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July 16, 2007


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All I know is what we do. Our equity is about 26% of our net worth.

Works for us.

My initial reaction was somewhere around 25%. However, as time increases I would expect that your house becomes a lower percentage of your networth, this assumes that you continue living in the same house while still contributing to other investments. I think for some younger folks 40% might not be too high, but I don't think that I would go much higher than that.

Also, if people include housing in their networth calculations, do they use a negative number if they are upside (that is if they are willing to admit that they are upside down)?

First of all, I agree that true net worth includes home value (and mortgage debt). But it's very useful to cut that and other assets out to get a measure of liquid net worth.

I agree that there is no lower end, except in the sense that without real estate you are not truly diversified. I'm not sure what percentage of American money is in real estate, but for diversification purposes I think everyone needs either hard assets in real estate or some liquid investments in REITs or something similar. Otherwise you are overexposed in the other markets. I also believe that in many markets a home is an excellent investment for financial gains-- though this is far from the truth in many larger markets.

As for a maximum . . . I think 40% may be a good max, but it should be this high only for young people and/or people in their first homes, and should decline as you get older. If buying a home means you'll have much more than this tied up, you are probably not financially ready to buy one. I've had my house for 2 years, and when I first bought it may have actually comprised a little more than 40%. Currently it is hovering around 33%, and generally declining. I wouldn't feel very comfortable if more than half my money was tied up in my house, for the simple fact that I either have to sell it or PAY (for a loan) to extract it if I need it. Having a large chunk of money tied up in the house seriously reduces your financial flexibility. This is one of the best arguments, IMO, for not paying down the mortgage quickly. It puts you in a more cash-poor situation than you need to be in.

This one should really be based on personal comfort, if you are comfortable with a good amount of your net worth being at risk of fire, flood, angry neighborhood kids, etc. Go for it. Personally I would keep it low.

There are a lot of variables on this one. Just starting out on your own and renting/roommate? How about being a small business owner and having a large portion of your net worth be in your company? Or maybe new retirees who live in a small but comfortable home that's paid off and saved/invested well throughout their lives?

My take on it would be that there probably is a maximum percentage, but there may not be a minimum. The biggest test of all would be how long you can go in retirement or major emergency without refinancing or downsizing your home. I think that would be the more important test of your personal liquidity.

What ever it is as you reach retirement age it needs to be paid for.

We're also in the process of moving (we're building actually). Based on our current home however, 20% of the equity makes up our net worth of 250k.

More than most other questions posed in this forum, the answer is, it depends. Many people in the NE, CA and FL saw their home equity skyrocket in the early 2000s, at teh same time the stock market was anemic: so their relative home to stock equity was high. Lately, stocks have been roaring, and the real estate bubble hissing, so the ratio changes.
Overall, I'd rather than $400k in home equity than in stocks, becasue GENERALLY your home is not likely to decline in value if you were prudent in purchasing it (and paying fairly for it) in the recent past. In other words, history shows bear markets on Wall Street can rob more capitalization than bear housing markets along Elm St.

I meant to write,"I'd rather have $400 k...."

Currently our net house value (estimated market value - mortgage debt) is about 20% of our net worth. I'm not really sure how relevant that ratio is though. One reason being that the percentage can vary so widely based on how much mortgage debt I carry. If I aggressively liquidated investments and savings to pay down my mortgage, I could probably raise that percentage to 30% pretty quickly. Conversely, based on the substantial equity in my house, I could do a cash-out refinance and reduce that percentage to around 10%. Therefore I could make this number high or low without changing my house's market value or my net worth.

Estimated house market value / net worth would be less variable, but without the debt aspect again I'm not sure how relevant it is, at least for my primary residence. If I were looking at investment property I think it would be more relevant, but then you're really asking an investment asset allocation question, which doesn't seem like what you're going for.

My goal was to pay my home off in 5 more years. I moved in 3 years ago, owe roughly 170k now and it is estimated to be worth 275k. My original thought was that would put me in a better situation to get everything I want in my next house for somewhere around 475k PV (where I live). Do you think I am making a mistake not putting my money elsewhere? I currently put 10k/year in 401k and about 3k/year in Roth IRA and I am 29 years old.

My net worth would look like the following as a 34 year old assuming the stock market doesn't crash.

