Today’s housing market is showing a few signs of perking up, but can be especially frustrating to one group: downsizers.

These are folks who want to move to smaller homes. Some are retiring, some have become empty nesters. Some have tired of the hassle and expense of maintaining large homes. Others want to convert home equity to cash.

In some respects, this looks like a perfect time to downsize. Prices of less-expensive homes have fallen dramatically, and it seems like there are bargains everywhere. Also, prices seem to be falling more slowly, suggesting one could buy a cheaper home without too much worry that its value could fall even further.

But there’s a catch: many experts think prices of higher-end homes still have a good way to fall, perhaps 10% or more. While that may argue for selling now, it has left buyers skittish. So homeowners with bigger, more expensive homes may be stuck with them for some time, unable to free up the cash they need to buy the smaller homes that are so enticing.

Some of these homeowners may be able to support two homes for a time. But this generally requires some combination of having a lot of equity in the larger home and a big enough income to support two mortgages.

One option for people who are not in that situation is to rent out the bigger home to cover expenses, thereby increasing income enough to qualify for a mortgage on the new property. Use the Maximum Mortgage Calculator to figure how much you could borrow based on the best rates uncovered by the shopping tool.

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Before doing this, bone up on the tax rules, described in IRS Publications 527 and 523. Generally, you can escape capital gains tax on a rental property if it was your principal residence for at least two of the five years before the sale. An individual can escape tax on up to $250,000 in gains, couples $500,000.

Most prospective downsizers will probably have to wait until the market for pricier homes stabilizes, hoping for a sweet spot when those homes move faster but prices of cheaper homes have not gone up significantly. That’s not a pie-in-the-sky dream, as few experts think the housing market will boom again anytime soon.

But to be on the safe side, the downsizer should be ready to move quickly. That means using this delay to prepare the current home for sale by painting, improving landscaping and getting repairs and improvements out of the way. Generally, it does not pay to undertake major improvements like adding bedrooms or even redoing the kitchen. An annual survey by Remodeling Magazine shows there’s little chance a major improvement will add as much value as it costs, though you can improve the odds by doing work yourself.

The downsizer-in-waiting can also prepare to move quickly by house hunting now, before the market improves, to settle on prospective neighborhoods. Watch home prices and for-sale listings on sites like and

Finally, use this hiatus to polish your financial profile and improve your credit score so you’ll have the best possible chance of obtaining a mortgage, if you’ll need one, at the lowest rate you can possibly get. Pay down debts such as high-interest credit card balances. Make sure you don’t have more lines of credit than you need.

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