What percent of net worth should a persons house be?

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masonstone
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What percent of net worth should a persons house be?

Post by masonstone » Thu Oct 17, 2019 5:37 am

What percent of net worth should my house be? I'm thinking of upgrading my house and I don't want to use income as a measure since it keeps changing so I'd rather use net-worth measure. Also I'm 38 and will stay in this house till my kids (who are under the age of 5) finish high-school and possibly longer.
Last edited by masonstone on Thu Oct 17, 2019 9:19 am, edited 2 times in total.

drawpoker
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Re: What percent of net worth should a persons house be?

Post by drawpoker » Thu Oct 17, 2019 5:56 am

Seems like an odd question here :? Is there really a "should", some pre-determined fixed allocation that has been proclaimed by some authority? That's news to me. :shock:

Anyway, the question needs more clarity.

Do you mean the market value of a house? Or the amount of equity? At what stage of life, pre-retirement, or not?

Since this is BH forum, where living below your means is core, I imagine the answers you will get will be on the low side. Okay, I'll start. The market value of my mortgage-free house would represent a little less than 15% of net worth. Am retired.

HomeStretch
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Re: What percent of net worth should a persons house be?

Post by HomeStretch » Thu Oct 17, 2019 6:06 am

I think of a home purchase in terms of net income. A monthly mortgage payment shouldn’t be more than xx% (like 15%) of income or home purchase price shouldn’t be more than a multiple of years of income (like 2 years).

I wouldn’t use percentage of net worth. But, as a house is not a liquid asset, I wouldn’t use liquid funds to pay off my house, for example, if my home value was then a high percentage of my net worth.

ETA: in retirement, I will not want my paid-off house to be more than 15-20% of net worth. Despite being paid-off, there are ways I can access the equity. As spouse and I do not have long-term care insurance, home can be mortgaged or sold if necessary to fund LTC expenses. Throughout retirement we will monitor house-related expenses. If our net total expenses result in an unreasonable portfolio withdrawal %, then we will sell and either downsize to a smaller house/condo or rent.
Last edited by HomeStretch on Thu Oct 17, 2019 10:32 am, edited 1 time in total.

student
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Re: What percent of net worth should a persons house be?

Post by student » Thu Oct 17, 2019 6:40 am

I also think that it is strange to use net worth as a yard stick. For a regular Joe who is working, I find that it is more appropriate to use annual income. The one that I use is between 2x and 3x annual income. When I purchased mine close to 20 years ago, it was 3x my income, now it is under 2x. (I have an el cheapo condo.) Of course for someone in the top 1%, it may be good to use net worth as a measurement but I have no experience in this and it unlikely I would reach this status.

Edit: Others have mentioned the ratio of cost of maintaining house to income, which I agree is a better measurement. My above suggestion is only meant to be a simple proxy.
Last edited by student on Thu Oct 17, 2019 7:01 am, edited 1 time in total.

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RickBoglehead
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Re: What percent of net worth should a persons house be?

Post by RickBoglehead » Thu Oct 17, 2019 6:42 am

masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should a persons house be?
It shouldn't be. In other words, there is no percentage that it should be. There is no "should".

A house's value doesn't need to be measured against anything, including a person's income.

The only relationship that matters is what percentage of a person's monthly income is the mortgage, PMI (if they have it), and property taxes.

That's it. Anything else is meaningless.
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snackdog
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Re: What percent of net worth should a persons house be?

Post by snackdog » Thu Oct 17, 2019 6:45 am

First home might be 100% and up even with minimal equity. At death it might also be 100% (paid off), if things have been timed properly. In between it could as low as you like down to even 0% if you don't own.

BlueCable
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Re: What percent of net worth should a persons house be?

Post by BlueCable » Thu Oct 17, 2019 6:46 am

I don't think such a metric can provide any useful insight.

I bought my first house first $150k with negative $75k net worth. I'm not sure if you can even calculate your proposed statistic if you have a negative net worth.

My second house is currently at 50% of net worth, but that's going to dwindle towards 10% as my net worth increase.

A better metric to measure affordability is a cost to income measure.

jabroni
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Re: What percent of net worth should a persons house be?

Post by jabroni » Thu Oct 17, 2019 7:04 am

Using that as a metric would lead to the assumption that a person should get a new house every year as their net worth increases.

Traditional personal finance advice is to ensure that your mortgage payment is ~25% of your monthly take home pay. If you can go cheaper without feeling deprived, great!

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Re: What percent of net worth should a persons house be?

Post by SQRT » Thu Oct 17, 2019 7:12 am

Agree it’s a poor metric and there is certainly no “should”. However, I think the metric makes a little more sense once a person is retired. Then it would reflect how much the retiree wants to allocate to a house. Funds allocated to your house will not generate cash flow that can otherwise be spent in retirement. (Other than later in life once the house is sold.)Even then it would be very much dependant on where one wants to live. San Francisco vs Tupelo. From previous threads, retirees generally have under 25% of their total net worth tied up in personal use real estate.

