Why is Home Part of NW [Net Worth]

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brokenrecord
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Why is Home Part of NW [Net Worth]

Post by brokenrecord » Sun Sep 30, 2018 8:56 pm

Hi all,

I finally got around to creating an account, and I'm thinking through questions I've had over the months. One that keeps popping up is this: Why is one's primary residence part of a net worth portfolio? Am I correct in thinking that the real estate market is a rising tide? If I were to sell my home, I would assume that to buy another, I would pay as much (or more for larger home) than the one I'm selling?

I understand HCOL to LCOL, and perhaps my thinking is limited in that I don't plan to move from my current city of San Antonio. Curious of thoughts. Thanks!

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willthrill81
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Re: Why is Home Part of NW

Post by willthrill81 » Sun Sep 30, 2018 9:21 pm

Your net worth is all of your assets less your liabilities. Since a home is an asset, it belongs on the balance sheet.

Beyond that, if you own your home, then it provides ongoing value to you since it is less costly than renting an equivalent home (aside from a few rare exceptions). For instance, when compared to renting an equivalent home and taking into account the ongoing cost of ownership, we are getting about a 5% return on the value of our home every year, aside from any property appreciation that might occur.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Quaestner
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Re: Why is Home Part of NW

Post by Quaestner » Sun Sep 30, 2018 9:27 pm

I agree that home equity is definitely an asset and part of your net worth. I think most of us here would say that home equity should NOT be part of your "asset allocation".

theplayer11
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Re: Why is Home Part of NW

Post by theplayer11 » Sun Sep 30, 2018 9:30 pm

since net worth is a meaningless figure, why does it matter?

ResearchMed
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Re: Why is Home Part of NW

Post by ResearchMed » Sun Sep 30, 2018 9:32 pm

willthrill81 wrote:
Sun Sep 30, 2018 9:21 pm
Your net worth is all of your assets less your liabilities. Since a home is an asset, it belongs on the balance sheet.

Beyond that, if you own your home, then it provides ongoing value to you since it is less costly than renting an equivalent home (aside from a few rare exceptions). For instance, when compared to renting an equivalent home and taking into account the ongoing cost of ownership, we are getting about a 5% return on the value of our home every year, aside from any property appreciation that might occur.
Also, if you ever need long term care, the value of your home, which IS part of your net worth, can be used.

One way would be to sell it, and either use the proceeds for long term care as a buy in or per month/year, or to buy something less expensive (or just rent), e.g., for the other spouse.

Even if you *plan* to leave the house to heirs, that value IS still "there" in case of need.

RM
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KlangFool
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Re: Why is Home Part of NW

Post by KlangFool » Sun Sep 30, 2018 9:32 pm

OP,

1) I do not count net worth. It is a meaningless number.

2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.

KlangFool

The Wizard
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Re: Why is Home Part of NW

Post by The Wizard » Sun Sep 30, 2018 9:36 pm

brokenrecord wrote:
Sun Sep 30, 2018 8:56 pm
Hi all,

I finally got around to creating an account, and I'm thinking through questions I've had over the months. One that keeps popping up is this: Why is one's primary residence part of a net worth portfolio?
Net Worth "portfolio" isn't quite the right term.
But Net Worth includes all of your possessions.
When my second parent died, we had an auction to get rid of a lot of their stuff.
That was a contributing factor to their net worth.

My Husqvarna chainsaw, bought new for $400, could easily be sold for $100+.
So I would include that in my Net Worth, if I ever decided to total it up, which is unlikely.

What does Net Worth have to do with your ability to retire next year?
Very little.
What actually matters is: your level of Investible Assets...
Attempted new signature...

The Wizard
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Re: Why is Home Part of NW

Post by The Wizard » Sun Sep 30, 2018 9:37 pm

theplayer11 wrote:
Sun Sep 30, 2018 9:30 pm
since net worth is a meaningless figure, why does it matter?
Good question.
It DOESN'T really matter.

Next question...
Attempted new signature...

ResearchMed
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Re: Why is Home Part of NW

Post by ResearchMed » Sun Sep 30, 2018 9:37 pm

KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
OP,

1) I do not count net worth. It is a meaningless number.

2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.