370k net worth
75% in primary home

We bought a home while we still have a negative net worth (student loan debt), so this seems like a very odd question to me. Obviously, as time goes on, the house will be a progressively smaller portion of our full net worth.

I'd love to see the house which is worth $5,000! (1% of $500,000 net worth)

My equity is 0% of my net worth. No, wait...division by zero produces a meaningless result, right?

An income argument would suggest something like a quarter to a third of net worth but should one use net house or gross house? Net seems more reasonable for someone starting out but even then it may take nearly all your net worth as a first time buyer. I don't think it should be necessary to save 3 times your down payment before buying, though if you have it, great. This should decline over time.

If your house becomes more highly valued should you borrow more against it? Perhaps. Should you do so even if the only means of paying off the increased debt is the investment return on the borrowed money? Perhaps not.

What alternatives do you have? If rent is a higher (lower) percentage of your income is a higher (lower) percentage for housing reasonable? Probably.

A few years ago mine was a third, but now it is over a half. This should decline until the next housing run boosts it again, but I am not interested in moving or renting so there is little control over it.

I'm not sure if net worth is the way to calculate it. Think of a doctor out of medical with some student loan payments and a huge salary. The person would have no real net worth, but could probably afford a substantial home. For this reason, I think you could include your yearly salary into the equation.

I think you are probably right with it between 20-40%, but I'd like to see it as close to zero as possible. I don't think 1% is too low because it may mean that you are worth a REAL lot. As long as the home suits my needs, I'd rather money in other areas such as investment real estate, stock, or bonds, etc. So put me in the "low as possible" camp.

Interesting question, but opens up quite a can of worms. I'd be in the $500k range net worth, maybe 90% in my home, but this in no real way shape or form reflects our finances. We bougth a house at what we felt was a very reasonable price and well it more than doubled in value after a few years. Very house rich. Yet living in a very high COL area we also had to put A LOT down to comfortably get into a house (not into the ARMs and 0 downs). So either way you slice it we have a lot in our house. Take away all our equity and we are about 50/50 house and retirement/cash.

We did most of this up to age 25 and then we took significant time off to have kids (didn't save much). We have pretty aggressive goals for our retirement and investments over the next decade (now we're 30) so I imagine it will shift significantly in future years. Age is probably another factor to consider. Then again if our house doubles in value again in the next decade what can I do - I can't save up that fast. Not that I expect it to happen, but sometimes there is not much you can do from being house rich. It's not a horrid problem to have either. ;)

Because of this I put greater weight on measuring our liquid net worth as a measure of our financial progress. The housing/equity portion of our net worth is quite volatile and reflects little of our actual financial progress. I also am quite adverse to prepaying our mortgage at this point - it skews our net worth even more heavily as far as our home. IT makes me uncomfortable to skew our percentage above 90% - what's the point? Our house is almost 70% equity though we only put 20% down a few years back. So I guess it reflects a little in our overall financial goals.

I think for most people in high COL areas the affordability of a house is going to be a much greater facter than the percentage of net worth. We actually moved somewhere significantly cheaper, just at the right time, ourselves.

Our parents are very house rich as well (bought homes int he 70s - paid off long ago). Doesn't reflect that they are frugal and huge savers. The fact is my parents' house is worth 10 times what they paid and in-laws is about 15 times what they paid. I am positive both have more net worth in their house than their investments...

Sorry to blab more but wanted to say Lord had good points as well. I think many would argue we put too much into a home so young, BUT it was cheaper than renting at the time. I don't think personally we could have done anything better for our financial future. So bring on the equity!

Here is my $0.02. I belive my home should be between 10-15% of my target net worth (for financial independance).

If you think about it from a planning perspective with the costs of home ownership, the house must be a smaller percentage of your target net worth inorder to ensure you aren't consuming your net worth to support it. For instance my target net worth is ~$2.25M so I am thinking I should not buy a house for much more than $250k.

My thoughts:
-- Equity in your house doesn't help you in retirement, unless you want to downsize or move to a cheaper location.
-- Probably to your advantage to have your house paid for in retirement.
-- Housing equity portion of many net worth statements are inflated because (1) people think their house is worth more than it really is and/or (2) they don't account for the cost of a sale (real estate commissions, fixing up the house, etc. And what about moving costs if you're downsizing?)

