why consider home value as part of net worth?

[shamelessHedon]

This has never made sense to me. If I'm living in my house, any value is irrelevant until and unless I sell.

What am I not grasping?

I even think this way about my rental. It has a "value" to me of the monthly positive cashlow alone, until I have a signed sales contract.

Maybe I think this way because real estate here is still very slow. Slow enough that if you are banking on selling your home to access its value, you are probably in for a long wait. Devastating for some.

[Eric]

Nothing has any value until you sell it.  Stocks, real estate, gold bars, whatever.

[JessieImproved]

My home's value is important to me because I don't plan to live in it during retirement.  My post-retirement home will likely cost much less (mostly because of area), so I'll be leveraging the equity in my current home to help pay for it.

[Spork]

As mentioned above: it depends on your plan.  If your plan is "and then move to low cost of living area with very small house" ... including it could make sense.

I keep several sets of stats.  One is "net worth" and includes the house ... but I in no way use this in figuring retirement date.  I use it more as a big picture scorecard.  That way I can see that a big chunk of money moved from "non-tax advantaged funds" to "house".  I can tell at a glance it was (more or less) an even trade.  It may reduce "time to retirement" by taking money out of the funds... but it doesn't reduce net worth.  Of course, if the real estate market plummets, it *does* ... but that would also be a easily reflected on the net worth graph.  You'd see net worth go down, but only the "real estate assets" ... not the other assets.

[Gray Matter]

The equity in your home is part of your net worth, as are other assets (even depreciating ones like cars, furniture, etc.)  So when calculating net worth, there it is.  That said, I don't count it when I think about retirement.  It's not an asset I want to tap for retirement, and even if I downsized in terms of size, the cost may be the same if I'm buying into a retirement community (unlikely unless I undergo a major personality shift, but still).

[Random]

As others have said, your equity should be part of your net worth, but should not figure in your retirement stash calcs, unless you plan to move to a less expensive market and can take some of your equity and move it into your investment portfolio.  Another "retirement" use of house equity could be using is for a reverse mortgage late in life as a contingency.

When I am doing "what if" scenarios with my wife, we run the "move to a new location and put $200k in the bank" scenario as a plausible way to think about when to pull the trigger.

[marty998]

Well, if you didn't own the house you would be paying rent wouldn't you? So equity is the net present value of not paying rent?

Might make sense where you are. Sydney house prices bear no relationship to any earthly Financial theory.

[chasesfish]

Well, if you didn't own the house you would be paying rent wouldn't you? So equity is the net present value of not paying rent?

Might make sense where you are. Sydney house prices bear no relationship to any earthly Financial theory.

Maybe true, but you also no longer pay property taxes in the US.

One of my coworker has a nice free and clear house, but pays 13k/yr in property taxes.  When he retires, he can move to a much lower cost of living area and rent a place for what his property taxes cost and live off the invested house value ~ 950k.  Not a large place, but he enjoys a very short commute.

[shamelessHedon]

I think that I consider other items to be functional as assets because I could dispose of them in fairly short order and without upsetting the apple cart too much.

[odput]

Like Spork, I also keep 2 separate values, one including house value and one without.  I use the number without the house value for all my planning, progress tracking etc. because I have a very difficult time making my plans based on "current value estimates" (as Eric said, nothing is worth anything until you sell it, and it may come nowhere close to what the estimated value is).  I basically am considering the value of my houses (I also have a rental that I do NOT include the value while planning, but do include the cashflow as income) as another layer of safety in the plan.

But as many have already alluded to, and answering your title question: by definition, net worth is net assets minus net liabilities, so it must be included if you are looking for true net worth.  I find other numbers much more useful though

[hybrid]

Perhaps you are having trouble separating the notion of liquid and illiquid assets.  A gold bar can be turned into cash readily, a home you are living in cannot.

Nevertheless, your home has positive value (hopefully!) and it should be factored in, even if you never cash out that illiquid asset.  I'll give you an example of why it should be counted.  In January 2008 I lived in a house with significant net worth, though mostly illiquid.  When we moved that untappable net worth suddenly became liquid and a large chunk of our newly liquid assets went into the next house, but not all of it.  Although moving happens infrequently for most people, eventually every asset becomes liquid (even if part of an estate for your benefactors, as was the house we ultimately purchased).

[shamelessHedon]

I appreciate it!

I struggle.with the idea of selling when we move. It is probably silly but I'm attached to this (too big) house. I'm working on letting go.