KlangFool
"Worst case"... you probably don't need the same amount of money sunk into your primary residence, IF you fell upon hard times/health.
Again, that "value" is there. And IF you are needing to live elsewhere for health/care purposes, well, that is where you'd be... living... and eating.

RM
This signature is a placebo. You are in the control group.

The Wizard
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Re: Why is Home Part of NW

Post by The Wizard » Sun Sep 30, 2018 9:38 pm

KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
OP,

1) I do not count net worth. It is a meaningless number.

2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.

KlangFool
Well stated, Klang...
:sharebeer
Attempted new signature...

KlangFool
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Re: Why is Home Part of NW

Post by KlangFool » Sun Sep 30, 2018 9:41 pm

ResearchMed wrote:
Sun Sep 30, 2018 9:37 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
OP,

1) I do not count net worth. It is a meaningless number.

2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.

KlangFool
"Worst case"... you probably don't need the same amount of money sunk into your primary residence, IF you fell upon hard times/health.
Again, that "value" is there. And IF you are needing to live elsewhere for health/care purposes, well, that is where you'd be... living... and eating.

RM
"Worst case", your house is worth less than the mortgage or if it is worth nothing but you still have to pay property tax.

KlangFool

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willthrill81
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Re: Why is Home Part of NW

Post by willthrill81 » Sun Sep 30, 2018 9:41 pm

The Wizard wrote:
Sun Sep 30, 2018 9:36 pm
What does Net Worth have to do with your ability to retire next year?
Very little.
What actually matters is: your level of Investible Assets...
So owning a home free and clear rather than renting an equivalent home doesn't matter in retirement?

I would rephrase it to say that what matters is whether you can produce an income sufficient to reliably meet your spending needs. Investable assets may or may not be part of that equation (e.g. Social Security, rental property, pension).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

brokenrecord
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Re: Why is Home Part of NW

Post by brokenrecord » Sun Sep 30, 2018 9:42 pm

Got it, thanks. Makes sense and I should have thought through that aspect of it. Too narrow and short-termed minded for my own good I guess.

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willthrill81
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Re: Why is Home Part of NW

Post by willthrill81 » Sun Sep 30, 2018 9:43 pm

KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.
A home owned free and clear should reduce one's spending needs compared to renting an equivalent home in all but a few rare instances.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

TravelGeek
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Re: Why is Home Part of NW

Post by TravelGeek » Sun Sep 30, 2018 9:45 pm

The Wizard wrote:
Sun Sep 30, 2018 9:36 pm

What does Net Worth have to do with your ability to retire next year?
Very little.
What actually matters is: your level of Investible Assets...
What actually matters is the level of investable assets in relation to expenses. I could increase my level of investable assets by selling our home (owned free and clear), but then my expenses would also increase because I now have to pay rent.

brokenrecord
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Re: Why is Home Part of NW

Post by brokenrecord » Sun Sep 30, 2018 9:47 pm

willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.
A home owned free and clear should reduce one's spending needs compared to renting an equivalent home in all but a few rare instances.
Willthrill81, your first point is where I'm hung up. Liquid assets for what? If I'm wanting to move into a larger house to accommodate a larger family in the next 5-10 years, I won't have enough equity to offset the larger home purchase. I feel like I need a post tax savings account to supplement.

ResearchMed
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Re: Why is Home Part of NW

Post by ResearchMed » Sun Sep 30, 2018 9:49 pm

KlangFool wrote:
Sun Sep 30, 2018 9:41 pm
ResearchMed wrote:
Sun Sep 30, 2018 9:37 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
OP,

1) I do not count net worth. It is a meaningless number.

2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.

KlangFool
"Worst case"... you probably don't need the same amount of money sunk into your primary residence, IF you fell upon hard times/health.
Again, that "value" is there. And IF you are needing to live elsewhere for health/care purposes, well, that is where you'd be... living... and eating.

RM
"Worst case", your house is worth less than the mortgage or if it is worth nothing but you still have to pay property tax.

KlangFool
I'm obviously not referring to a zombie apocalypse, but to some unfortunate health problem such that you are not able to live in your home anymore, but need extensive health care.
If that never happens, then all is good, and you can leave the house to heirs, charity, or the government, as you see fit.
And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) when we all refer to "value" as being/not being part of "net worth", or there's nothing to discuss.

