Should You Include Your Primary Home in Net Worth?

September 5th, 2020 by 

When calculating net worth you need to include the value of your home. Proper net worth accounting adds up all assets and subtracts all debts. Primary homes are assets, and debt secured by primary homes is debt.

Adding Homes to Net Worth: Confusingly Controversial

Although including primary home equity in net worth is correct, this is a surprisingly controversial subject.

You can find arguments against this proper net worth math everywhere from message boards to blog posts to social media. Very influential people have argued – and undoubtedly will continue to argue – in favor of completely ignoring a primary home in any wealth calculation.

Modern home, presumably owned with equity and included in net worth
A home has value even if a person owns it.

Blue checkmarks, popular authors, fervent financial gurus, and angry commenters aside, these arguments are all wrong. Your home's contribution to your net worth is real.

As far as we can tell, the argument for excluding primary homes come from two angles: the legal angle and the emotional angle. We'll address both in turn.

The Law, Primary Homes, and Wealth Calculations

Here on the site, we calculate the number of accredited investors in America. The law which governs accreditation, §230.501, has a few criteria for an individual to be Accredited. The most common way for a natural person to achieve the status is through a wealth calculation:

  • $1,000,000 in net worth outside equity in a primary residence

(More math on this is in our net worth percentile calculator).

And therein lies some controversy - the Securities Act explicitly disallows primary home equity in accreditation.

It's not just the Securities Actwhich treats a primary residence as special. Many states recognize a primary house - homestead - as an asset with increased protection.

Some localities change tax rates or otherwise incent homesteaders, and many states exempt part of a house from bankruptcy proceedings. (Look up your state here).

Undeniably, Federal, State, and Local laws variously treat the primary home as special. However, the legal argument still isn't a good one, for a couple reasons...

1. Your Home is Not an Investment

We agree 100% with this sentiment: your home is not an investment. Instead it is, at its core, shelter.

The one thing all of the primary home laws have in common is protecting the home from seizure or loss. Those laws aren't saying that net worth doesn't include a primary home. They are making a value judgement that it is extremely punitive to force the loss of a home on top of other losses.

The Securities Act, therefore, is calculating what's 'okay' for an investor to lose in a risky private placement.

Tax breaks are value judgements that homesteaders should receive a break over landlords and absentee homeowners. And bankruptcy laws are acknowledgements that people need shelter and shouldn't have to endure the loss of a home on top of other assets.

2. The Math Doesn't Work When Excluding Primary Homes

Reasoning through the legalities, you'll quickly realize that the math wouldn't work anyway.

The simple truth is, whether you're a renter or a borrower or living rent-free through the kindness of some individual, your shelter costs money.

At its core, it doesn't make sense that you would exclude a primary home... yet could sell that home and instantly create wealth 'from scratch'. (Okay, fine - after selling and escrow, minus a few percent for realtor's fees.)

A renter is also in a worse place than a homeowner if an investment goes south. The renter will then have zero resources left to rebuild, while the homeowner still can sell the house for real money which uncontroversially would count towards net worth.

There's a reductio ad absurdum argument here as well:

Imagine a homeowner with $999,999 in a checking account and a primary home worth $3,000,001 owned free and clear. He or she would not be an accredited investor, despite being worth $4,000,000.

Importantly, §230.501 recognizes the fungibility of a primary home's value. Debt secured by the home in the previous 60 days only counts on the debts side; any resulting assets aren't included.

That's an absolute necessity with the absurdity - if that clause didn't exist you could simply tap home equity and deposit it at the bank to hack your number!

Emotional Arguments about Net Worth and Primary Homes

The other argument type we've seen for ignoring primary homes in net worth calculations is emotional. These arguments appeal to frugal instincts, bias, and even normative judgements about whether homes are "worth it".

These emotional arguments oftentimes target coastal states with huge home prices relative to the heartland. "But home prices may fall" is a common theme, along with value judgements like "that home is unnecessary!".

