What's the Right Home Equity as Percentage of Net Worth?
There's no single "appropriate" percentage for home equity as part of net worth, as it depends heavily on your age, life stage, financial goals, risk tolerance, and location. However, we can discuss general guidelines and considerations for both home equity as a % of net worth and home value as a % of gross assets.
I. Home Equity as a Percentage of Net Worth (The More Important Metric)
This measures the portion of your ownership stake in your home relative to your overall wealth (Assets - Liabilities).
General Guidelines:
Under 50%: Often considered a healthy, diversified range for most working-age individuals (especially pre-retirement). This suggests significant wealth exists in other assets (retirement accounts, investments, cash, business interests).
30% - 50%: A common target range for many financial planners, indicating diversification while acknowledging a home's importance.
Above 50%: Becomes increasingly concentrated. Common in:
Early Homeowners: Just starting to build wealth outside their home.
High-Cost Areas (VHCOL): Where home prices vastly outpace income/other investment ability.
Pre-Retirees/Retirees: Who have paid off their mortgage but may not have accumulated large liquid portfolios.
Individuals with Lower Incomes/Net Worth: Where the home is the primary savings vehicle.
Above 70%: Generally considered highly concentrated and potentially risky. Signifies heavy reliance on a single, illiquid asset.
Key Considerations:
Age & Life Stage:
Younger (20s-40s): Often start with a high percentage (maybe 60-80%+) as they build equity faster than other investments initially. The goal is to gradually decrease this percentage over time by building other assets.
Mid-Career (40s-50s): Should be actively diversifying. Aiming for 30-50% is common. Focus shifts to retirement savings.
Pre-Retirement (Late 50s-60s): Percentage might increase as the mortgage is paid down/off, but ideally, other assets have also grown significantly. 40-60% might be common.
Retirement (65+): Percentage often peaks (potentially 50-70%+) as the home is paid off. Crucially: They need enough liquid assets (investments, cash) to fund retirement without being forced to sell the house. High concentration here increases "house rich, cash poor" risk.
Liquidity Needs: Home equity is illiquid. Selling is slow and expensive. If too much net worth is locked in home equity, accessing cash for emergencies, opportunities, or retirement income becomes difficult without taking on debt (HELOC/Reverse Mortgage) or selling.
Risk Tolerance: Concentrating wealth in one asset (your home) is risky. Local real estate markets can decline. Diversification into stocks, bonds, etc., spreads risk. A lower home equity percentage generally indicates lower concentration risk.
Goals: Saving for retirement, kids' college, starting a business? These usually require liquid assets, not just home equity.
Location (Cost of Living): In VHCOL areas (e.g., SF, NYC), even modest homes represent huge values, making it harder to keep this percentage low without substantial non-home wealth.
Other Assets: The percentage only makes sense in context. 70% home equity with a $10M net worth ($7M home equity, $3M other) is very different risk-wise than 70% with a $300k net worth ($210k home equity, $90k other).
II. Gross Home Value as a Percentage of Gross Assets (Total Asset Value)
This measures the value of your home before subtracting the mortgage relative to the total value of everything you own (including the home itself).
Why it's Less Useful (but sometimes looked at):
Ignores Debt: A $1M house with an $800k mortgage represents only $200k in net equity. Focusing on the gross $1M value overstates the homeowner's actual wealth stake.
Primarily Assesses Concentration Risk: It shows how much of your total asset value is tied up in one illiquid physical asset. A very high percentage (e.g., >50-60%) still signals significant concentration risk, even if you have a mortgage.
Considerations:
High Percentage (>50-60%): Indicates heavy reliance on residential real estate within your total asset base, regardless of debt. Still carries illiquidity and local market risk.
Lower Percentage (<30-40%): Suggests a more diversified portfolio of assets (stocks, bonds, investment properties, businesses, cash) alongside your home.
Conclusion & Recommendations
Focus on Home Equity % of Net Worth: This is the more meaningful metric for understanding your wealth concentration and liquidity.
Target Below 50% for Diversification: While individual circumstances vary, aiming to keep home equity below 50% of net worth (especially during peak earning years) is generally prudent for diversification and liquidity.
Age is a Major Driver: Higher percentages are normal early on and potentially later in life (if the mortgage is paid off), but the middle career phase is crucial for diversification.
High Concentration = Higher Risk: Percentages consistently above 60-70% of net worth in home equity signal significant concentration risk and potential liquidity problems. Actively focus on building liquid investments outside your home.
Gross Value % Highlights Asset Type Risk: A very high gross home value percentage (>50-60% of total assets) signals heavy exposure to a single, illiquid asset class, even if leveraged.
Context is Everything: There's no magic number. A high percentage might be perfectly acceptable for a retiree with a paid-off home and ample pensions/investments, but risky for a young family with minimal savings. Regularly review your overall financial plan and asset allocation with your goals and risk tolerance in mind.
In essence: Strive to build wealth beyond your home equity. While your home is a significant asset and often a forced savings vehicle, over-reliance on it for net worth exposes you to unnecessary liquidity and concentration risks. Diversification remains a cornerstone of sound financial planning.