RM
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willthrill81
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Re: Why is Home Part of NW

Post by willthrill81 » Sun Sep 30, 2018 9:50 pm

brokenrecord wrote:
Sun Sep 30, 2018 9:47 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.
A home owned free and clear should reduce one's spending needs compared to renting an equivalent home in all but a few rare instances.
Willthrill81, your first point is where I'm hung up. Liquid assets for what? If I'm wanting to move into a larger house to accommodate a larger family in the next 5-10 years, I won't have enough equity to offset the larger home purchase. I feel like I need a post tax savings account to supplement.
If I sell a free and clear home for $200k, I now have $200k in cash. There is no rule stating that I must then turn around and buy a larger home or another home at all with those proceeds.
Last edited by willthrill81 on Sun Sep 30, 2018 9:51 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JoeRetire
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Re: Why is Home Part of NW

Post by JoeRetire » Sun Sep 30, 2018 9:50 pm

brokenrecord wrote:
Sun Sep 30, 2018 8:56 pm
Why is one's primary residence part of a net worth portfolio?
Because of the definition of net worth.

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willthrill81
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Re: Why is Home Part of NW

Post by willthrill81 » Sun Sep 30, 2018 9:53 pm

TravelGeek wrote:
Sun Sep 30, 2018 9:45 pm
The Wizard wrote:
Sun Sep 30, 2018 9:36 pm

What does Net Worth have to do with your ability to retire next year?
Very little.
What actually matters is: your level of Investible Assets...
What actually matters is the level of investable assets in relation to expenses. I could increase my level of investable assets by selling our home (owned free and clear), but then my expenses would also increase because I now have to pay rent.
Again, don't confuse investable assets with the ability to retire. It gets a lot of press around here, but a combination of things such as Social Security, pension, annuity payouts, and rental income, for instance, could be enough to enable one to retire very well with no investable assets (in the commonly referred to sense here such as stock and bond holdings). I have a family member who has been FI since his 40s solely due to a large pension.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: Why is Home Part of NW

Post by KlangFool » Sun Sep 30, 2018 9:57 pm

ResearchMed wrote:
Sun Sep 30, 2018 9:49 pm
KlangFool wrote:
Sun Sep 30, 2018 9:41 pm
ResearchMed wrote:
Sun Sep 30, 2018 9:37 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
OP,

1) I do not count net worth. It is a meaningless number.

2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.

KlangFool
"Worst case"... you probably don't need the same amount of money sunk into your primary residence, IF you fell upon hard times/health.
Again, that "value" is there. And IF you are needing to live elsewhere for health/care purposes, well, that is where you'd be... living... and eating.

RM
"Worst case", your house is worth less than the mortgage or if it is worth nothing but you still have to pay property tax.

KlangFool
I'm obviously not referring to a zombie apocalypse, but to some unfortunate health problem such that you are not able to live in your home anymore, but need extensive health care.
If that never happens, then all is good, and you can leave the house to heirs, charity, or the government, as you see fit.
And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) when we all refer to "value" as being/not being part of "net worth", or there's nothing to discuss.

RM
ResearchMed,

If a person needs the house in those cases, they are "House Poor" asset wise. They are in a very bad financial shape. They do not need any health problem to get them into financial trouble. A regular recession/economy crisis is good enough to wipe them out.

<< And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) >>

The market value of the house changes. So, between the time that someone counted the value versus when they actually need to sell it, the value may disappear. This was demonstrated clearly during 2008/2009 recession. So, your assumption is useless.

KlangFool

The Wizard
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Re: Why is Home Part of NW

Post by The Wizard » Sun Sep 30, 2018 9:58 pm

willthrill81 wrote:
Sun Sep 30, 2018 9:41 pm
The Wizard wrote:
Sun Sep 30, 2018 9:36 pm
What does Net Worth have to do with your ability to retire next year?
Very little.
What actually matters is: your level of Investible Assets...
So owning a home free and clear rather than renting an equivalent home doesn't matter in retirement?

I would rephrase it to say that what matters is whether you can produce an income sufficient to reliably meet your spending needs. Investable assets may or may not be part of that equation (e.g. Social Security, rental property, pension).
The income equation is what matters in retirement, correct.

But yes, some folks plan to sell their larger house and downsize to something in a LCOL area.
So they might include a portion of house value in Investible Assets.

