Should personal net worth include your primary residence?

[La Jolla Renter]

Should personal net worth include your primary residence?

This was a topic at a dinner party I went to last night.

I said no. It is no surprise that the couples that needed the equity in their home to qualify said yes and the rest said no.

FYI, the book “The Millionaire Next Door” said no.

[doubledogdare]

I guess it all depends upon the situation and perspective. The answer is no from an asset management industry standpoint (e.g., private bankers, discretionary and advisory brokers, etc.). The key client measure is Investable Assets, which excludes money tied-up in a primary residence. To get into a decent private bank or high end broker, you have to be a High Net Worth Individual, which is someone with > $1MM in Investable Assets.

However, I think that the IRS does consider the primary residence to be part of net worth for the purposes of estate tax calculation as well as the courts (e.g., divorce settlememts)

[(former)FormerSanDiegan]

Or, more specifically :Should the equity in your personal residence count toward your net worth ?

It absolutely does (reasons below), minus expenses required to sell. However people should also consider their net worth minus personal residence when assessing their financial situation.

Reason #1 : If you do not count homne equity you can have the following situattion. Person A has a 50% LTV loan remaining on their million-dollar home. 500K in equity. They decide to take out a home equity loan for 500K so that they have 100% LTV. ALl of the sudden their net worth goes up by 500K in that situation. Does that make sense ? NO.

Reason #2: Powayseller decises to sell her house in which she has 250K in equity. When she sells her net worth goes up 250K if you previously excluded home equity. However, those funds are presumably for purchase of a house some time in the future. Either way the 250K of worth was under her control. It shoudl count.

[lindismith]

I agree with FormerSD.

I liked this sentence from the initial post:
It is no surprise that the couples that needed the equity in their home to qualify said yes and the rest said no.

This is addressed somewhat in the KPBS thread, when interviewing Case. Apparently, when home values rise, people spend more money. We are all aware of this on Piggington, but what I didn’t know was that when values are on their way down, spending does not diminish.

So, I guess I answered my own question in the Fashion Valley thread: people are spending because psychologically they still think they are wealthy. And to some extent they are. I mean, the worst is yet to come, no?

[poorgradstudent]

Net Worth = Assets – Liabilities.

A house is an asset.

Seems like easy math to me, but I may be oversimplifying.

[34f3f3f]

Your net worth is your total assets less liablities. If you have $1m in cash today you are a millionaire. However, the statement that if you buy a house tomorrow for $1m in cash, you are no longer a millionaire, seems a little ambiguous.

The flip side is, if you include a property, should you include your cars, antiques, pictures, jewelry? If you exclude your main residence, do you exclude your holiday home that you rent out and that you bought as an investment/second home. Some people buy pictures, antiques and jewelry as items that they make use of, but that can be liquidated in times of need, and hopefully at a profit.

It really boils down to who wants to know, your bank, your buddy, or the local friendly burglar.

[Daniel]

I agree that the primary residence equity counts toward “total net worth”. It is helpful though to be very specific when speaking about the subject. There is “total net worth”, which includes everything, “liquid net worth” or “investable assets”, which excludes RE and any other iliquid stuff (if you have a Picasso, for instance), and, finally, “total net worth excluding personal residence”, which does include, for instance, rental properties, but does not include, obviously, one’s personal residence.

It is by this latest measure that San Diego has 100,000 millionaires. I suspect that many of them wouldn’t make the cut under the “liquid net worth” category, but have second homes and investment properties that appreciated mightily over the past 10 years.

[Author]

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