When I calculate my net worth, I divide it into categories, home equity, retirement savings, liquid investments. And I discount values for taxes etc.

The equity in my 'I haven't even moved in yet' house is just over 50% of my net worth. Its possible that this could increase quite a bit if house prices go up - if they went up by £10K in a year, the house would probably form 60-70% of my net worth.

You' re a fool to be buying a house right now. Go to the bookstore and buy "Sell Now!" by John Talbott. Published in late 2005 or early 2006, it has proven its worth as it was written at a time when everyone was obsessed with RE...people thought home prices could never go down and would keep going up 20-30% per year. Of course, now that housing is in a death spiral, at least in California, the arguments in this book are proving true.

Why would you want to pay some greedy flipper a huge premium on a house purchased for one half or one third of its 2001 price? You're paying for their retirement, and that is a dumb financial move any way you slice it. I'll sit back and watch these fools fall into foreclosure. Waiting has served me well thus far...prices in California are down 10-20% from their early 2006 highs. A house is not an investment, it is not liquid. It is little more than a forced savings account for those who can't manage money.

I think the question misses a key point. There is no distinction in the question between home equity and home value. Of those two components, only home equity affects net worth. Adding home value that is encumbered by a mortgage has no effect on net worth. Suppose someone with assets of $1,000,000 and net worth $500K buys a $400K home and finances $300K of it. In that scenario 20% ($100K/$500K) of the net worth is invested in the home, but 28% of total assets are in the home ($400K/$1,400,000). Compare that to the person with the same net worth who paid cash for the home instead of getting a loan. In that scenario, 80% of net worth would be in the home, but the percentage of assets consumed by the home (28%) remains the same.

Perhaps a better (or at least equally important) question is "what percent of one's ASSETS should be invested in a home?" In either of my scenarios, I cannot say which person is making a wise decision or a foolish decision because I do not know the makeup of the remaining 72% of their assets. How many financial management theories advocate asset as the key to investment performance? In my second scenario, the individual is clearly levered to the hilt on everything but his home, having only $100K equity in the remaining $1 million in assets. What kind of return is he getting on those assets? Is it a small business that generates significant cash or is it a highly leveraged rental real estate "empire"?

From what we know, buying a house is illiquid as you need a place to live irrespective of whether its gone up or down. It frankly shouldnt be dependant on a % of networth, but more on a % of sustainable yearly family income after tax. I'd be more comfortable buying a home who's installments are a max of 33% of Income after Tax. What % it represents of my networth to me is irrelevant.

The whole argument begs the question. The assumption is that buying a house is always a good thing. What if you don't want a house? What if your job keeps you moving every few years? What if you can find better investments elsewhere?

Personally, all of the above are true for me. I don't even WANT a house. When I see people dropping outrageous sums monthly into PITI/maintenance & upgrades while putting a pittance into their retirement accounts, I zip my lip, shake my head, and just move on.

If I knew that I would be in the same location for a very long period of time, I might pay cash for a house (and reduce my fixed income allocation accordingly). But barring that scenario, I don't see myself ever buying. While everyone else is shoveling every spare dime into their house, I'll keep saving my 5-7k per month and RENTING my brand new house (month to month). Housing is an expense; it's consumption. Just pay for what you use, and invest the difference.

My entire net worth is liquid, broadly diversified, and closing in on 7 figures soon. As a millionaire, I'll continue to RENT and keep my money compounding. Who needs a house? What a hassle and headache! I got better things to do...


Some guidelines for the standard salary earner
A1) The lower your net worth, the higher your home's value as a % of your net worth.
A2)The higher your net worth, the lower your home's value as a % of your net worth.
B) Your home's value should be between 3.5 - 5 times your net annual income, this is thought to be within acceptable ranges by many financial institutions. Obviously this multiple declines rapidly as your annual income rises.
At the end of the day, your home value is what you can afford to pay, say you are renting your home (from a 3rd party), what % of your net income is bearable (to you) - to be paying in rent (or mortgage); the answer should range from a very low 10% for high income earners - to a maximum of 25% for low income earners (tops); otherwise you are living well above your means.
If you are your own boss, you should rent and use your capital to minimize borrowings.

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