Situations vary...
Last edited by The Wizard on Sun Sep 30, 2018 10:02 pm, edited 1 time in total.
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willthrill81
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Re: Why is Home Part of NW

Post by willthrill81 » Sun Sep 30, 2018 9:59 pm

KlangFool wrote:
Sun Sep 30, 2018 9:57 pm
<< And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) >>

The market value of the house changes. So, between the time that someone counted the value versus when they actually need to sell it, the value may disappear. This was demonstrated clearly during 2008/2009 recession. So, your assumption is useless.

KlangFool
If there is no mortgage remaining, then even during the depths of the last recession, there was still home equity present. It is not a useless assumption.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: Why is Home Part of NW

Post by KlangFool » Sun Sep 30, 2018 10:06 pm

willthrill81 wrote:
Sun Sep 30, 2018 9:59 pm
KlangFool wrote:
Sun Sep 30, 2018 9:57 pm
<< And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) >>

The market value of the house changes. So, between the time that someone counted the value versus when they actually need to sell it, the value may disappear. This was demonstrated clearly during 2008/2009 recession. So, your assumption is useless.

KlangFool
If there is no mortgage remaining, then even during the depths of the last recession, there was still home equity present. It is not a useless assumption.
willthrill81,

<<there was still home equity present. >>

Home equity only make sense when a person could sell the house and there were buyers. If nobody is buying, the home equity is zero. Whether the mortgage is paid off, it is irrelevant at that point.

KlangFool

ResearchMed
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Re: Why is Home Part of NW

Post by ResearchMed » Sun Sep 30, 2018 10:09 pm

KlangFool wrote:
Sun Sep 30, 2018 9:57 pm
ResearchMed wrote:
Sun Sep 30, 2018 9:49 pm
KlangFool wrote:
Sun Sep 30, 2018 9:41 pm
ResearchMed wrote:
Sun Sep 30, 2018 9:37 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
OP,

1) I do not count net worth. It is a meaningless number.

2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.

KlangFool
"Worst case"... you probably don't need the same amount of money sunk into your primary residence, IF you fell upon hard times/health.
Again, that "value" is there. And IF you are needing to live elsewhere for health/care purposes, well, that is where you'd be... living... and eating.

RM
"Worst case", your house is worth less than the mortgage or if it is worth nothing but you still have to pay property tax.

KlangFool
I'm obviously not referring to a zombie apocalypse, but to some unfortunate health problem such that you are not able to live in your home anymore, but need extensive health care.
If that never happens, then all is good, and you can leave the house to heirs, charity, or the government, as you see fit.
And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) when we all refer to "value" as being/not being part of "net worth", or there's nothing to discuss.

RM
ResearchMed,

If a person needs the house in those cases, they are "House Poor" asset wise. They are in a very bad financial shape. They do not need any health problem to get them into financial trouble. A regular recession/economy crisis is good enough to wipe them out.

<< And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) >>

The market value of the house changes. So, between the time that someone counted the value versus when they actually need to sell it, the value may disappear. This was demonstrated clearly during 2008/2009 recession. So, your assumption is useless.

KlangFool
Same thing with those invested assets, also per 2008/2009.

And we simply disagree about the value of a home. (We are not alone there, of course.)

WHY would someone need to continue to own a home that is no longer needed for living in *and* doesn't want to sell, when one needs, for example, to move to assisted living?
If they decided to sell it RATHER than continue paying maintenance and taxes, that makes them "house poor"?
Not by most conventional definitions. Here is one: "House poor is a situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities." I think it often also implies one may be spending such a high proportion of disposable income, that paying for food/clothing/transportation/etc., becomes difficult, and most "extras" are simply unaffordable.
That certainly doesn't describe someone with a home that is easily "afforded" but no longer needed.

Also, surely it matters whether that home is worth $100k or $10M in terms of "value" (unless one really plans to entirely disregard that home).

RM
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The Wizard
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Re: Why is Home Part of NW

Post by The Wizard » Sun Sep 30, 2018 10:14 pm

KlangFool wrote:
Sun Sep 30, 2018 10:06 pm
willthrill81,

<<there was still home equity present. >>

Home equity only make sense when a person could sell the house and there were buyers. If nobody is buying, the home equity is zero. Whether the mortgage is paid off, it is irrelevant at that point.

