When individuals are ageing, they may lose some of their functional abilities. This may have important consequences for their optimal form of housing arrangement. We set up a theoretical model for the optimal choice of housing in the later part of life. In the empirical part of the paper we estimate a multinomial logit model for choice of housing. Four modes of housing are distinguished: ordinary private housing, specially designed private housing, sheltered dwellings, and nursing homes. The model is estimated from a nation-wide Norwegian sample containing all individuals who have had some problems related to functionality. All households not included in the sample reside in ordinary private dwellings. We find a strong impact of weak functional abilities on the choice of housing, but the capacity of the nursing home sector and specially designed dwellings also plays an important role. Moreover, municipality-specific affects are important.