JLP’s Question of the Day – Net Worth

In light of yesterday’s post about net worth, I want to pose this question:

Should home equity be included in figuring net worth?

I say yes but I think people should be careful if they live in an area where property values have soared through the roof, which could indicate a bubble. Although we all want our net worths to be as high as possible, they should be a realistic picture of our financial situations otherwise the exercise is a big waste of time.

29 thoughts on “JLP’s Question of the Day – Net Worth”

  1. Of course it should. The caveat being it should be included one way or another. If you are upsidedown on your house, your net worth should reflect that. Typically, I use the purchase price of the house against any and all loans against it (mortgage, second loan, HELOC, etc.).

  2. No way – what good is it? It really depends on a couple things.

    What is the purpose of calculating your net worth? If its to show off to your friends then yeah stick it in there. If it is to focus on accumulating enough money to sustain for retirement and you plan on living in that house forever, what sense does it make to put it in there?

    When I purchase my permanent home, my thought is to keep the house equity in my monthly net worth reports, but exclude it from my “net worth retirement goal”.

  3. We include it in our overall net worth calculation, but we use a conservative estimate based on the appraisal done when we refinanced our mortgage in 2001. The market has gone up since then, but we’ve ignored it in our net worth calculations.

    Our net worth spreadsheet has three sections: tax-advantaged accounts (401K, Roth), taxable accounts and investments, and equity in our house. We don’t include cars or other personal property.

  4. This is a major pet peeve of mine. I just don’t see the benefit of assigning some arbitrary value to your home and possessions and adding it to your net worth. I could make the argument that my home equity is in the neighborhood of $250k – $350k. But unless I actually sell my house, determining my home equity is at best an educated guess.

    I agree with 2million, this is just a way to inflate your bottom line. I find it particularly amusing that a prominent blogger has not changed their home value in the past year even though they live in the same softening real estate market that I do. The net worth on that site is just “funny money” as far as I am concerned.

  5. An inflated net-worth by adding an inflated house value makes no sense at all. You should see the real money to account for it.

    You can withdraw your savings, you can sell your stock ..things like these give you a liquid net worth. How fast can you sell your house and make profit from it? In all probability (unless you are into flipping houses) you will sell your house only if you need to move from one place to another…not because it has increased in value. And as such, at the time you move, you will accept whatever value you are offered.

  6. One issue is one of pure accounting: if you don’t include your house as an asset, do you not include your mortgage as a liability? What do you do with principal paydown? Also, if you were underwater on your house/mortgage, would this be a hit on your net worth? (I suppose this is an argument for including car value in net worth calculations if you buy with a car loan..)

    OTOH, raising your net worth by bubbly appreciation is silly, especially since people who do this almost always ignore transaction costs…

    We find the accounting works better by sticking to our most recent “hard” price on our house, and figuring the RE component as this price minus our current mortgage balance. This way, we also show the mortgage principal paydown as a net worth increase.

  7. It should included conservatively. At least for me a large chunk of our income goes to building that equity. I just gained another $180 of equity with my last mortgage payment. Also we should remember the cost of selling, unless doing a for sale by owner, you pay 5-7% in selling cost to the realtor. You will not walk away from the house with that house value, but if I go and get a loan, the banker with sure look to see how much equity I have, so it is borrowing power.

  8. I tend to agree with Foobarista, that it is included, but by separating the different assets into categories you keep in mind that the different assets in your net worth have varying levels of liquidity or availability. It is accepted accounting to include all assets. Your bank uses the equity of your house to determine loan worthiness. Companies commonly (and I believe are required to) keep track of assets such as equipment or real estate.

    To take Golbguru’s argument a step further (about not being able to withdraw your money), maybe we shouldn’t count IRA’s or 401K’s either, because you can’t withdraw them quickly (unless you are allready retired). Or maybe we discount them by the amount of the penalties for early withdrawal?

    I have withdrawn my equity in my house several times (by refinancing or second mortgage) to invest in other things. I do not do it lightly, and I have to be pretty comfortable with the risk, but it is certainly an asset that I consider available to me for the right use.

  9. Let me rephrase my answer:

    You should NOT include home equity in your net worth.

    You should, however, list your house as an asset at its most recent valuation (not your off the wall estimate as to it’s value, rather the last time you refinanced it, or when you bought it if less than five years ago). You should also list all liens against the property as a liability.

    If you are going to calculate “Net Worth” then it needs to be done correctly. If not, I could call myself a “millionaire” because I would satisfy my own personal definition of that word. It doesn’t make it correct or accurate, but, hey, it’s my definition after all!

  10. Lots of good comments.

    I think it is important to understand what your true net worth is. So, if you leave the value of your house out of the calculatio, you won’t get a true picture of your net worth. That said, it should be a realistic value on the house. And, if you live in an area that has experienced a housing bubble, then a downward adjustment is in order. Afterall, if you added to your net worth when your house appreciated, then you should subtract from your net worth when your house depreciates.

