Percent of Net Worth in Home too Much?

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tryingtogetahead
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Percent of Net Worth in Home too Much?

Post by tryingtogetahead »

I know many BHs do not even count their home in their NW, but if I do, my home equity represents almost 20% of my total NW (i.e., $625,000 home equity on a $3.25mm NW). The home has done nothing for me appreciation wise over the 7 years I have owned it while my stock portfolio has ballooned. My total NW was $650,000 when I bought the house 7 years ago and I have marched to $3.25mm over that period. This "asset" has been a significant drag on my NW growth. Do BHs consider this a problem? Should I borrow against it to juice my returns and NW growth or should I look at this as a way to "smooth the ride" and provide balance to my NW and its growth over time? I guess I was heavily influenced by this advice earlier in my career and am now rethinking it now that I have a larger base: https://www.youtube.com/watch?v=xdfeXqHFmPI
dbr
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Re: Percent of Net Worth in Home too Much?

Post by dbr »

I don't understand what the issue is. If you want to own a home and live in it the you are not even remotely "house poor." Keep in mind stock returns over the last decade have been huge and won't be the average for the next decades.

If you made a mistake it was tying up capital in the home seven years ago, but that doesn't help now.

Generally having an owner occupied home is a life-style choice and then an investment decision. Rent versus buy and borrow to invest decisions are tricky so I can't answer that, but I would repeat that 20% of growing net worth in your home sounds fine to me.
delamer
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Re: Percent of Net Worth in Home too Much?

Post by delamer »

Look at your home as a place to live, first and foremost.

It hasn’t been a drag on your net worth; it’s given you shelter at a basically fixed price for seven years (while enabling you to build equity as a bonus).
Carefreeap
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Re: Percent of Net Worth in Home too Much?

Post by Carefreeap »

Ours has ballooned to something like 40% of our NW over the last 8 years but I try to keep it in stride. We always have business corrections that humble us.

We're in the SF Bay Area and with the wildfires and rolling blackouts upon us in addition to the Covid 19 crisis we could see another real estate correction. We like and appreciate where we live and are grateful to be heathy and financial solid.

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keystone
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Re: Percent of Net Worth in Home too Much?

Post by keystone »

You're doing great financially and I don't see any reason to change anything.

Most of us here do not consider owning a home as an investment, rather it is a cost of living like owning a car. Most people do not sell their car so that they can invest additional funds.
RocketShipTech
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Re: Percent of Net Worth in Home too Much?

Post by RocketShipTech »

If this actually concerns you there are a few things you can do about it:

1. Take out a HELOC, invest it in the stock market
2. Refinance into an interest-only mortgage, cash-out if possible
3. Increase your stock allocation (by selling bonds or leveraging up) so that your portfolio grows faster than your home equity
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JoeRetire
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Re: Percent of Net Worth in Home too Much?

Post by JoeRetire »

tryingtogetahead wrote: Thu Aug 20, 2020 12:09 pmThis "asset" has been a significant drag on my NW growth. Do BHs consider this a problem?
Since I don't care at all about net worth, and even less about net worth including home equity, put me in the "don't consider this a problem" category.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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gr7070
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Re: Percent of Net Worth in Home too Much?

Post by gr7070 »

tryingtogetahead wrote: Thu Aug 20, 2020 12:09 pm I know many BHs do not even count their home in their NW,
I suspect this isn't true. It seems most if not the major majority of us include it in our *net worth*. By the commonly accepted definition it technically is. Those who don't are making up definitions.

Many of us do not include it in our *portfolios*. Maybe most of us???

As noted above by many commenters we don't view it as (just) an investment. It's viewed mostly as shelter with a lifestyle choice to own or rent; that owning on-average provides financial benefits (return, cost-certainty, etc.).

As long as you're saving enough to retire appropriately and can afford your shelter do as you wish.

Additionally, 20% of NW is likely way too low for even those who place importance upon this issue.

Way, way too much is made of this either way one wants to view it. It's a waste of time and effort.
Last edited by gr7070 on Thu Aug 20, 2020 1:58 pm, edited 1 time in total.
student
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Re: Percent of Net Worth in Home too Much?