For the record I have about 18% tied up in personal use real estate. Aged 69 retired 13 years.

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Re: What percent of net worth should a persons house be?

Post by bgf » Thu Oct 17, 2019 7:22 am

we are mid30s in a LCOL area. our first home is big enough for our soon to be family of 4. no intention of moving. purchase price 4 years ago is less than half our net worth, and is about 1.5x our annual gross income.

this isnt possible for most people in more expensive areas, but we also arent experiencing increases in property values people in those areas will experience. i assume itll just keep up with inflation.
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Re: What percent of net worth should a persons house be?

Post by tennisplyr » Thu Oct 17, 2019 7:22 am

Well, one could say if you're very lucky and have a sizeable portfolio, the house could be a huge portion of net worth :wink:
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Re: What percent of net worth should a persons house be?

Post by remomnyc » Thu Oct 17, 2019 7:32 am

Agree that it's an odd question. A house COULD be a higher percentage of your net worth if you have a low net worth and SHOULD be a lower percentage of your net worth if you have a high net worth. In general, I think housing related payments (PITI) should not exceed 25% of your income and your mortgage should not exceed 3x your annual salary.

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Re: What percent of net worth should a persons house be?

Post by gasdoc » Thu Oct 17, 2019 7:46 am

I am weighing in only because, though I doubt a ratio of house value to net worth is valuable, I do think there should be some sort of ratio of home value to income or net worth. I just don't know how to answer the question myself. Certainly it is not reasonable to expect a person to live in a $30,000 trailer if they have a net worth of $10M, or an income of $500K per year, right? Or is it reasonable for a person with an income of $30K per year and a negative net worth at age 58 to own a $1.5M home. But are there any reasonable standards someone in the housing market should be looking at? Dave Ramsey has rules of thumb regarding monthly mortgage payments in relation to monthly income, but what if one buys and owns the house outright? More questions than answers, but I think the topic is a good one! Thanks, OP!

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mak1277
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Re: What percent of net worth should a persons house be?

Post by mak1277 » Thu Oct 17, 2019 7:48 am

SQRT wrote:
Thu Oct 17, 2019 7:12 am
Agree it’s a poor metric and there is certainly no “should”. However, I think the metric makes a little more sense once a person is retired. Then it would reflect how much the retiree wants to allocate to a house. Funds allocated to your house will not generate cash flow that can otherwise be spent in retirement. (Other than later in life once the house is sold.)Even then it would be very much dependant on where one wants to live. San Francisco vs Tupelo. From previous threads, retirees generally have under 25% of their total net worth tied up in personal use real estate.

For the record I have about 18% tied up in personal use real estate. Aged 69 retired 13 years.
I don't even think this matters. I think people should measure their ability to retire based on invested/investable assets compared to expected expenses. If I have enough invested assets to cover my future expenses, who cares what % of net worth is my house?

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Re: What percent of net worth should a persons house be?

Post by gasdoc » Thu Oct 17, 2019 7:51 am

gasdoc wrote:
Thu Oct 17, 2019 7:46 am
I am weighing in only because, though I doubt a ratio of house value to net worth is valuable, I do think there should be some sort of ratio of home value to income or net worth. I just don't know how to answer the question myself. Certainly it is not reasonable to expect a person to live in a $30,000 trailer if they have a net worth of $10M, or an income of $500K per year, right? Or is it reasonable for a person with an income of $30K per year and a negative net worth at age 58 to own a $1.5M home. But are there any reasonable standards someone in the housing market should be looking at? Dave Ramsey has rules of thumb regarding monthly mortgage payments in relation to monthly income, but what if one buys and owns the house outright? More questions than answers, but I think the topic is a good one! Thanks, OP!

We own one personal home and one rental property. Each is 10% of our net worth.

gasdoc

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Re: What percent of net worth should a persons house be?

Post by Chris K Jones » Thu Oct 17, 2019 7:58 am

It has been useful for me to think about this, but there is no "should" as others have pointed out.

I ended up with the house after a divorce and reaalized that a majority of my net worth was my house. Prior to the divorce and the 2009 stock market fall, it had been about 15% of my net worth. I realized that I needed to get back into equities and wanted my home to be a much smaller percent of net worth. I sold the house and now I rent. I will buy an inexpensive condo at some point in the future which I anticipate will be less than 10% of my net worth. I hope this helps. Best wishes.

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Re: What percent of net worth should a persons house be?

Post by CyclingDuo » Thu Oct 17, 2019 7:59 am

masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should a persons house be?
A house is not an investment, it's an expense. :shock:

As others have said, there are too many variables surrounding cost of living area, age, time of purchase compared to years of contributing to investments, etc.... resulting in no one size fits all with regard to a formula that measures how much one's home equity is of their net worth.

