6

I've thinking about buying a house, and how that would affect my net worth. It seems to me that if out of pocket + debt = value then the transaction shouldn't affect my net worth in the short term. What sort of actions would cause my net worth to go down?

Chris W. Rea
  • 31,999
  • 17
  • 103
  • 191
C. Ross
  • 7,886
  • 9
  • 46
  • 78

6 Answers6

15

Buying a house can definitely make your net worth go down because there are expenses involved (interest expense, closing costs, taxes, maintenance, etc.). So unless the house appreciates in value enough to offset these things, you will see a drop in your net worth from buying a house. More specifically it can have a negative impact on your net worth, since changes in your net worth are the cumulative result of all your inflows and outflows of money.

JohnFx
  • 53,876
  • 13
  • 137
  • 250
5

One way to think of net worth is to think if you sold everything you owned, how big of a pile of money would be standing next to you (assuming your net worth is positive).

If you started with $100K and then bought a house worth $100K you would have $0 in the bank and a house. If you sold that house for $100K you would pay the realtor 6% (typically) or $6K leaving you with $94K. This means the act of buying your house has reduced your net worth by $6K.

I asked a related question about how to value your home in your net worth.

Community
  • 1
Alex B
  • 17,394
  • 11
  • 58
  • 108
3

Cosigning a loan for someone else will make net worth decrease, whether backed by security or not.

kajaco
  • 352
  • 1
  • 5
3

In general, buying a house will improve your net worth over the long haul, because unlike cars, houses don't suffer as much from depreciation.

The problem with real property is that markets are very cyclic and aren't very liquid assets. Farmers with thousands of acres of valuable land are often cash poor for that very reason. A lot of people here are negative about housing ownership — this is illustrative of the fact that 2010 is a year where real estate is on the down-side of the cycle.

RegDwight
  • 135
  • 1
  • 1
  • 5
duffbeer703
  • 30,455
  • 54
  • 101
2

You can look at buying a house as being a long term investment in not paying rent. In the short time there are costs to buying (legal, taxes, etc). This depends on only buying house of the size/location you need e.g. no better then what you would have rented.

House buying tent to work out best when there is high inflation, as the rent you would otherwise be paying goes up with inflation – provided you can live with the short term pain of high interest rates.

Ian
  • 2,968
  • 19
  • 20
1

Houses depreciate. Period.

Things break: the hot water heater explodes, the AC cuts out in August, the roof leaks, the basement floods, toilets back up, raccoons dig up the garden. Each time something breaks, the house loses value. Every year the paint fades a little, the house loses value. Every time GE comes out with a more efficient washing machine, the house loses value.

The only reason a house appears to maintain its value over time is because the money you spend repairing and improving it offsets this unavoidable depreciation. Even then, over extended periods of time it will typically just track inflation--so you're treading water. Not that there's anything wrong with that. You need to live somewhere.

eater
  • 209
  • 1
  • 3