    We use our tax assessor’s value on our home as our value for net worth purposes, which I hope would be conservative.

  11. I see where 2million is coming, but he adds a “and you plan on living in that house forever” qualification. If that is truly the plan, then I agree with leaving it out. However, if you live in a million dollar home in California and you are thinking about moving to a shack in Texas, then that’s a lot of money you can add to your net worth.

    I look at it this way. If some hardship occurred and I lost all my other assets and savings, I could sell the home, move to a cheaper place to live, and be fairly well off. However, if you disregard the equity in your home, it would appear that if your assets (excluding your home) and savings went belly-up, you’d be completely broke. I don’t feel that’s an accurate estimate.

    Plus if you don’t count your home in the bottom line, you can almost always get a higher net worth by renting instead of buying. That has the potential of leading people to a decision that might be inappropriate for them.

  12. I think my approach is closest to Foobaristas. I certainly include my home, as it is both my largest asset and also functions as investment property. My home is a multi-family brownstone, so I can extract value in the for of rental income, and also could develop it into either a 100% rental property or condos someday. So, I feel it well qualifies in the investment r.e. category.

    I think it’s important to think about NW in a couple different ways, depending on which end goal you are thinking about. Bottom-line, your equity in your home is an important component to your financial flexibility. I don’t keep much emergency cash on hand because I have a $500,000 home eq line for that. That frees me up to make other investments with my cash. It also provides a substantial immediate source of funds should I come across an oppty I’d like to capitalize on, such as purchase of other investment property or to help my wife start her business. Like anything, it’s not to be used recklessly. The one thing you will find among the truly wealthy, is that they have many sources of funds to help them capitalize on opportunities – the rich get richer because they have access to capital, substantial amounts of it.

    Anyhow, I break NW into non-retirement accts, retirement accts, and equity in r.e. I use apparaised value for r.e. And things like valuable collectibles and antiques, unvested stock options, etc. are placed under a heading called intangible assets.

    When I think about retirement, I focus on the non-r.e. stuff, when I think about estate planning, I look at the big picture.

  13. I don’t see how you could not include your home since it is certainly something that could be turned into cash if absolutely necessary. Should it be included in retirement calculations? No, probably not – but that is a different question altogether.

    I do agree with many others that it really should be as accurate as possible. We just had our home appraised and even taking and even taking a conservative view of that appraisal we have a large amount of equity built up.

    Besides, if I don’t include my house my net worth takes a very serious beating!

  14. Great discussion – the real question is – is your net worth your balance sheet or a measurement tool for your financial goals?

    To me its a measurement tool – to many its more like a balance sheet. I think its interesting alot of pf bloggers use a mark-to-market approach to valuing their home in their net worth, yet use their net worth as a measurement tool to financial freedom. This gets them nowhere.

  15. Your net worth is… your NET worth. Clearly that includes your home equity, no matter how “inflated” the market in your area is. If you can sell a hovel for $1 million, then the hovel is worth $1 million.

    If you’re not going to count your house, why would you could any stocks you own? Stocks are much more volatile than home prices, and they too only have value on paper until you sell.

    The real question is, is your “net worth” a useful number for determining when you can retire and live off the assets? Only if you’re very careful about it. Some of the “gotchas” with net worth:

    1) Any funds in tax-advantaged accounts will be reduced when you withdraw the money. That’s not true of funds in taxable accounts. Ideally you would “discount” your tax-advantaged accounts to adjust for this.

    2) When you retire, you’ll need someplace to live. Unless you’re pretty sure you know exactly when you’ll die, or you buy an annuity, it’s tough to live off your home equity.

    3) Many assets that SHOULD be included in net worth are depreciating assets. For example cars.

    I calculate a couple numbers. First is my net worth. This is a fairly “smooth” number, in that it generally trends upward at a fairly predictable rate. I include my house’s value in this number (I don’t include cars, other property, or company stock options, because these things are very hard to value accurately). I value my house conservatively. But, for example, this summer we finished our basement for around $20K. That took $20K out of our taxable accounts and I added $20K to our home’s value. Thus the change to our net worth was $0.

    I also calculate a “retirement worth”. This includes the funds that I consider available for retirement. It’s pretty much the same as net worth, less our home equity and with our tax-advantaged accounts discounted by about 30% to reflect their decrease in value as funds are withdrawn.

    Both of these are fairly unscientific. But it’s impossible to be scientific when looking 15-20 years in the future regardless. Really all I’m looking for is some gauge of progress, kind of like those “United Way” thermometers they use for fundraising. These numbers do a pretty good job of giving me that gauge.

