Poll: Primary Home as % of Net Worth

[rodi]

Have you heard what they call a millionaire in California? A home owner

Their is a lot of truth to the joke.

Friends of mine had a primary home and two rental properties here in San Diego - the wife laughed and said they were "nega-millionaires".... Owed more than $1M in real estate.

 

[Midpack]

I don't quite get the idea of an "appropriate" amount to spend on a residence. Doesn't it go: Find a place you want to live; decide how much money you can spend; look for a house (or build one) that fits your budget and your needs? Addendum: Why would it matter what other people spend on their houses? I am just not sure how this equates to advice or wisdom.

I get that, I was going for order of magnitude. And I’m not asking or judging anyones choices, it’s an anonymous poll. There have been threads if not polls on this very subject here in the past, but it’s been a while and I just couldn’t find one.

To me it’s not unlike people asking how much house they can afford - their income vs mortgage, a very common question. In this case, I’m asking how much house a retiree or anywhere without need of a mortgage should afford. Like some/many here, we’ve never spent what lenders told us we could afford (our current house was less than half what a lender would say we could afford on paper), and I guess I haven’t shaken that mindset in retirement. This would be the largest purchase we’ve ever made by a wide margin. As I expected, DW is probably right, I’m being a cheapskate (she hasn’t actually said that BTW).

 

[Alan]

The problem with valuing the pension as an asset is that you receive the cash flows only if you are living.... and while mortality is very predictably for groups it is very dicey for individual lives.... that is why standard setters decided to exclude life annuities from assets (a period certain annuity would be an asset since benefits are not dependent on a life).

Also, if you included pensions as an asset it could be volatile... if your pension is a large part of your net worth and you are diagnosed with cancer, then your net worth drops like a rock... I'm don't think that makes a lot of sense.

I agree. My wife and I have 4 lifetime private pensions plus 4 more pensions to come with US and UK SS to come. (We maintained our UK SS record with voluntary contributions so have 30 years of credits). However, when we die there is nothing to pass onto the heirs.

I do include the value of our primary house in the net worth calculation as it will be added to the value of our estate when we die and the UK has a much lower threshold for Estate taxes than the USA.

 

[Moemg]

I actually have the opposite problem right now . I am looking to downsize . Our current home is too large and requiring too much maintenance as we age . What galls me is that I will be paying the same or slightly more for a smaller home as I paid for this home years ago . I will make a nice profit on this home but it still upsets me.

 

[Amethyst]

Just background data, I get it.

I just arbitrarily decided how much we can afford to spend, and now we are looking at what it will buy in a place where we might like to live, that has lower taxes than where we now live. Our problem is that while we can buy a very "nice" house, none of the many-fake-gabled production houses appeals to us and we are scared of buying a lot and building from a distancce. And the real estate agents want to sell us older houses and we want newer...it's a puzzlement. There is no retirement-house Nirvana...except when Other People brag about theirs, of course

I get that, I was going for order of magnitude. And I’m not asking or judging anyones choices, it’s an anonymous poll. There have been threads if not polls on this very subject here in the past, but it’s been a while and I just couldn’t find one.

To me it’s not unlike people asking how much house they can afford - their income vs mortgage, a very common question. In this case, I’m asking how much house a retiree or anywhere without need of a mortgage should afford. Like some/many here, we’ve never spent what lenders told us we could afford (our current house was less than half what a lender would say we could afford on paper), and I guess I haven’t shaken that mindset in retirement. This would be the largest purchase we’ve ever made by a wide margin. As I expected, DW is probably right, I’m being a cheapskate (she hasn’t actually said that BTW).

 

[NW-Bound]

I actually have the opposite problem right now . I am looking to downsize . Our current home is too large and requiring too much maintenance as we age . What galls me is that I will be paying the same or slightly more for a smaller home as I paid for this home years ago . I will make a nice profit on this home but it still upsets me.

Our main home is not so large that we need to downsize, although I have 5 free rooms upstairs, of which I really use only 1 for my electronic lab. Downsizing costs a lot of money, and moving creates stress. I'll just stay here until I die. I would sell the 2nd home first, but even that is not on the plate now.