KlangFool
I can't totally disagree, Klang, but in most US metropolitan areas, there is *always* a market for residential real estate.
But how much is a valid question.

In boomtown areas like parts of North Dakota, you can easily have zero value and a ghost town in two decades.
But not in Boston or Washington DC...
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TravelGeek
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Re: Why is Home Part of NW

Post by TravelGeek » Sun Sep 30, 2018 10:38 pm

willthrill81 wrote:
Sun Sep 30, 2018 9:53 pm

Again, don't confuse investable assets with the ability to retire. It gets a lot of press around here, but a combination of things such as Social Security, pension, annuity payouts, and rental income, for instance, could be enough to enable one to retire very well with no investable assets (in the commonly referred to sense here such as stock and bond holdings). I have a family member who has been FI since his 40s solely due to a large pension.
I don’t disagree with you. There are obviously other income sources people might have that determine their ability to retire. I assume the person I responded to just simplified it. And some of these other categories of retirement income can be purchased with investable assets (annuities, rental income), so they are somewhat interchangeable or convertible. They should not be ignored, though, in determining one’s ability to retire.

The point I was making is essentially that the home value impacts the expenses required in retirement (no rent, so likely lower expenses). I can easily increase my investable assets by selling my home. That does not make me richer (increase my net worth).

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willthrill81
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Re: Why is Home Part of NW

Post by willthrill81 » Sun Sep 30, 2018 11:26 pm

TravelGeek wrote:
Sun Sep 30, 2018 10:38 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:53 pm

Again, don't confuse investable assets with the ability to retire. It gets a lot of press around here, but a combination of things such as Social Security, pension, annuity payouts, and rental income, for instance, could be enough to enable one to retire very well with no investable assets (in the commonly referred to sense here such as stock and bond holdings). I have a family member who has been FI since his 40s solely due to a large pension.
I don’t disagree with you. There are obviously other income sources people might have that determine their ability to retire. I assume the person I responded to just simplified it. And some of these other categories of retirement income can be purchased with investable assets (annuities, rental income), so they are somewhat interchangeable or convertible. They should not be ignored, though, in determining one’s ability to retire.

The point I was making is essentially that the home value impacts the expenses required in retirement (no rent, so likely lower expenses). I can easily increase my investable assets by selling my home. That does not make me richer (increase my net worth).
:sharebeer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why is Home Part of NW

Post by NYC_Guy » Mon Oct 01, 2018 12:02 am

KlangFool wrote:
Sun Sep 30, 2018 10:06 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:59 pm
KlangFool wrote:
Sun Sep 30, 2018 9:57 pm
<< And I'm also *obviously* assuming there is actual "value" there (beyond mortgage, or no mortgage remaining) >>

The market value of the house changes. So, between the time that someone counted the value versus when they actually need to sell it, the value may disappear. This was demonstrated clearly during 2008/2009 recession. So, your assumption is useless.

KlangFool
If there is no mortgage remaining, then even during the depths of the last recession, there was still home equity present. It is not a useless assumption.
willthrill81,

<<there was still home equity present. >>

Home equity only make sense when a person could sell the house and there were buyers. If nobody is buying, the home equity is zero. Whether the mortgage is paid off, it is irrelevant at that point.

KlangFool
Klang - I often agree with you, but this is silly. All assets require a willing buyer to effect a sale, including stocks and bonds. Just because an asset - like real estate - is less liquid, that doesn’t mean it has no value. I currently live in a VHCOL area. I have a very expensive condo. Its current market value is about 4x the market value of the type of property to which I plan to retire. That difference is an asset that I use for retirement planning purposes. For purposes of my equity/fixed incone AA, I count about one third as equity and two thirds as fixed income. Essentially, the portion I count as fixed income is the amount on which I could currently obtain a nonrecourse loan. But that’s just my way of managing that particular asset.

Enzo IX
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Re: Why is Home Part of NW [Net Worth]

Post by Enzo IX » Mon Oct 01, 2018 12:30 am

Yes, a home is part of net worth less the mortgage, liens or other liabilities against it.