Post by student »

My el cheapo condo is worth about the same as I purchased it close to 20 years ago. In any case, OP has a great NW even without counting home equity. So I think OP is doing fine.
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rob
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Re: Percent of Net Worth in Home too Much?

Post by rob »

gr7070 wrote: Thu Aug 20, 2020 1:02 pm
tryingtogetahead wrote: Thu Aug 20, 2020 12:09 pm I know many BHs do not even count their home in their NW,
I suspect this isn't true. It seems most if not the major majority of us include it in our *net worth*. By the commonly accepted definition it technically it is. Those who don't are making up definitions.

Many of us do not include it in our *portfolios*. Maybe most of us???

As noted above by many commenters we don't view it as (just) an investment. It's viewed mostly as shelter with a lifestyle choice to own or rent; that on-average provides financial benefits (return, cost-certainty, etc.).

As long as your saving enough to retire appropriately and can afford your shelter do as you wish.

Additionally, 20% of NW is likely way to low for even those who place importance upon this issue.

Way, way too much is made of this either way one wants to view it. It's a waste of time and effort.
Agree.... I don't put the mortgage in my portfolio either, although both would be in a "net worth" calc if I ever bothered doing one.

I do have multiple "portfolios" and while it's semantics, the differences are important due to different timing and risk tolerance.... I have a bucket for retirement and this is the one I spend most time on but also have a bucket for college expenses for kids and a smaller one for expected expenses over next few years (roof, new car). Last is liquid, college is aimed with a mid term timeframe based on kids ages but I have always treated it as though I would augment with current cash flow - they are too low for a full ride for all kids and courses.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
Broken Man 1999
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Re: Percent of Net Worth in Home too Much?

Post by Broken Man 1999 »

Our casa is about 12% of our NW.

The home is certainly appreciating at a much lower rate than our retirement portfolio. And, the lower the assessments, the lower the property taxes. At the height of the RE bubble our property taxes were around $2,600/year. Taxes now are $1,700/year. I would rather have lower taxes with a lower assessment than higher taxes with a higher assessment. Of course if we were desiring to sell, the higher the price the better.

Hopefully DW and I will be rolled out on a gurney, as neither of us has any desire to sell, at least until one of us is gone. Then, the one remaining will probably get a small condo/townhome near one of the DDs. We are hoping the DDs will have a bidding war for the pleasure of having one of us living nearby. :D

I have to say that although I know homes are part of NW, I have never tracked it, or provided anyone with the figure.

We always bought homes with no consideration of effects on NW. Our metrics for home buying were income, cash flow available to pay PITI, need (or sometimes wants).

Housing prices are market dependent, family size, income available, preference for different housing options, age, etc.

I don't consider our home as an investment, just nothing more than shelter that we like.

Broken Man 1999
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Topic Author
tryingtogetahead
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Re: Percent of Net Worth in Home too Much?

Post by tryingtogetahead »

Isn't someone's home generally their largest asset and many people sell their homes in retirement and downsize to use the appreciation to fund part of their retirement? If so, isn't home value very important to most people? Also, isn't this an important measure b/c if you are buying a house that would be say 50% of your NW, that will kill your returns and you are buying too much house?

BTW, my primary home is nearly 20% of my NW b/c we have 83% equity in the home due to modest appreciation and significant debt repayments (a mistake I made in the first 2 years of owning the home when I was obsessed with being debt free). I guess many BHs have a small % of their NWs in their homes b/c they have 20% equity or so and therefore the home equity would only represent 4-5% of their NW?
Mr.Chlorine
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Re: Percent of Net Worth in Home too Much?

Post by Mr.Chlorine »

Your NW has increased by a multiple of 5 over 7 years and is subsequently about 5 times your home equity. To me, that sounds like a pretty good 7 years!
dbr
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Re: Percent of Net Worth in Home too Much?

Post by dbr »

tryingtogetahead wrote: Thu Aug 20, 2020 2:35 pm Isn't someone's home generally their largest asset and many people sell their homes in retirement and downsize to use the appreciation to fund part of their retirement? If so, isn't home value very important to most people? Also, isn't this an important measure b/c if you are buying a house that would be say 50% of your NW, that will kill your returns and you are buying too much house?