It's probably more useful to look at what percentage of one's monthly income goes to housing. Again, that is not a one size fits all, but it does point out a possible balance or imbalance of a household budget. Too much going to housing takes away from the other areas of the budget and savings. Too little going to housing increases what you can spend on other areas of your budget and savings. Finding just the right balance of the portion going to housing to fund all other aspects of the household monthly cash flow, budget, and savings seems to be the target sweet spot to find and measure.
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Rus In Urbe
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Re: What percent of net worth should a persons house be?

Post by Rus In Urbe » Thu Oct 17, 2019 8:01 am

Well, I'll be odd one out.

I find this a useful metric.

If your house is a larger percentage of your net worth, it means you are also spending a lot more on taxes, upkeep, maintenance, etc. Primary real estate is not an investment (unless you are in the rental business or a practiced flipper) and IMHO real estate can't be counted on to appreciate much if you honestly account for its associated costs. But that's just me.

Unfortunately, most people have most of their assets tied up in their house. I know many people who are rent poor/house poor, because they live in something expensive and aspirational to the life-style they want to project to others. TV shows seem to have seduced our entire society to believing that they "need" certain things in a house---it's a kind of contagious illness. One only has to re-read that old classic, "The Millionaire Next Door" to remember that the choice you make in housing is one of the most important financial decisions ever.

Over the past 20 years, we had two major real estate transactions------real estate agents were dismayed we chose options that were "much less than we could afford" and gobsmacked when we paid in cash for one of them. Though we once made money selling a Manhattan apartment, I consider that a stroke of luck and not something that can be counted on.

I'm heading into retirement in December. No mortgage. We live in LOCOL area. Our house (which is extremely comfortable) is about 7.5% of net worth. I am happy to have our assets elsewhere. I am perfectly content that others assume we are much less wealthy than we are (and then they wonder how we can afford our travels and our philanthropic activities).

I've always kept track of House (or Real Estate) as a % of net worth. I have found it a useful and revealing number for my own planning.

EDIT ADDITION: Naturally, for younger people buying a home will mean that the percentage will be larger but if they buy wisely and keep investing, that percentage number will fall over time as investments increase.
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SQRT
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Re: What percent of net worth should a persons house be?

Post by SQRT » Thu Oct 17, 2019 8:07 am

mak1277 wrote:
Thu Oct 17, 2019 7:48 am
SQRT wrote:
Thu Oct 17, 2019 7:12 am
Agree it’s a poor metric and there is certainly no “should”. However, I think the metric makes a little more sense once a person is retired. Then it would reflect how much the retiree wants to allocate to a house. Funds allocated to your house will not generate cash flow that can otherwise be spent in retirement. (Other than later in life once the house is sold.)Even then it would be very much dependant on where one wants to live. San Francisco vs Tupelo. From previous threads, retirees generally have under 25% of their total net worth tied up in personal use real estate.

For the record I have about 18% tied up in personal use real estate. Aged 69 retired 13 years.
I don't even think this matters. I think people should measure their ability to retire based on invested/investable assets compared to expected expenses. If I have enough invested assets to cover my future expenses, who cares what % of net worth is my house?
Agree, except the amount tied up in one’s house will have an impact on your investable assets and thus cash flow(income) in retirement. So it’s a balancing act more house and less income versus less house and more income.

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JoMoney
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Re: What percent of net worth should a persons house be?

Post by JoMoney » Thu Oct 17, 2019 8:09 am

Percentage of net worth is a funny way to measure it, since ideally if you're buying you'll stay in that house for a long time, and be growing your net worth over time.
Some old "rules of thumb" were: house value should be in the range of 2-5x annual income
another is that your house payment (or rent) should be no more than 1/3rd you're annual income (get out a mortgage calc to see what that means at current interest rates)
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Re: What percent of net worth should a persons house be?

Post by an_asker » Thu Oct 17, 2019 8:14 am

masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should a persons house be?
20%.

Each time your net worth increases, you expand your house; and when the stock market goes down, you need to knock down a bedroom or two!

mak1277
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Re: What percent of net worth should a persons house be?

Post by mak1277 » Thu Oct 17, 2019 8:24 am

SQRT wrote:
Thu Oct 17, 2019 8:07 am
mak1277 wrote:
Thu Oct 17, 2019 7:48 am
SQRT wrote:
Thu Oct 17, 2019 7:12 am
Agree it’s a poor metric and there is certainly no “should”. However, I think the metric makes a little more sense once a person is retired. Then it would reflect how much the retiree wants to allocate to a house. Funds allocated to your house will not generate cash flow that can otherwise be spent in retirement. (Other than later in life once the house is sold.)Even then it would be very much dependant on where one wants to live. San Francisco vs Tupelo. From previous threads, retirees generally have under 25% of their total net worth tied up in personal use real estate.

