I think they did understand that. They expected their home to appreciate at about the same rate as the apartments they wanted to downsize into. If, while retirement planning, their home was worth $300k and nearby acceptable condos were selling for $200k, then it's entirely reasonable (though in retrospect wrong) for them to look at the market and believe that this should mean that no matter how housing prices change they should always be able to sell their more-valuable house for a less-valuable condo.
What happened here isn't that they got blindsided by their home not appreciating fast enough to outstrip local condos, what appears to have happened is that the local housing market now values those condos higher than it does their detached home. That's a pretty fundamental cultural shift that I can't blame them for not predicting 20 years ago.
> what appears to have happened is that the local housing market now values those condos higher than it does their detached home.
I think it is even more benign: they are trying to stay in the same area and in their area (likely sparsely populated, given their 2-acre lot) the available condos are giant 4-level new developments that cost a lot.
They can still downsize, just need to move further away from where they live today. My 2c.
I think this is basically the heart of the matter. Given the large-lot neighborhood they're used to, finding a condo that's going to feel "comfortable" to them is hard enough to begin with. Then, factor in the accessibility issues like finding a one-level, 2-bedroom condo with no steps, no multi-step front stoop, and preferably with a no-step shower and a garage: you've narrowed the market dramatically. You're basically in "retirement community" territory, which is significantly more expensive per square foot than SFH, not less. Having just been through this, it means locating somewhere you swore you'd never live and sticking out like a sore thumb as a senior in a "starter" community.
What happened here isn't that they got blindsided by their home not appreciating fast enough to outstrip local condos, what appears to have happened is that the local housing market now values those condos higher than it does their detached home. That's a pretty fundamental cultural shift that I can't blame them for not predicting 20 years ago.