There are many reasons for wanting to buy a smaller home.  The kids have moved out and 5 bedrooms are no longer needed.  The current home or yard have become too much to clean & maintain.  Baby-boomers are preparing for retirement. 

Regardless of why you are considering buying a smaller home, how should you approach this situation in the current market?  It depends upon your timing, relative home prices and what home values are doing where you next wish to live.

If you know you are going to sell & buy in the next year or two and the current value of your desired new home is considerably less than your current home, then you should sell as soon as is feasible for you.  This is because as prices decline, the values of the homes become closer which results in a net loss in equity. 

If everything drops 10% in value over the next year, then the value of a current $600,000 home drops to $540,000 and the new smaller home that is today worth $400,000 drops to $360,000.  The difference in prices changed from $200,000 to $180,000 and that $20,000 change in the spread is a net loss to the seller.

The situation can be far more dramatic for home owners who are considering selling and moving to an area of the country where prices are flat or perhaps even rising.  Say you want to retire in beautiful Charlotte, North Carolina where you can buy your dream home today for $300,000.  If homes there continue to appreciate over the next year, say 5% or $15,000, while the home here depreciates by $60,000, the real loss in net worth is $75,000 for waiting one year to retire & sell. 

This can be a huge hit to a baby-boomer's retirement nest egg.  Thus, if you are considering selling your current home & buying a less expensive home in a depreciating market, it is best to do so sooner than later. 

However, if your dream smaller home happens to be more expensive than your current home, and is located in an area which is also experiencing declining prices, then you do not need to be in a rush to sell & buy quickly.  There are two benefits to taking your time.  Firstly, the price difference between the homes would be narrowing, meaning that ‘net loss' discussed above becomes a ‘net gain'.  Secondly, waiting will allow buyers to purchase at a lower price which will result in slightly lower buying expenses and lower property taxes.