For the record I have about 18% tied up in personal use real estate. Aged 69 retired 13 years.
I don't even think this matters. I think people should measure their ability to retire based on invested/investable assets compared to expected expenses. If I have enough invested assets to cover my future expenses, who cares what % of net worth is my house?
Agree, except the amount tied up in one’s house will have an impact on your investable assets and thus cash flow(income) in retirement. So it’s a balancing act more house and less income versus less house and more income.
But my point is this...if you start with investable assets, and get that number where you want it, you can literally put every other dollar you have into your home if you want to. Just for the sake of a ridiculous example, let's say you decide you need $1 million for retirement. Once you have that, you could buy a $10 million house if you have the money, as long as you can still fund your expenses with the $1 million investable assets. So whether the percentage of NW is 10% or 91%, as long as you fill the investable asset bucket first, the house bucket is irrelevant.

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Re: What percent of net worth should a persons house be?

Post by Broken Man 1999 » Thu Oct 17, 2019 8:31 am

My answer to the question asked: I have no idea. We are retired with no mortgage.

At current stock market valuations, and recent sales comps in our neighborhood, our home is 11.21% of our net worth. The stock market has been jumping around, but the home sales amounts in the neighborhood are slowing rising.

I have no idea if that figure of 11.21% represents something good, or something bad. It is what it is, and thankfully I know what is is.:D

Broken Man 1999
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Re: What percent of net worth should a persons house be?

Post by bgf » Thu Oct 17, 2019 8:33 am

I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.

from that, you should have as small a percentage of your net worth in your home as you find comfortable and reasonable. you want as much of your net worth as possible in the highest returning, most diversified assets, which for BHs is going to be your portfolio. similarly, we argue over 0.01% in expense ratios, and a home can cost you as much as 6% in transaction costs to sell, not to mention the time and emotional energy. the larger the percentage of your net worth, the more substantial those costs, financial and emotional.

i really am surprised. i think many people here realize their home is too large a percentage of their net worth, but there is little they can or are willing to do about it. the result is that they rationalize the situation.
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mak1277
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Re: What percent of net worth should a persons house be?

Post by mak1277 » Thu Oct 17, 2019 8:47 am

bgf wrote:
Thu Oct 17, 2019 8:33 am
I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.

from that, you should have as small a percentage of your net worth in your home as you find comfortable and reasonable. you want as much of your net worth as possible in the highest returning, most diversified assets, which for BHs is going to be your portfolio. similarly, we argue over 0.01% in expense ratios, and a home can cost you as much as 6% in transaction costs to sell, not to mention the time and emotional energy. the larger the percentage of your net worth, the more substantial those costs, financial and emotional.

i really am surprised. i think many people here realize their home is too large a percentage of their net worth, but there is little they can or are willing to do about it. the result is that they rationalize the situation.
You assume, incorrectly (at least in my case), that maximizing return is the stated purpose of every dollar I acquire.

Edit to add: Lest you think I'm rationalizing, my current home is ~6% of my NW (and it's fully paid off).
Last edited by mak1277 on Thu Oct 17, 2019 8:48 am, edited 1 time in total.

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Re: What percent of net worth should a persons house be?

Post by lostdog » Thu Oct 17, 2019 8:48 am

I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
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Re: What percent of net worth should a persons house be?

Post by ddurrett896 » Thu Oct 17, 2019 8:57 am

I'd use income, especially for younger buyers.

House sale price = 2-2.5x the HHs gross income.

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Re: What percent of net worth should a persons house be?

Post by HEDGEFUNDIE » Thu Oct 17, 2019 8:58 am

bgf wrote:
Thu Oct 17, 2019 8:33 am
I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.

from that, you should have as small a percentage of your net worth in your home as you find comfortable and reasonable. you want as much of your net worth as possible in the highest returning, most diversified assets, which for BHs is going to be your portfolio. similarly, we argue over 0.01% in expense ratios, and a home can cost you as much as 6% in transaction costs to sell, not to mention the time and emotional energy. the larger the percentage of your net worth, the more substantial those costs, financial and emotional.

i really am surprised. i think many people here realize their home is too large a percentage of their net worth, but there is little they can or are willing to do about it. the result is that they rationalize the situation.
The only quibble I have with your post is “highest returning, most diversified assets”. The latter does not imply the former.

Otherwise you are spot on. A house is part of your net worth just as the balance in your 401k is. More so, actually, as a house is more liquid than a 401k. Compare the 10% early withdrawal penalty for a 401k with 6% transaction costs on a house.

It’s undeniable that a house is the largest, most undiversified asset most people will ever own. Which is why it always puzzles me when Bogleheads bend over backwards to shovel *more* money into that asset by paying off their mortgage early. The inconsistency is mindBogling.

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Re: What percent of net worth should a persons house be?

