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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?

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    The more I read on owning versus renting, the more I'm convinced that aside from being financially prudent, the money thing should be taken out of the homeownership question - i.e. look at the ways homeownership could bankrupt you or ruin your credit score if you mess up, but don't look at it in terms of monetary value. Buy a house for the intangibles as long as you can afford it. – justkt Sep 17 '10 at 16:17
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    @justkt your primary residence is not an investment unless you plan to sell it and actually use the equity that you built up (if you are lucky to have any equity left). If you keep selling and buying a bigger house then you just pumping money in and never see it again. Not really a definition of an investment. From an investment point of view i am sure you can do better by renting and investing into something else, maybe even a rental property – Vitalik Sep 19 '10 at 16:12
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    A house is an investment: It's an inflation-protected perpetual bond that pays interest equal to ~80% of your rent bill. It's not a lottery ticket. It's not AAPL. It's not GOOG. – eater Mar 1 '11 at 17:21
  • @eater -- Many houses come with the mineral rights to the land under them, and most houses come with the development rights to the land they are on (subject to zoning laws, setbacks, and other restrictions.) These rights amount to bonus lottery tickets. There is a chance that down the road, someone might want to buy the house for its land value. – Jasper Oct 26 '15 at 20:13
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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.

  • This is offset a bit by the fact that your monthly payment goes partially to paying down your debt, compared to renting where your entire payment is essentially wasted (from a net worth perspective) – Eric Petroelje Sep 17 '10 at 16:00
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    Also the interest you pay each month will be a reduction in net worth. All that being said in general a house purchase will increase your net worth in the long run. There are always exceptions to this rule. – mpenrow Sep 17 '10 at 16:03
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    I would argue that appreciation in a house generally doesn't increase your net worth in terms of real dollars, only in nominal dollars. – JohnFx Sep 17 '10 at 16:10
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    @Eric Interest payments are also thrown away (aside from the ~25% written off for US taxes if you have enough other deductions). In the short term, your interest payment should be lower than your rent, or you could probably invest more profitably somewhere else. – SpecKK Sep 17 '10 at 19:50
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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.

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

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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.

  • I agree here that net worth should improve in the long haul. The more immediate and negative impact from buying a home is usually a lowered cash flow. – nutella Dec 31 '13 at 7:21
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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.

  • In the UK, houses tend to go up in value, as the land increases in value a lot faster then the building needs work. We also built to last. – Ian Oct 25 '15 at 19:07
  • Due to the planning system, in the UK, land prices tend to track wages not inflation over the long term. Wages tend to increase more than inflation. – Ian Oct 25 '15 at 19:07
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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.

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