much space. It's another thing to downsize when your family situation hasn't changed and you're talking about cramming the same number of people into less square footage.

Chances are, you spend a lot of time at home. So you'll need to weigh the savings downsizing will offer you against the impact to your comfort and quality of life.

Also, hanging onto a larger home could give you more options to monetize it. It may be possible, for example, to rent out a portion of a larger home -- say, a finished basement -- to generate some income while retaining more space for your family to enjoy. So before you rush to downsize, it pays to consider some alternatives. But if you do decide to downsize, know that now is a pretty good time to make that move, and that's likely to be the case throughout the year.