Post by JohnFiscal » Thu Oct 17, 2019 9:00 am

masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should a persons house be?
There was a similar thread recently "Net-worth rule of thumb for house purchase?"

viewtopic.php?f=2&t=288193&p=4698420#p4698420

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Re: What percent of net worth should a persons house be?

Post by KlangFool » Thu Oct 17, 2019 9:01 am

lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool

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Re: What percent of net worth should a persons house be?

Post by renue74 » Thu Oct 17, 2019 9:07 am

HEDGEFUNDIE wrote:
Thu Oct 17, 2019 8:58 am
bgf wrote:
Thu Oct 17, 2019 8:33 am
I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.

from that, you should have as small a percentage of your net worth in your home as you find comfortable and reasonable. you want as much of your net worth as possible in the highest returning, most diversified assets, which for BHs is going to be your portfolio. similarly, we argue over 0.01% in expense ratios, and a home can cost you as much as 6% in transaction costs to sell, not to mention the time and emotional energy. the larger the percentage of your net worth, the more substantial those costs, financial and emotional.

i really am surprised. i think many people here realize their home is too large a percentage of their net worth, but there is little they can or are willing to do about it. the result is that they rationalize the situation.
The only quibble I have with your post is “highest returning, most diversified assets”. The latter does not imply the former.

Otherwise you are spot on. A house is part of your net worth just as the balance in your 401k is. More so, actually, as a house is more liquid than a 401k. Compare the 10% early withdrawal penalty for a 401k with 6% transaction costs on a house.

It’s undeniable that a house is the largest, most undiversified asset most people will ever own. Which is why it always puzzles me when Bogleheads bend over backwards to shovel *more* money into that asset by paying off their mortgage early. The inconsistency is mindBogling.
I've read multiple forum posts that indicate some Bogleheads are fine with a mortgage. In today's climate, it's almost free money.

But, it's a mental accounting thing if one wants to pay off their home. If one were ever to lose their job, they still have their home and only have to pay utilities, taxes, and insurance.

I think in the back of everybody's mind who wishes to pay off their home is the 2008 crisis....whether it's relevant or not to their personal situation.

By the way...my opinion on the % of net worth for a home....I don't think it should be tied to Net worth. As with most mortgage instruments, I would look at debt to income ratio and see what I can afford that is way below what the Dodd-Frank law indicates is an acceptable DTI.

We see a home as a utilitarian asset. We have one. We bought in 2002 and have never thought about upsizing. When our kids leave for college, we'll downsize into a more utilitarian home that fits the needs of 2 people.

I always love the "can I afford this $1M house?" In my mind, I'm thinking, who in their right mind would want a $1M house?

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Re: What percent of net worth should a persons house be?

Post by mak1277 » Thu Oct 17, 2019 9:14 am

renue74 wrote:
Thu Oct 17, 2019 9:07 am

I always love the "can I afford this $1M house?" In my mind, I'm thinking, who in their right mind would want a $1M house?
I don't necessarily want a million dollar house, but I'd love to have a $300,000 house on $700,000 of land.

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Re: What percent of net worth should a persons house be?

Post by renue74 » Thu Oct 17, 2019 9:15 am

mak1277 wrote:
Thu Oct 17, 2019 9:14 am
renue74 wrote:
Thu Oct 17, 2019 9:07 am

I always love the "can I afford this $1M house?" In my mind, I'm thinking, who in their right mind would want a $1M house?
I don't necessarily want a million dollar house, but I'd love to have a $300,000 house on $700,000 of land.
Haha....good. I'm with you there. $700K of land with the house right in the middle. No neighbors, no HOA, no city tax rate.

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UpsetRaptor
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Re: What percent of net worth should a persons house be?

Post by UpsetRaptor » Thu Oct 17, 2019 9:16 am

If you're doing things right, it should be a negative number until retirement. :D

lostdog
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Re: What percent of net worth should a persons house be?

Post by lostdog » Thu Oct 17, 2019 9:18 am

KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
Thanks. Good to know.
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smitcat
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Re: What percent of net worth should a persons house be?

Post by smitcat » Thu Oct 17, 2019 9:30 am

KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
I never found the net worth to home value metric to be useful.
If this is a good ratio = 2.5:1 or 40%.
What would a good ratio of net worth to home value be after you are retired?

JackoC
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Re: What percent of net worth should a persons house be?