If I have a one million house with no encumbrances against it will raise my net worth by one million dollars. Assets-Liabilities=Net Worth

Because all your assets and liabilities are always in flux and changing on a time basis one must put an as of date on top of the statement. Ones net worth is always in flux, just log on to your brokerage statement at the end of the day. A house, watch or rare painting is doing the same thing just not easily valued each day.

If I sell my house for a million dollars, I don't have to buy another house, I could just rent and still have my million dollars in the bank.

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Re: Why is Home Part of NW [Net Worth]

Post by SGM » Mon Oct 01, 2018 1:27 am

Around 2008 it was difficult to sell homes even in high cost of living areas such as D.C. This hit nursing homes in the area. Many beds remained open because many of the elderly could not sell their homes. At that time many nursing homes decreased the number of nursing home beds permanently and increased the number of rehab beds in order to stay in business.

A home is part of net worth, but one may not be able to sell it in a severe financial crisis.

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Re: Why is Home Part of NW [Net Worth]

Post by JoMoney » Mon Oct 01, 2018 2:31 am

I don't own a home, but I'm amenable to the idea of counting it or not counting it.

The number that I tend to focus on, is how much income/withdrawal rate ones net worth can support. Although owning a home doesn't provide any income (it's actually a liability when considering property taxes, HOAs, insurance, and depreciation on the structure), since most everyone needs to live somewhere owning a home tends to be beneficial to the bottom line - it adds the benefit of "imputed rent", that is the rent one might otherwise have to pay and require a larger withdrawal rate if one was living off there assets and didn't own their home.
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Re: Why is Home Part of NW

Post by JohnFiscal » Mon Oct 01, 2018 2:42 am

Quaestner wrote:
Sun Sep 30, 2018 9:27 pm
I agree that home equity is definitely an asset and part of your net worth. I think most of us here would say that home equity should NOT be part of your "asset allocation".
Agree completely.

I'll add that I have always tried to minimize my expenditure on housing...renting or buying. For instance, at the moment I have just retired, so no more "income" coming in, and my mortage is paid off. So this is sort of a base state. In this state my home provides about 1/6 of my net worth. Now that I think about it, this is about the proportion that I've always spent on housing on an on-going monthly basis (rent+utilities, or mortgage+all other costs).

I've advised others, such as my mom and pointed out to my spouse about her parents, who were RE-happy, that houses are not gingerbread houses where you can break off a piece to eat when you are hungry; property is not always a liquid asset and it's a lumpy asset, you can't sell just part of it as you need cash. This situation has gotten dire for my in-laws.

Edit: I conservatively (?) carry my house on the books for the price I paid for it 9 years ago. This seems conservative relative to sales in this subdivision. I may get a happy surprise should I sell, but then it will cost some money to get it in salable condition. a wash.

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Re: Why is Home Part of NW [Net Worth]

Post by gotester2000 » Mon Oct 01, 2018 3:46 am

You can downsize, move to an LCOL, reverse mortgage or move to an old age home. Home equity should be part of your networth. Any capital asset depends on its market value at the time of selling;so counting stocks but omitting real estate is wrong. You will tap all your sources based on your need, whether they can be easily liquidated or not. And that includes your paintings, cars, watches, gadgets or anything that can be sold if needed.

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Re: Why is Home Part of NW [Net Worth]

Post by Bacchus01 » Mon Oct 01, 2018 5:42 am

As you are seeing, it’s a matter of choice and preference. I count it in our net worth. We also own three properties and I count them all. I feel they are all invested assets that we will sell at some point. In fact, our plan is to sell all three when we retire.

But some people don’t, and that’s okay too. It’s part of your net worth whether you want to count it or not.

Most people here would prefer to look at their “investable” net worth. That’s okay. You have to decide whether your house is part of that.

Regardless, it’s certainly part of your cash flow and living expense analysis.

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Re: Why is Home Part of NW [Net Worth]

Post by dcabler » Mon Oct 01, 2018 5:52 am

Count me among those who don't count it in my NW. Heck, like others, I don't even keep track of NW. The mortgage + property taxes + maintenance are considered part of the expenses side of what I track. We have a lot of equity in the house and we are contemplating downsizing at some point and using the equity to purchase the next place outright. But at this point I don't know when, where, how much and whether there would be anything left over to add to the portfolio for future withdrawals. So for now, I'll ignore it.