About how much of one's net worth to spend on a home, it really depends on what one has. If I had only $1M, I would not spend $300K on a house. But if it were $10M, I would have no hesitation buying a $3M house on the waterfront on Bainbridge Island. And could you imagine Buffett spending 30% of his net worth on a home? There's no house that costs $27B!

 

[Alan]

I actually have the opposite problem right now . I am looking to downsize . Our current home is too large and requiring too much maintenance as we age . What galls me is that I will be paying the same or slightly more for a smaller home as I paid for this home years ago . I will make a nice profit on this home but it still upsets me.

I know how you feel, we went through the same process in 2003. However, we rationalized it by accepting that the smaller place would take much less hassle and money to run.

 

[mokan]

Its just a survey but I enjoyed it

Thanks to the OP for starting the thread. Take it all with a grain of salt, of course, but its quick & cheap external benchmarking.

We're in the middle of selling one house and upgrading. We also need to decide whether to keep the vacation place. If we keep the vacation place, then we edge toward 22%. Include discounted pension value & that becomes 17%. Dump the vacation house and down to 13%. All fuzzy numbers but the main point is that it isn't 10% and it isn't 30%.

For our part, we're just going to do it in cash. I'm expecting the market to tumble anyway so I have more cash than normal. I looked at a mortgage and didn't like the short term cost.

As to those questioning the metric, the ratio of housing value to potentially income generating net worth made sense to me. Of course magnitude matters but there are limits to what you should ask for.

 

[hesperus]

But if it were $10M, I would have no hesitation buying a $3M house on the waterfront on Bainbridge Island. And could you imagine Buffett spending 30% of his net worth on a home? There's no house that costs $27B!

We're in the former, and only live in a 1240 sq ft 1950's home - plenty for DW and I. I often think we need to put more NW into our primary, but it's hard to even think about putting 30% of our NW into a home. I suppose it's just that ol LBYM habit, and the fact that that sized house would also include much more in the way of expenses. I'd rather have it in the portfolio.

 

[Aiming_4_55]

I'm not retired, but in the planning phase (RE in 1 - 5 years is my best estimate). We relocated for a new job several years ago, and due to the COL, we downsized from a two story 3,000 sq ft SFR home to a single story 1,500 sq ft condo. The condo was about $150k more, but better weather and close to the beach. First floor was a nice long term factor. While I have a longer timeframe (age 50 to 95) to fund and kids to raise, the extra $$ is well spent in my mind. It did take some time to embrace, but I'm coming around to spending more.

The job and new city were both for the experience as I was looking for something new and exciting to some degree.

Perhaps, sell your place and rent for the first year or two as many normally recommend before buying. Within that time, you can decide if it's worth the extra $$ or not. Or, relocate to another area for new experiences again.

 

[kcowan]

And I know polls here always have outliers, I don’t think I can remember one that floated through without some concerns expressed. I’ve come to expect that.

Yes I am an outlier because we rent for 5 months in one location. I am also Canadian so I am used to being an outlier on this forum.

 

[beachfire]

We just retired in a High cost of living area and we are at about 25%.

 

[exnavynuke]

The home we’re considering would cost about $200K more than our current home, and that would come from our investments, reducing net worth as defined for this poll.

Thankfully the poll seems to be yielding the range of results I was expecting.

I’ve seen the debate on this forum many times, and it seems the consensus guidance here has been to not include their primary residence in net worth, at least when figuring out what you can spend in retirement - e.g. SWR. Even aside from homes, what makes up net worth for each of us can vary considerably. Those who have generous pensions and retirement health care could have a relatively lower net worth. That would have a PV/FV but I wasn’t sure everyone includes that in net worth. In any event, I was just trying to establish some basis for the poll, there are several legitimate approaches, none I know of that will work for every situation.

And I know polls here always have outliers, I don’t think I can remember one that floated through without some concerns expressed. I’ve come to expect that.

Net worth has a definition, and it includes home equity. The preference to not use net worth when talking about SWRs is because it is immaterial to the subject, since only those parts of your net worth that will provide income are applicable when calculating a SWR (and home equity is generally not an income source for most people).

For this poll, I could use my current values and get ~66%, not including pension. Or I could use the NPV of my pension and drop that number to about 25%. Or I could use my projected retirement balance without pension and get around 22%. Or I could use my projected retirement balance with pension NPV and get an even lower number.. so I don't know what to vote here. Oh, and then there's the value of my free healthcare for life to take into consideration...I think I'll just skip voting.