Post by JackoC » Thu Oct 17, 2019 9:31 am

SQRT wrote:
Thu Oct 17, 2019 8:07 am
mak1277 wrote:
Thu Oct 17, 2019 7:48 am
SQRT wrote:
Thu Oct 17, 2019 7:12 am
Agree it’s a poor metric and there is certainly no “should”. However, I think the metric makes a little more sense once a person is retired. Then it would reflect how much the retiree wants to allocate to a house. Funds allocated to your house will not generate cash flow that can otherwise be spent in retirement. ...
For the record I have about 18% tied up in personal use real estate. Aged 69 retired 13 years.
I don't even think this matters. I think people should measure their ability to retire based on invested/investable assets compared to expected expenses. If I have enough invested assets to cover my future expenses, who cares what % of net worth is my house?
Agree, except the amount tied up in one’s house will have an impact on your investable assets and thus cash flow(income) in retirement. So it’s a balancing act more house and less income versus less house and more income.
Yeah I agree with your original statement and follow up. Once living in significant part on investment returns, the % of assets tied up in house is relevant. Because I am consuming the owner implicit rent on that portion of my assets, not receiving rent from somebody else (like if I had with half the house and the other half in a rental property), not receiving the full return on financial assets I could otherwise buy with with the net proceeds of selling my house and getting a cheaper one. What % of my assets is subject to that diminished return? Relevant IMO.

Most respondents are answering the question 'for a new home purchase, financed by a mortgage, what % of % of net worth should it be, for a person in their working years?' In which case net worth is relatively less relevant. For people like me, retired and living in paid off house purchased long ago worth a multiple of the purchase price, the net worth measure is actually significant. The cash cost of living in our house is fairly moderate as a % of our total cash expenses. Prop taxes are a moderate % of value which makes them a big $ number compared to most, but our total $ spending is also high compared to most. Insurance, upkeep and utilities are not that high because it's not a big house, and ins co will only insure for what they claim is structure replacement cost, most of the market value is the land the house sits on. The big cost is not a cash cost: it's the implicit yield we're losing by not having that money in other assets. House as % of net worth is a measure of how big a relative omission that is.
Last edited by JackoC on Thu Oct 17, 2019 9:34 am, edited 2 times in total.

Valuethinker
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Re: What percent of net worth should a persons house be?

Post by Valuethinker » Thu Oct 17, 2019 9:32 am

masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should my house be? I'm thinking of upgrading my house and I don't want to use income as a measure since it keeps changing so I'd rather use net-worth measure. Also I'm 38 and will stay in this house till my kids (who are under the age of 5) finish high-school and possibly longer.
It's better to treat a house as a consumption item which you happen to need - like owning a car*.

When you are young, your house may be 100% of your net worth. In fact given the debt, your net worth can be negative (mortgage + student loans, maybe car lease).

Hopefully when you get to your 50s, it is less than 1/3rd of your net worth. OTOH you can live in London, and house price appreciation has, until the last 18 months or so, exceeded stock market gains since about 1994. So your home has become a steadily larger part of net worth, all other things being equal.

Post retirement it will again start to grow as you spend your liquid portfolio. Eventually though you will sell your house and perhaps go into a nursing home (I have 2 relatives over 90 who are finally facing this reality having lived in their homes for 50+ years) so the percentage will drop to zero.


* I don't own a car, but I live in a big city with a huge, mostly reliable, public transport system. A car would sit on the street 6 days a week. Most people need a car for work and access to entertainment.

barnaclebob
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Re: What percent of net worth should a persons house be?

Post by barnaclebob » Thu Oct 17, 2019 9:37 am

Not counting the mortgage my first house was probably 75% of my net worth when i bought it, 33% when I sold it. Next house is at about 50% and slowly decreasing. It will be about 15-20% by the time we retire.

Bir48die
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Re: What percent of net worth should a persons house be?

Post by Bir48die » Thu Oct 17, 2019 9:53 am

an_asker wrote:
Thu Oct 17, 2019 8:14 am
masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should a persons house be?
20%.

Each time your net worth increases, you expand your house; and when the stock market goes down, you need to knock down a bedroom or two!
Agree with this percentage. Personally I don't factor in home value when keeping track of NW. Main metric is invested assets. However as I age out it will become important as something I could tap into when they ship me away.

WillRetire
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Re: What percent of net worth should a persons house be?

Post by WillRetire » Thu Oct 17, 2019 9:56 am

It is worthwhile to look at market value of a house as a % of net worth because it reflects your exposure to that asset class, namely local real estate. And even if your equity is low, the housing market doesn't care about that; A 10% drop is against the value, not just your equity stake.

Like all asset allocation discussions, the correct % depends on the individual's circumstances and family finances.

A young upwardly-mobile person may support a higher %. The younger you are, the more time you have to recover from market downturns IF you are forced to sell the house in a downturn. An older person nearing retirement should probably be more conservatively diversified and strive for a lower % assuming remaining assets are needed to fund retirement. (If remaining assets are not needed, then do whatever you want!)

There are many sad stories about the effects of the housing collapse on people of all ages. Some people took years to recover from that. It could happen again.

As others have pointed out, the more expensive the house, the more expensive it is to insure & maintain, but that's an income/expense issue, not an asset allocation issue nor a balance sheet issue.

