I think this article misses one of the big downsides to downsizing in California (where this article is focused): property tax. In California, property tax is basically based on purchase price. This means even if an owner can make a healthy profit moving to a smaller home, that profit might be gone in 10 years due to the increased property taxes. Even if seniors are interested in downsizing, it might be financially detrimental to do so, and they stay in place, which constrains the supply of "family homes", making them more expensive and basically adds to the housing crisis.

Fewer older homeowners selling is part of what is keeping the inventory of homes historically low and pushing prices ever higher in markets across the US. Empty nesters of this age own more larger homes — three bedrooms or more — than Millennials with kids do.

Dragos said she understands that, as homeowners, theirs are enviable problems. They own an asset that has soared in value, after all.

But as she and her husband sit at their dining table discussing the morbid math — what is left after capital gains taxes, what happens if he dies first, what if she goes before him — she says they see no good options for how to get out from under their home while keeping an acceptable amount of profit from its sale, which they’d like to use to fund their retirement.

This is the problem. People trying to sell large, expensive homes for something smaller and have any appreciable difference in cost. No one is going to sell a 3,000sqft house for a 1,200sqft condo just to break even. They'll just stay in their big homes and the housing market will continue to be fucked.

This is really only an issue right now in high COL areas where people are trying to change homes, not sell second homes for profit.

Most homeowners don’t have to pay capital gains on their home when they sell. Thanks to tax legislation from the ’90s, a gain of up to $250,000 for a single tax filer or $500,000 for a couple filing jointly is exempt from tax.

This is so when someone tries to change homes, they don't lose most of their equity. This exemption only applies to primary residences, so people speculating with homes don't benefit. The issue is that exemption ceiling has not kept pace with the massive inflation in high COL areas. Which further restricts the amount of homes for sale in those areas, driving up prices, etc.

A homeowner who keeps all the profit of a home that sells for $500,000, for example, may find that a condo in their same area, where they can age in place, is $450,000. After calculating realtor fees and closing costs, the profit hardly covers the new purchase, let alone provides any extra income for retirement.

No one will downsize if there's no real benefit. This will freeze the housing market.