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Re: Why is Home Part of NW

Post by Jags4186 » Mon Oct 01, 2018 6:50 am

theplayer11 wrote:
Sun Sep 30, 2018 9:30 pm
since net worth is a meaningless figure, why does it matter?
If you have a lot of money, your heirs may not think it is a meaningless figure...

You count it because it is part of your net worth. I count anything I would sell as part of my net worth. I would sell my car if I had to, so I count it's current value as part of my net worth. I would throw out my TV if I got a new one so it's worth $0 even if it has some modest value. Same with my couch, refrigerator, books, etc.
Last edited by Jags4186 on Mon Oct 01, 2018 7:01 am, edited 1 time in total.

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Re: Why is Home Part of NW [Net Worth]

Post by SQRT » Mon Oct 01, 2018 6:57 am

I calculate net worth but only “in my head” rounded to nearest million. I include my portfolio, PV of my pension, and real estate. Don’t bother with cars,furniture,art,etc. When I think about our legacy, I exclude my pension. Our real estate might represent about 20% of our total net worth. Other than legacy (and divorce?) there is no reason to do this other than ego. In retirement it’s really the availability of cash flow that counts. Obviously,you should also have a good handle on your expenses and the size and type of real estate might impact your expense base.

This seems so self evident to me. I’m surprised the topic comes up here so much?
Last edited by SQRT on Mon Oct 01, 2018 7:02 am, edited 1 time in total.

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Re: Why is Home Part of NW [Net Worth]

Post by 8foot7 » Mon Oct 01, 2018 7:00 am

If you don't believe your home is part of your net worth, then please feel free to sign a quit-claim deed for your home over to me.

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Re: Why is Home Part of NW [Net Worth]

Post by 2cents2 » Mon Oct 01, 2018 7:08 am

I use net worth plus value of life insurance for composition and value of estate. Anyway that is what our attorney was interested in when making up our will. I assume that is what the IRS uses to figure out whether or not an estate tax is owed?

But, I don't use net worth to figure out how much my retirement income will be. A home could be part of retirement income if the plan was to get a reverse mortgage.

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Re: Why is Home Part of NW [Net Worth]

Post by nisiprius » Mon Oct 01, 2018 7:12 am

I've never known what "net worth" is supposed to be good for, except for bragging. And quasi-bragging, letting financial institutions know some imprecise measure of how rich you are, and whether they can consider you "qualified" to buy into hedge funds and such.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Why is Home Part of NW

Post by goblue100 » Mon Oct 01, 2018 7:18 am

brokenrecord wrote:
Sun Sep 30, 2018 9:47 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.
A home owned free and clear should reduce one's spending needs compared to renting an equivalent home in all but a few rare instances.
Willthrill81, your first point is where I'm hung up. Liquid assets for what? If I'm wanting to move into a larger house to accommodate a larger family in the next 5-10 years, I won't have enough equity to offset the larger home purchase. I feel like I need a post tax savings account to supplement.
When I'm 80 I can sell my $3330,000 house and live in a $2000 a month condo or (hopefully not!) nursing home. Putting that money in bonds or CDs should cover my rent for at least 15 years. You better believe my house equity is part of my plan.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: Why is Home Part of NW [Net Worth]

Post by bengal22 » Mon Oct 01, 2018 7:37 am

My Parents are selling their home and the proceeds will fund about 5 years in an independent living facility.

IMHO net worth is the most valuable financial number I track. It is the truest barometer of my financial health. I know that at anytime short of a zombie apocalypse I can convert my home equity into livable funds. I never understand the thinking that net worth is not important.
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Re: Why is Home Part of NW [Net Worth]

Post by FreemanB » Mon Oct 01, 2018 7:43 am

nisiprius wrote:
Mon Oct 01, 2018 7:12 am
I've never known what "net worth" is supposed to be good for, except for bragging. And quasi-bragging, letting financial institutions know some imprecise measure of how rich you are, and whether they can consider you "qualified" to buy into hedge funds and such.
I actually view it as an overall financial health progress indicator, personally. I suspect many people(Not on this board, but in general) who consider themselves well off financially would be quite surprised at how low their actual net worth is, once they weigh all of their assets and liabilities. In that sense, it gives at least a glimpse of your overall financial situation. It isn't as good as a detailed budget or other types of analysis, but its a fairly easy way to start. As for using it to brag, I suspect most people bragging about their net worth are also likely exaggerating it as well, or simply not including their liabilities. I've only discussed net worth with my wife when we hit a significant milestone, and even that was done jokingly.