Like investment-only AA, total AA is a personal choice. In my younger years, house was 50% of net worth. Now, it's maybe half that. I'd like it to be smaller still.

KlangFool
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Re: What percent of net worth should a persons house be?

Post by KlangFool » Thu Oct 17, 2019 10:12 am

smitcat wrote:
Thu Oct 17, 2019 9:30 am
KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
I never found the net worth to home value metric to be useful.
If this is a good ratio = 2.5:1 or 40%.
What would a good ratio of net worth to home value be after you are retired?
smitcat,

Please note that my ratio is "Net Worth to House Purchase Price". It is not "Net Worth to House Value". It is designed to prevent folks from overspending on the house. From that standpoint, it is useful.

"Net Worth to House Value" is totally useless.

KlangFool

smitcat
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Re: What percent of net worth should a persons house be?

Post by smitcat » Thu Oct 17, 2019 10:13 am

KlangFool wrote:
Thu Oct 17, 2019 10:12 am
smitcat wrote:
Thu Oct 17, 2019 9:30 am
KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
I never found the net worth to home value metric to be useful.
If this is a good ratio = 2.5:1 or 40%.
What would a good ratio of net worth to home value be after you are retired?
smitcat,

Please note that my ratio is "Net Worth to House Purchase Price". It is not "Net Worth to House Value". It is designed to prevent folks from overspending on the house. From that standpoint, it is useful.

"Net Worth to House Value" is totally useless.

KlangFool
Thank you - agreed.

JackoC
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Re: What percent of net worth should a persons house be?

Post by JackoC » Thu Oct 17, 2019 10:24 am

WillRetire wrote:
Thu Oct 17, 2019 9:56 am
It is worthwhile to look at market value of a house as a % of net worth because it reflects your exposure to that asset class, namely local real estate. And even if your equity is low, the housing market doesn't care about that; A 10% drop is against the value, not just your equity stake.

Like all asset allocation discussions, the correct % depends on the individual's circumstances and family finances.

Like investment-only AA, total AA is a personal choice. In my younger years, house was 50% of net worth. Now, it's maybe half that. I'd like it to be smaller still.
Yes there is no single answer for all people or even the same person at different times. But I wonder how many of the people saying it doesn't matter because 'a house isn't an asset' (which it absolutely is) and 'I don't count it', if you pressed them on that logic, would eventually give as a reason 'but it's just not that big a % of my net worth' :D

It pretty obviously does matter what % of NW it is for the reason you gave, exposure to price risk, since houses are *risk* assets (which is why it's not only incorrect but potentially dangerous to claim owned homes aren't assets). As well as the one I and others gave: a large % of NW in house is a large % of potential rental yield (or dividend or interest yield if you put the money in financial assets) you're consuming by living there.

There are friends of ours, more than one couple, not that well off and not huge savers AFAIK who have $1mil+ places in our neighborhood (which is std for our neighborhood) on cusp of retirement. Having long owned them, and assuming they haven't taken out too many more loans on them, the equity in those places could easily be majority of their NW. That's not relevant because 'a house is not an asset?' Nonsense. Their asset allocation is heavily skewed to price risk of inner NY area real estate, and the owner implicit rent is a big number compared to their incomes. Perhaps it's an extreme case, but in general an owned home's % of NW is only 'irrelevant' in later working life or retirement if it's a pretty low %...which means the % is relevant. :happy

KlangFool
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Re: What percent of net worth should a persons house be?

Post by KlangFool » Thu Oct 17, 2019 10:35 am

JackoC wrote:
Thu Oct 17, 2019 10:24 am
WillRetire wrote:
Thu Oct 17, 2019 9:56 am
It is worthwhile to look at market value of a house as a % of net worth because it reflects your exposure to that asset class, namely local real estate. And even if your equity is low, the housing market doesn't care about that; A 10% drop is against the value, not just your equity stake.

Like all asset allocation discussions, the correct % depends on the individual's circumstances and family finances.

Like investment-only AA, total AA is a personal choice. In my younger years, house was 50% of net worth. Now, it's maybe half that. I'd like it to be smaller still.
Yes there is no single answer for all people or even the same person at different times. But I wonder how many of the people saying it doesn't matter because 'a house isn't an asset' (which it absolutely is) and 'I don't count it', if you pressed them on that logic, would eventually give as a reason 'but it's just not that big a % of my net worth' :D

It pretty obviously does matter what % of NW it is for the reason you gave,
JackoC,

Do you count the value of your bicycle as % of your NW? If you are homeless and the bicycle is your only possession, it matters to you. Hence, you count that. But, if you are not a homeless person, you do not count your bicycle because it does not matter to you.

I am not an accountant. I do not count anything unless it matters to me. My house value does not matter to me. Hence, I do not count that.

KlangFool

deikel
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Re: What percent of net worth should a persons house be?

