Equity in your home doesn't translate to net worth

Michelle Singletary
Wednesday, August 25, 2010; 8:32 PM

I have my own spin to put on the news that sales of existing homes plunged 27 percent in July: Stop thinking of your home as your cash cow.

In the past few decades, borrowers have heavily leveraged themselves by using their houses to buy the things they've wanted-cars, vacations, college educations, better kitchens or bathrooms. That's one of the advantages of entering into a mortgage for a home: You can still use the home as collateral to borrow more money.

But an estimated one in seven homeowners now has a home worth less than what they owe on their mortgages, and nearly 5 million need their home prices to rebound by 25 percent before they are back above water, according to a "State of the Nation's Housing" report released this summer by the Joint Center for Housing Studies of Harvard University.

With the rise in foreclosures and the decline in housing sales, we should be recalculating how homeownership fits into our net worth and, more importantly, how we view homeownership.

How much of our housing wealth is really net wealth?

Housing wealth represents a large component of total family wealth, according to the most recent data compiled in the Federal Reserve's "Survey of Consumer Finances." In 2007, the primary residence accounted for 31.8 percent of total family assets.

You calculate your net worth (or wealth) by adding up the value of all your assets and then deducting all your liabilities. With a house, you deduct the amount you owe on your mortgage (liability) from the approximate fair-market value of the property. By the strict definition of net worth, if your home's estimated market value is more than what you have in the bank, then you have equity, and that equity is considered an asset and goes on the plus side of your net worth.

During one of my recent financial talks, I asked all the homeowners to stand. In the room of a few hundred, about 40 percent rose. Then I asked how many of those standing had a mortgage on their home. If they did, I asked them to sit down.

Only a few people were left standing.

By the looks on the faces of the people who had to sit down, it was a classic aha-Oprah Winfrey moment.

You see, if you have a mortgage, home equity loan or line of credit on your home, you are not really a homeowner. We should stop deceiving ourselves that we are.

True, you do have certain rights to a home even with a mortgage. But as many people discovered when the economy slammed into the Great Recession, if you lose your job and you no longer have the means to pay your mortgage, you quickly realize you don't own the property you so proudly proclaim is yours.

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