The second post in this series explains why your home should be included in your calculation of net worth. The case can best be illustrated with an example. Consider the following two people:
Person A: this person has no assets and no liabilities. Net worth is zero.
Person B: this person has no assets and no liabilities other than owning outright the family home.
In all other relevant respects the two people are identical.
Those who argue that the home should not be included as part of your net worth would conclude that the net worth of Person A is the same as Person B - which is absurd. (Those who argue that the home is a liability would reach an even more absurd conclusion.) The home has value and that value can be realised. Another way of looking at the question is to consider what you are trying to measure. If you are trying to determine your overall financial position, then your home is clearly part of that calculation and must be included in order to obtain a valid determination of your position. If you are trying to evaluate some sub-set of your assets (e.g. retirement accounts) then it may be valid to exclude your home but in doing so you are not determining your overall net worth - only the value of the chosen sub-set of assets.
A few other miscellaneous points on this issue:
1. wealth surveys often look at "investable assets" or similar concepts and exclude the home from their calculations. The reasons for this approach is often that the surveys are done by institutions who want to sell financial products and services to high net worth individuals (HNWIs). From the institutions' perspective, the home is largely irrelevant as it will seldom (if ever) be available as an investment and is therefore not relevant to the purpose of the survey. Put differently, what these surveys measure is not net worth but a particular sub-set of the assets that comprise the HNWIs net worth;
2. if you want to borrow money, the lenders will look at your net worth and will take the value of your home into consideration in deciding whether or not to grant a loan and, also, in deciding the terms of the loan. Even the fact that you own rather than rent is a positive factor in some lenders' evaluation of your risk profile. From the lender's perspective the home clearly is one of your assets and is highly relevant to the bank's assessment of your credit worthiness;
3. statistically home owners are wealthier than non-owners - much wealthier. The reasons for this are debatable but the correlation is a strong one. One of the reasons may be that owning a home requires a degree of financial discipline both to accumulate a deposit and to pay off the mortgage (many sub-prime lenders and borrowers would have done well to think about this).
For those who lack the financial discipline to save regularly, the requirements of servicing a mortgage is a form of forced saving.
As a final note: while I maintain that the home is an asset and is part of your net worth determination, I have not got into the issue of whether or not it is a good or a bad investment. That is another issue and a much harder one to evaluate.
Next up: the role of the home in retirement planning.