  16. I believe your primary residence should be included in your net worth. The first reason is because many people have loans against their house – if they aren’t including their house in their net worth, how are they handling the loan? The second reason is that even if you plan on living in your house forever, having that house is still an asset that you can draw income from – reverse mortgage, home equity loan, home equity line of credit, renters, etc.

  17. I didn’t read through all of the comments so someone may have addressed this already.

    You include your car loan and the value of your car in your net worth, right? Why not your house?

    The way the question is worded assumes (I’m guessing) POSITIVE equity. Some people are upside down, especially with creative financing these days.

    Should one include their mortgage loan as a liability and the most recent value of their home as an asset when calculating net worth? YES!

    Whether those numbers inflate or deflate the final number doesn’t matter, as long as they are current, accurate and complete. Even if I plan to live in the house forever, when I die, it’s not being buried with me. It’ll become part of my estate. Therefore, including both completes my total financial picture.

  18. Reading some more of the comments confirms my thinking. You should include your home in your NW. The question is whether NW is the “right” measure for retirement planning. And I think the answer is “yes” and “no”. I like samerwriters’ “retirement worth” concept quite a bit. In my own situation, I am doing pretty well on NW, but concerned about being behind in schedule in my retirement worth, which is what I’m very focused on right now. Sure, I could someday convert my considerable equity in r.e. into cash, but I want to be in control of that timing. Later life planning is a complicated thing.

    I think you have to consider multiple measures – no one measurement is a catch all for PF health. And no simple plan can address all the possibilities.

  19. Yes, with a stipulation! I believe that one should include the house as an asset on their statement as well as the loan against the house as a liability! For the liability part, that is simple to calculate or know. As for the asset, well, that is a little more difficult.

    To determine the worth, though, one has 3 choices to determine the worth.

    1) Sell the house – Clearly the market will decide the worth
    2) Have the house appraised – Good idea, but will cost you cold, hard cash
    3) Go with the price one purchased the house for

    Obviously, option 1 will give you the most accurate value, but not the best way to find out if you want to stay in the house. The second will determine the worth, but cost you a few hundred bucks for each assessment. The 3rd is the most logical. If you determine the worth by any other means, it is not completely accurate and therefore you will either inflate or deflate your ‘true’ net worth.

    As for cars, jewelry, home furnishings, and all the other stuff you can throw on there to make the number go up or down, I say to each their own (I like to keep it as minimal as possible, keeps us motivated)!


  20. I include ours, but only at the purchase price from 3 years ago.

    If you’re not going to count your house, why would you could any stocks you own? Stocks are much more volatile than home prices, and they too only have value on paper until you sell.

    Excellent point.

  21. If you do something like #11 (Brad) then perhaps you can include your home value in your net worth. But do many people do that? I don’t think so.

    If it is just a technicality of the concept of “net worth” then fine, you can be technically correct by including your house. But then you have to be careful because the net worth statement can become deceptive. It can make you feel richer than you really are.

    I know I have an ultra-conservative view on this.

  22. Definitely part of our net worth and an integral part of our retirement plan.

    Unlike a car, a home is generally a store of value. The value may fluctuate, but it is still an asset that has value and treated as part of a financial plan.

    Our home is part of our financial plan for three reasons. The first is that it saves us money (at the time we purchased) because the cost of ownership was less than the cost of renting. The second is that the “p” component on our mortgage payments represents a form of automatic savings. The third is that when we retire our home will be debt free – meaning that there will be a valuable asset that we can extract value from either by way of a sale or a mortgage should the need arise. We think of the debt free home as a form of insurance should things go wrong with the rest of the retirement plan.

    Questions of valuation are rather arbitrary for me because our retirement goals are benchmarked against income streams and living expenses rather than net worth. For what its worth, we value our properties (including our home) at our estimate of market value, usually erring on the conservative side.

    One more point. There is a strong correlation between net worth and owning a home.

  23. I’d say yes. Always use market price.
    If someone see that 80% of the networth is coming from home equity, he or she should be thinking about diversifying the networth out of the home.
    Without including everything, you won’t be able to make a good judgment when you should.

  24. 4 thoughts:
    1) If one’s intent of networth is to use it as a tool for Financial Independence, then it is most useful if one clearly separates income producing and non-income producing assets; and subsequently conservatively estimate all non-income producing assets.
    2) If homes are assets, then include them when evaluating asset allocations. Most posts I’ve seen include only Stocks/mutual funds/Bonds/Real Estates/etc…. (overwhelmingly the first 2 or 3)
    2.1) But homes or primary residences are different in that they don’t generate income most of the time, but incure expenses, such as: property tax, utiltities, insurance, maintenance.
    2.2)If one considers homes or primary residences as assets within asset allocations, I would guess an overwhelming majority of bloggers on NetworthIQ.com are way overloaded in homes/primary residences being their dominant investment in terms of asset allocation (within their networth).

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