Post by deikel » Thu Oct 17, 2019 10:42 am

I dot see how there could possibly be an answer to this question

If you think in the direction of....in order to build wealth, then you can argue that a house helps to force you to save money (since mortgage payments are not optional, paying your own savings are)....but the overall housing market in the US appreciates at a lousy rate (certain hot speculation markets excluded)...so as an investment its a bad idea and it should be a low percentage of your net worth

As an ill-liquid asset, for emergencies, its a lousy idea - so it should be a low percentage of your net worth - yet, society urges you to buy a home and build wealth (see above)

Many low income families net worth is probably exclusively their share of the house and statistically, it is providing a wealth building tool for the middle class - but again, I think its the forced savings and not the smartness of the investment - so for many, its a large percentage of their net worth, especially when they start out...

un-answerable question

If I would do it again, my house would be an even smaller part then it was (or now is) - the McMansion trend is stupid in so many ways.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

deikel
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Re: What percent of net worth should a persons house be?

Post by deikel » Thu Oct 17, 2019 10:44 am

KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
What is the rationale behind this please ? Is there an older thread to link to ....I am curious where that number comes from and what it considers or not...thx
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

Topic Author
masonstone
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Re: What percent of net worth should a persons house be?

Post by masonstone » Thu Oct 17, 2019 10:46 am

deikel wrote:
Thu Oct 17, 2019 10:42 am
IIf I would do it again, my house would be an even smaller part then it was (or now is) - the McMansion trend is stupid in so many ways.
I agree

SQRT
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Re: What percent of net worth should a persons house be?

Post by SQRT » Thu Oct 17, 2019 10:48 am

JackoC wrote:
Thu Oct 17, 2019 9:31 am
SQRT wrote:
Thu Oct 17, 2019 8:07 am
mak1277 wrote:
Thu Oct 17, 2019 7:48 am
SQRT wrote:
Thu Oct 17, 2019 7:12 am
Agree it’s a poor metric and there is certainly no “should”. However, I think the metric makes a little more sense once a person is retired. Then it would reflect how much the retiree wants to allocate to a house. Funds allocated to your house will not generate cash flow that can otherwise be spent in retirement. ...
For the record I have about 18% tied up in personal use real estate. Aged 69 retired 13 years.
I don't even think this matters. I think people should measure their ability to retire based on invested/investable assets compared to expected expenses. If I have enough invested assets to cover my future expenses, who cares what % of net worth is my house?
Agree, except the amount tied up in one’s house will have an impact on your investable assets and thus cash flow(income) in retirement. So it’s a balancing act more house and less income versus less house and more income.
Yeah I agree with your original statement and follow up. Once living in significant part on investment returns, the % of assets tied up in house is relevant. Because I am consuming the owner implicit rent on that portion of my assets, not receiving rent from somebody else (like if I had with half the house and the other half in a rental property), not receiving the full return on financial assets I could otherwise buy with with the net proceeds of selling my house and getting a cheaper one. What % of my assets is subject to that diminished return? Relevant IMO.

Most respondents are answering the question 'for a new home purchase, financed by a mortgage, what % of % of net worth should it be, for a person in their working years?' In which case net worth is relatively less relevant. For people like me, retired and living in paid off house purchased long ago worth a multiple of the purchase price, the net worth measure is actually significant. The cash cost of living in our house is fairly moderate as a % of our total cash expenses. Prop taxes are a moderate % of value which makes them a big $ number compared to most, but our total $ spending is also high compared to most. Insurance, upkeep and utilities are not that high because it's not a big house, and ins co will only insure for what they claim is structure replacement cost, most of the market value is the land the house sits on. The big cost is not a cash cost: it's the implicit yield we're losing by not having that money in other assets. House as % of net worth is a measure of how big a relative omission that is.
Yes. My point exactly. When I bought our place in Arizona I had to forecast both the extra actual annual cost of the place but more importantly the opportunity cost of selling some of our portfolio to buy the house.

If someone had a fixed requirement for their portfolio in retirement, I guess they could spend the rest. But most people could always use more portfolio so still have to balance this with a house purchase.
Last edited by SQRT on Fri Oct 18, 2019 9:05 am, edited 3 times in total.

randomguy
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Re: What percent of net worth should a persons house be?

Post by randomguy » Thu Oct 17, 2019 10:55 am

an_asker wrote:
Thu Oct 17, 2019 8:14 am
masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should a persons house be?
20%.

Each time your net worth increases, you expand your house; and when the stock market goes down, you need to knock down a bedroom or two!
Between 0% (i.e. you rent) and about 1000% (i.e. you put down llke 5% which a good most of your net worth because buying is cheaper and better for your situation than renting). It is all situational dependent. The 60 year old about to retiree is not the same as the 25 year old just starting out. The 70 year old who is living on SS happily is not the same as someone who needs 4% from their assets. And so on.

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