I'm interested in tracking my net worth as a way of measuring progress and I'd like to include home equity in my net worth. How are you tracking home equity? Are you using purchase price? Average home price? How often do you update your home's value? Only with an appraisal? Based on Zillow (which seems to fluctuate too much)?
I value my home at slightly below (say, less 8-10%) of comparable, recent sales in my neighborhood. I do this for a couple of reasons:
I wouldn't expect to get the best price at any peak. Wishful thinking. And,
Actually realizing any money from a sale would involve real estate commissions, moving fees, legal fees, etc.
I never guess. If I cannot find a comparable sale, I leave the home value as-is until there is data.
I think it depends on how you want it to show up in your finances.
For the first few years of my personal finances, I didn't bother even counting my house at all, but I did track the loan on it. So my software just always showed me with a huge negative net worth, which I just ignored.
When I decided to add in the house (mainly because of the always-present annoying red negative net worth in my financial software), I just put it in at purchase price. Today, that is way more than what I'd see if I were to sell it, but it doesn't really matter.
It doesn't matter because my house is not an investment. I don't want fluctuations in the housing market affecting my view of "net worth progress". I want my "net worth" as reported by my books to reflect the result of income, expenses, and investment variations. Since my home isn't any of those, I don't want home market fluctuations overshadowing the real work I'm doing.
If my house was an investment, then I definitely would track its value much more closely. As it is now, I'll probably update it once every few years to whatever I feel the fair market value is. That way it won't get out of date too much, but will stay constant most of the time. I am considering selling in 15 years or so; as that time draws closer, I'll probably bring the asset value more in-line with reality.
It's not a liquid assest, so current valuation isn't really something you should track too closely until you're ready to move.
I'd valuate the place every 3-5 years based on comparale sales. Anything less than that and you're either going to feel like a chump when someone gets foreclosed on or like a genius when houses start going up. Both feelings are dangerous from a financial POV.
My answer is similar to Steve's. When I create my balance sheet on Excel, the net worth removes the full value of the house. i.e it ignores the house value but includes the mortgage as a negative. In other words, if I told you my net worth is $X, it's really $X plus a fully paid home. I do this for one reason. When we retire, and apply the 4% rule, the house can't be counted, it's not like we plan to rent out a room.
On the other hand, I do understand those who are moving, from a high cost area such as L.A. or New York to the midwest and know they can replace their house and pocket some money. In my retirement planning I ignore this as well as Social Security and any potential inheritance.