Yes, a lot of conversations here neglect or forget that people in retirement often downsize or rent and the equity becomes an invested asset. It is also true that owner occupied real estate may not have the appreciation other investments might have. A warning is not to count on recency in stock returns. We have been in a major bull market from 2010

BTW, my primary home is nearly 20% of my NW b/c we have 83% equity in the home due to modest appreciation and significant debt repayments (a mistake I made in the first 2 years of owning the home when I was obsessed with being debt free). I guess many BHs have a small % of their NWs in their homes b/c they have 20% equity or so and therefore the home equity would only represent 4-5% of their NW?

And in retirement might amount to 20% with a paid off house. We are at 17% but live in a relatively modest house.
jarjarM
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Re: Percent of Net Worth in Home too Much?

Post by jarjarM »

Our home equity is ~15% of overall NW. Not retire yet.
Ryzen
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Re: Percent of Net Worth in Home too Much?

Post by Ryzen »

Our net worth is just about to cross into positive territory not counting home equity, yet we own a small, affordable home. We like owning our own place and our mortgage payment is much lower than rent would be, especially since we were able to take advantage of the current refinance boom. It's a place to live and it doesn't make me uncomfortable that home equity is quite literally 100% of our net worth because it is not kneecapping other financial goals. In my opinion, a home is only "too much" if it is detrimental to your personal financial goals, and in your case I don't see that.
adamthesmythe
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Re: Percent of Net Worth in Home too Much?

Post by adamthesmythe »

This is a good reason not to track net worth and in particular to not include house value in net worth calculations. Because then you start thinking about things like this.

OK so I'm thinking about it. You can move to a cheaper place, take out a mortgage and invest it, or sell and rent. None of those would be attractive to me if I kinda like where I was living.

Skip the net worth thing and focus on a reasonable guess of income and expenses in retirement.
Lee_WSP
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Re: Percent of Net Worth in Home too Much?

Post by Lee_WSP »

tryingtogetahead wrote: Thu Aug 20, 2020 2:35 pm Isn't someone's home generally their largest asset and many people sell their homes in retirement and downsize to use the appreciation to fund part of their retirement? If so, isn't home value very important to most people? Also, isn't this an important measure b/c if you are buying a house that would be say 50% of your NW, that will kill your returns and you are buying too much house?

BTW, my primary home is nearly 20% of my NW b/c we have 83% equity in the home due to modest appreciation and significant debt repayments (a mistake I made in the first 2 years of owning the home when I was obsessed with being debt free). I guess many BHs have a small % of their NWs in their homes b/c they have 20% equity or so and therefore the home equity would only represent 4-5% of their NW?
For most Americans, yes. But they also don't invest 10-20% of their paychecks either.

Your question boils down to whether you should do a cash out refi. The answer is probably the same as to whether you'd buy your house with a 30 year mortgage & 20% down for what it appraises for. If not, would you do the loan at 30% down? 40% down? Etc.
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tryingtogetahead
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Re: Percent of Net Worth in Home too Much?

Post by tryingtogetahead »

Lee_WSP wrote: Thu Aug 20, 2020 3:03 pm
tryingtogetahead wrote: Thu Aug 20, 2020 2:35 pm Isn't someone's home generally their largest asset and many people sell their homes in retirement and downsize to use the appreciation to fund part of their retirement? If so, isn't home value very important to most people? Also, isn't this an important measure b/c if you are buying a house that would be say 50% of your NW, that will kill your returns and you are buying too much house?

BTW, my primary home is nearly 20% of my NW b/c we have 83% equity in the home due to modest appreciation and significant debt repayments (a mistake I made in the first 2 years of owning the home when I was obsessed with being debt free). I guess many BHs have a small % of their NWs in their homes b/c they have 20% equity or so and therefore the home equity would only represent 4-5% of their NW?
For most Americans, yes. But they also don't invest 10-20% of their paychecks either.