 

[copyright1997reloaded]

I answered 10%, but expect the % to rise if/when I move, sell my current house and buy another (likely smaller house). Why? Because the areas I am looking at seem to be more expensive than where I currently live.

I'm always amused by the "how much house" or "how much car" can one afford. That question makes sense (particularly the house one where its expected value should go up over time around the rate of inflation) for those who are house limited by income, but doesn't make sense (to me) once one reaches a certain wealth point. I could sell a bunch of assets and buy a considerably more expensive house, but for what purpose? More to take of? Bragging rights? Living around snobby people? No thanks.

 

[NW-Bound]

... But if it were $10M, I would have no hesitation buying a $3M house on the waterfront on Bainbridge Island.

We're in the former, and only live in a 1240 sq ft 1950's home - plenty for DW and I. I often think we need to put more NW into our primary, but it's hard to even think about putting 30% of our NW into a home. I suppose it's just that ol LBYM habit, and the fact that that sized house would also include much more in the way of expenses. I'd rather have it in the portfolio.

I do not want a mansion, but my pipe-dream location is expensive. And on a waterfront lot, it is rare to see something less than 3,000 sq.ft.

PS. If I had $10M, I would more likely buy a $3M home than a $150K car. It's all about priority.

 

[RobbieB]

For me a house has to "grab me" somehow, I have to have some emotion from it. It has to make me feel good.

And it always costs more than you want to spend yes?

And by all means, it should make you happier than where you are now or why bother?

 

[kcowan]

If I had $10M, I would more likely buy a $3M home than a $150K car. It's all about priority.

If I had $10m, I would probably get both.

Example of home

 

[NW-Bound]

Hey, the forum software messed up, and labeled my post as written by Midpack!

Anyway, the Vancouver $6M home makes the Bainbridge waterfront homes look like a steal.

Here's one on the market now for a mere $2.4M, with a nice view of the Seattle skyline. No-bank waterfront. Perfect for me to go crabbing, and my wife to watch me from the deck.

https://www.redfin.com/WA/Bainbridge-Island/4106-Rockaway-Beach-Rd-NE-98110/home/2140711

 

[MichaelB]

Hey, the forum software messed up, and labeled my post as written by Midpack!

Which post?

Edit - is it "if I had $10M"?

 

[NW-Bound]

It is as quoted by Kcowan in post #67.

Perhaps Kcowan did some edit, and caused the mislabeling.

 

[MichaelB]

It is as quoted by Kcowan in post #67.

Perhaps Kcowan did some edit, and caused the mislabeling.

Got it, thanks. I did an edit to fix - no harm done.

 

[Midpack]

I'm always amused by the "how much house" or "how much car" can one afford. That question makes sense (particularly the house one where its expected value should go up over time around the rate of inflation) for those who are house limited by income, but doesn't make sense (to me) once one reaches a certain wealth point. I could sell a bunch of assets and buy a considerably more expensive house, but for what purpose? More to take of? Bragging rights? Living around snobby people? No thanks.

We simply want to move south for better weather, and a change in scenery, and it’s going to cost significantly more. After a life of LBYM, it takes a little thought for me to essentially increase our fixed costs. We’re not looking to test our financial limits at all, nor for “bragging rights” or “living around snobby people.”

 

[Midpack]

Net worth has a definition, and it includes home equity. The preference to not use net worth when talking about SWRs is because it is immaterial to the subject, since only those parts of your net worth that will provide income are applicable when calculating a SWR (and home equity is generally not an income source for most people).

Hindsight is a wonderful thing. In retrospect I probably should have used your definition of net worth, I’m just used to thinking about net worth WRT supporting spending, which typically excludes home value. My mistake. Fortunately the poll results have served the intended purpose for me at least.

 

[Cat-tirement]

Doing the computation as specified, ours is just under 19% with the current value of our house. It would be just over 13% using our actual purchase price almost five years ago when prices were still under the influence of the real estate crash (which is why we bought then). We would likely be reluctant to buy our house now at its current value.

 

[copyright1997reloaded]

If I had $10m, I would probably get both.

Example of home

That home would be around $500-600K here. Location, location, location.