[kkbmustang]

My home's value is important to me because I don't plan to live in it during retirement.  My post-retirement home will likely cost much less (mostly because of area), so I'll be leveraging the equity in my current home to help pay for it.

+1

[blue mutant]

Somewhat tangential but keeping in mind the principal being paid down in any given month should help calculate your savings rate (or rate of increase in net worth).

[Abe]

How do you calculate the house value for net worth?
Is it (price paid) - (prinicipal left) - (total interest paid during term of mortgage) ?

[medinaj2160]

How do you calculate the house value for net worth?
Is it (price paid) - (prinicipal left) - (total interest paid during term of mortgage) ?

Value of your house - how much you still owe.

[Spork]

How do you calculate the house value for net worth?
Is it (price paid) - (prinicipal left) - (total interest paid during term of mortgage) ?

Assuming there has been no huge significant shift in real estate values in your area:

(Price paid) - (Principal left)

To be really accurate it would probably be: (appraised value) - (amount owed)


While interest is important to consider here... it is an expense.  The principal you owe the bank is a liability.  They're not the same thing..... much like your Vanguard account is an asset, but your weekly paycheck is income.  If you wanted, you could pay the liability portion in full (plus interest since last payment) and all the remaining interest would just disappear.  (Whether you want to do that is up for debate.)

[MrsPete]

Kind-of, sort-of. 

I consider my paid-for house a part of my retirement plan, but I don't consider it part of my net worth.  That is, I am counting on selling the house /reinvesting it into a smaller, designed-just-for-me retirement home on land I already own.  As such, I am planning on using the equity.  Since I'm moving to a less expensive area and building a smaller house (and my expectations are moderate -- it's not that I want solid gold faucets and marble counters; rather, I want everything arranged just as I want it; for example, storage just where I want it, windows just where I want them, a shower that'll be easy to use in my old age, etc.), I expect this house will cover most of the expense of the new house. 

On the other hand, I don't think to myself, "I have X amount in my 401K, Y amount in my investments, and the house is worth X."  Rather, I think of the house as money that I'll continue using . . . but money that's already spent.  After all, I do intend to live in the retirement house 'til the day I die. 

[happy]

Well, if you didn't own the house you would be paying rent wouldn't you? So equity is the net present value of not paying rent?

Might make sense where you are. Sydney house prices bear no relationship to any earthly Financial theory.

This is an interesting idea Marty:

If one's rent was $500/week ( not outrageous at all in Sydney if one has a family)  ie 26k a year , using the 4%SWR rule one would need a stash of 650k to generate the rent "forever".

[oldtoyota]

In my financial tracking spreadsheet, I just started listing out home equity in its own row. I have a variety of totals with different combos of numbers. The rows go something like this:

Total Retirement + liquid reserves
Total Retirement with fully vested 401K and w/o liquid
Total Retirement withOUT fully vested 401k (just in case I get laid off before I am vested) and w/o liquid
Total Retirement with fully vested 401K and home equity without liquid
Total with absolutely everything

The above is not for everyone, but I like to see the different totals. I started doing this when I realized I had 1.5 years to go before being vested in my 401K. I wanted to see all possible values. Now, I have around 9 more months before I'm fully vested...and the amount makes a dent.

[Tyler]

Many people researching ER confuse net worth and investments, especially when it comes to a home.  But they are two different measures used for different situations. 

Net worth is basically how much money you'd theoretically have if you sold everything, paid off any debt, and put any leftover cash in a briefcase.  It's a good measure of asset accumulation but not much else.  For people looking into early retirement and withdrawal rates, liquid investments and cash flow are far more useful measures.  And no, your primary house does not count as an investment.

[The Money Monk]

your house value is included in net worth simply because that is how net worth is defined, as the total current value of all your assets, minus your liabilities.

Whether or not net worth itself is all that meaningful is a different discussion.

[SnackDog]

If the Queen of England took pity on you and signed over the deed to Buckingham Palace to you I have a feeling you would suddenly get very interested in how property affects your net worth.

[Charlotte]

I consider my home as part of my net worth because I have a lot of cash tied up in it. Sure I need a place to live. And sure I can't sell it fast. But it is still an asset. I also consider our vehicles as part of our net worth.

Our overall balance sheet is divided into 3 major categories in a pie chart -- Cash and brokerage accounts, Home and Vehicles, and Retirement.

Works for us, and I like to see how the pie chart changes every month!