These arguments for excluding primary home equity also miss the point.

Wrong but Useful Net Worth Arguments?

We'll grudgingly admit these arguments are sometimes useful - for some people, it might be useful to ignore primary home equity when viewing finances. It might help to narrow down an expendable subset of total wealth without cluttering the view with home equity.

But remember - separating total net worth from spendable net worth is already common! Categorizing different assets is part of the game when reviewing your finances.

Just as you don't spend your college fund on vacation, you shouldn't invest in stocks using your house.

Ignoring home equity might sometimes be useful, but holistically viewing your assets and debts is important as well.

Primary Homes and Rental Suitability

While it's true that some areas have extreme housing price gains, that alone isn't a great argument to exclude home equity from wealth.

Houses for purchase are often better than units for rent. Many arguments conflate rental cost and housing rental cost, ignoring that it's more expensive to rent a single family home in a neighborhood. Often, rental cost and mortgage cost is a wash when comparing like-to-like.

While an emotional net worth argument might suggest renting to current owners, things aren't as they seem. There are objective measures of home quality outside home value - crime, school rating, distance from amenities, commute, and more. Arguing "you could save by renting!" isn't appropriate without also making sure comparisons are appropriate.

Take the San Francisco Bay Area, for example. It is possible to rent a bed relatively cheaply in a hacker house with 18 entrepreneur roommates – but why do that if you're married with two school age kids and a dog?

The value isn't obvious - or sometimes even existent - when you start to narrow the criteria.

Emotions Countering Emotional Net Worth Arguments

One argument for excluding primary home equity is of the form "you should be renting". This supposedly justifies leaving it out since "there is a better alternative to your current state".

There's an emotional counter - or an economically rational one - to this "renter argument" of net worth: when was the last time you washed a rental car?

Rope bridge as an analogy for stable housing
Stability is a good argument when countering emotional net worth discussions.

Many rental benefits - the ability to move easily, convenience factor, fungibility of many units, and anonymity of renting - are negatives for some lifestyles. As you wouldn't wash your rental car, you don't remodel your rental. In fact, you often can't - usually you have to use temporary fixtures and can't paint or even replace appliances.

A neighborhood of homeowners is different. By giving up the ability to quickly move, you also develop long-term relationships with neighbors. You and your neighbors can renovate your homes and improve your properties. Neighborhoods with many owners also have increased political clout - as people don't move as much, politicians overweight homeowners' political preferences.

Having a stake in home value has many positive benefits. Homeowners usually behave economically rationally, improving homes and forging fruitful relationships with neighbors. Politicians also see homeowners as more dependable, favoring them with other new laws of the sort described above in this post.

Depending on your own value judgements and stage in life, different emotional arguments will apply. Regardless - even if owning a home suddenly doesn't make sense, that doesn't make the home worthless. A change in life circumstances sometimes means you should sell the house, which will raise real funds (that also would count towards net worth).

Primary Home Equity Counts in Net Worth

You should always count your primary home equity in a net worth calculation. In this post, we've discussed some of the conclusions that arise from this simple fact - some which might help you with your own finances.

While you have many types of assets, not all assets are - or should be - interchangeable.

We wrote above about not spending your college fund to travel, but this really applies to all types of assets and debts you hold.

For immediate spending, you want liquid, easy to access funds... say, a checking or savings account. If you're rolling up an 'Investable Asset' category, you'd leave out this immediate spending as well as your primary home, the value of your car, and many other categories as well.

Remember... net worth is just a snapshot of finances at an instance in time. While real estate can fall in value in the future, so can all other assets - even cash!

At some level, wealth is a theoretical: if you sold everything today, how much cash could you raise? It doesn't necessarily include all transaction costs, taxes, and liquidity considerations... just as a business's book value or market value isn't a business's liquidation (or salvage) value.

Either way, that doesn't change the fact that a home has real value, whether you live in it or not. You should always count the equity of a primary home in a net worth calculation.



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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