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Re: Why is Home Part of NW [Net Worth]

Post by Kenkat » Mon Oct 01, 2018 7:52 am

bengal22 wrote:
Mon Oct 01, 2018 7:37 am
My Parents are selling their home and the proceeds will fund about 5 years in an independent living facility.

IMHO net worth is the most valuable financial number I track. It is the truest barometer of my financial health. I know that at anytime short of a zombie apocalypse I can convert my home equity into livable funds. I never understand the thinking that net worth is not important.
Yes, my in-laws did the same.

Assets can always be converted into income and net worth captures this. If for some reason assets cannot be converted into income, their value is zero - so net worth still captures this.

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Re: Why is Home Part of NW

Post by Artsdoctor » Mon Oct 01, 2018 7:53 am

theplayer11 wrote:
Sun Sep 30, 2018 9:30 pm
since net worth is a meaningless figure, why does it matter?
This is a question that has been raised many, many times.

Many of us would like to think that we'll stay in our homes for the rest of our lives, but this often is not the case. Knowing how much home equity you have can help make some decisions when you need to move at a later date. You might have to take money out of your portfolio to buy that new residence, or you may slate the surplus for investments. However, this is really nothing more than trading one asset for another.

The other time that net worth is actually an issue is in estate planning. While the federal limit is quite high, the state taxes can be extraordinarily variable. Consequently, keeping track of net worth, including life insurance, can be helpful when figuring out what happens when you pass.

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Re: Why is Home Part of NW [Net Worth]

Post by Steve723 » Mon Oct 01, 2018 8:02 am

Heh, what I did after reading countless threads on this topic is to simply take the value of my home equity and cut it in half for financial planning purposes. How is that for compromise?

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Re: Why is Home Part of NW

Post by bloom2708 » Mon Oct 01, 2018 8:04 am

theplayer11 wrote:
Sun Sep 30, 2018 9:30 pm
since net worth is a meaningless figure, why does it matter?
Far from meaningless.

If your stock/bond portfolio is growing but your net worth is not, you are doing something wrong. Borrowing too much, spending too much, buying too many depreciation assets.

If you have $1 million in stocks, bonds, cash but your net worth is -$200k, that makes a strong statement as to how you are doing.

Net worth may be meaningless for determining the income you can get off your portfolio of your stocks/bonds/cash, but it is far from meaningless.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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Re: Why is Home Part of NW [Net Worth]

Post by chevca » Mon Oct 01, 2018 8:59 am

Steve723 wrote:
Mon Oct 01, 2018 8:02 am
Heh, what I did after reading countless threads on this topic is to simply take the value of my home equity and cut it in half for financial planning purposes. How is that for compromise?
Why? Either count it or don't.

I don't find net worth meaningless, but I do wonder what good it actually does to track. When these threads come up and we see the numerous ways folks have of counting and tracking it it does seem pretty pointless. When things are that inconsistent, is it even a real thing? It is simply assets minus liabilities. Yet, many folks choose to personalize the definition.

As someone that used to have a negative net worth, post divorce, and as I started investing and actually paying attention to finances, I used to track net worth monthly, or shoot, even weekly. It was very nice to see positive changes then. As things luckily turned around and I have a net worth making me very comfortable, I maybe check it once a year, if that, and with just rough numbers. Still very positive?... Yep... all good then.

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Re: Why is Home Part of NW

Post by chevca » Mon Oct 01, 2018 9:04 am

brokenrecord wrote:
Sun Sep 30, 2018 9:47 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.
A home owned free and clear should reduce one's spending needs compared to renting an equivalent home in all but a few rare instances.
Willthrill81, your first point is where I'm hung up. Liquid assets for what? If I'm wanting to move into a larger house to accommodate a larger family in the next 5-10 years, I won't have enough equity to offset the larger home purchase. I feel like I need a post tax savings account to supplement.
Or, a high enough income to afford the new, bigger house, along with the equity from the old house. Or, yes, an additional savings amount along with the equity from the old house if you wanted to pay cash. Figuring our net worth doesn't have much to do with buying a house and affordability, IMO.

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