Your question boils down to whether you should do a cash out refi. The answer is probably the same as to whether you'd buy your house with a 30 year mortgage & 20% down for what it appraises for. If not, would you do the loan at 30% down? 40% down? Etc.
This is correct and insightful. I can do a cash out refi of 500k and payoff the 125k HELOC. This would give me 375k net cash to invest. The rate I was quoted was 2.5% 30 yr fixed. My hesitation is that the S&P has had a huge run recently and that would be 11.5% of my NW invested all at once at these prices. I do have mortgages on investment properties that I have refied to 2.5% also so I do have that exposure but the numbers are not big.
Lee_WSP
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Re: Percent of Net Worth in Home too Much?

Post by Lee_WSP »

tryingtogetahead wrote: Thu Aug 20, 2020 3:11 pm My hesitation is that the S&P has had a huge run recently and that would be 11.5% of my NW invested all at once at these prices.
You can't think that way. The money you've already got in the market is in at the market at the higher valuations already. You aren't pulling that out now are you?

The feeling of loss is real, but the timing decision is psychological rather than mathematical. Whether the additional funds changes your thinking on AA is a different question.
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Kenkat
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Re: Percent of Net Worth in Home too Much?

Post by Kenkat »

Sell the home and live in your stock portfolio instead. It should be very spacious and comfortable since it has grown so much in value.
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BolderBoy
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Re: Percent of Net Worth in Home too Much?

Post by BolderBoy »

tryingtogetahead wrote: Thu Aug 20, 2020 12:09 pmI know many BHs do not even count their home in their NW, but if I do, my home equity represents almost 20% of my total NW (i.e., $625,000 home equity on a $3.25mm NW). The home has done nothing for me appreciation wise over the 7 years I have owned it while my stock portfolio has ballooned. My total NW was $650,000 when I bought the house 7 years ago and I have marched to $3.25mm over that period. This "asset" has been a significant drag on my NW growth.
Eh?

So 7 years ago your home was almost 96% of your NW? And now is 20% of your NW and the home hasn't changed in value, right? What is your complaint?

And no, you should not take out a loan on your home to invest in the market.
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catlady
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Re: Percent of Net Worth in Home too Much?

Post by catlady »

This post seems like a humble brag. If you have 3.25mm in investible assets, I wouldn’t worry about your home’s value at all unless you’re planning to retire in the near future.
deikel
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Re: Percent of Net Worth in Home too Much?

Post by deikel »

You could calculate what your home actually saves you in housing costs and then calculate an investment return based on those numbers. So if your currently invested housing net asset value of say 150k saves you some 6k dollar in rent payment, then your investment returns 4%.

That is more then a cash/CD/bond and quite a bit less then stock investment. I believe that for most, the return is more in the 2% (simply because people tend to own more house then they would rent for)

So, if your net worth in home is large and returns less to you then the stock market, you are making your investments less efficient - how much less efficiency you deem acceptable is up to you. It makes your net worth increase over time smaller then it could be.

Its similar to a trade off between owning bonds/cash/CDs (which diminishes your returns) vs having the volatility of a full stock portfolio.
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Re: Percent of Net Worth in Home too Much?

Post by fanmail »

Kenkat wrote: Thu Aug 20, 2020 3:43 pm Sell the home and live in your stock portfolio instead. It should be very spacious and comfortable since it has grown so much in value.
:P
prairieman
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Re: Percent of Net Worth in Home too Much?

Post by prairieman »

I actually find this somewhat interesting since house values in my area probably increase by around 5-6 % per year - similar to what I expect long-term portfolio gains to be (50-60 % equities).
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Nowizard
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Re: Percent of Net Worth in Home too Much?

Post by Nowizard »

Not an issue in the opinion of most here. I suspect you can find someone's formula for what the relationship should be for those absolutely attempting to maximize their portfolio amounts.

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Re: Percent of Net Worth in Home too Much?

Post by eco_eco »

I keep our house in our net worth considerations as (during our accumulation stage), we’ve always wanted to make sure we were using the equity growth within the house to boost our overall performance. We’ve borrowed against the house to purchase rental property and stocks. We have been very comfortable doing this while we have safe and secure jobs with low likelihood of cashflow problems.

However, we don’t count the house in our investment net worth when forecasting income for our retirement/wealth preservation stage (since we need to live in it).

When we stop working we will be much less aggressive about our borrowing and will most likely de-leverage a fair bit to reduce risk.
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