At the same time you have altered your portfolio allocation considerably. Would you then reallocate a portion of your equity portfolio to maintain a desired ratio (i.e. 60/40)?

You also have the option of pulling that money back out of your home (via a fixed mortgage or HELOC) when interest returns to an attractive level.

IMO, the money you moved from a tradition fixed investment (CD, MMFs) to your home equity is as much fixed investment as any other. I would not rebalance my equity portfolio in such a scenario, unless I was looking to reduce my risk exposure.

Furthermore, it makes no difference whether you live in that house (you must pay to live somewhere) or pay to maintain it. Those expenses will not be affected either way.

I have had three different professional money managers and none of them ever bothered with any asset they didn’t fully control. The worst of all was Ameriprise (who I dropped for much much more serious reasons). In fact, one of them said that they will look at my retirement savings only when I leave my job and roll over my current 401K.

I have also spoken to many other financial advisors in social settings, etc. about this issue. Pretty much everyone claims they will definitely help you with non-controlled assets, etc.

The only pattern that emerged was that if I was *not* their customer they claimed they would help me with it, and if I was their customer they wouldn’t care.

It’s a terrible idea to include your “equity” as an asset, but it may be perfectly reasonable to include an estimate of the value of your house as an asset and the balance owed on your mortgage as a liability.

One advantage of doing this is that it may show that your overall asset allocation is really skewed. (As in Jim’s example, you might then realize that you have several hundred times your net worth invested in real estate.)

Rather than go by estimated sale price, though, you might consider other calculations of the value of your house. In particular, if you live in it, a house is worth what it lets you avoid paying in rent (adjusted for whatever extra you have to pay in taxes, insurance, maintenance, utilities, etc.). A present-value calculator can turn that monthly amount into a capital sum. Include that as an asset and your mortgage as a liability and you’ll have a much clearer indication of your true financial position than if you just ignore your house as an asset and treat your mortgage as if it were an expense.

So a word about equity. While owning a home it’s an “asset” you can only access via a debt instrument — a line of credit, second mortgage, or refinancing. And eventually it has to be paid back, unlike selling a stock or mutual fund. If you sell your home, equity — for most people I would argue — is a best a refund, and just a partial refund, of everything you’ve sunk into the money pit over time.

It’s interesting to me that the concept of “imputed rent” has emerged recently in light of the housing meltdown. As I understand it, the idea is you have to live somewhere anyway, and that is part of the value of owning a home. Hypothetically this “rent” should be backed out of the calcualtion when considering the return on your “investment.” It all sounds to me like an invention of the real estate industry to make us think things are not as bad as they are.

I’m pleased to see that there is a growing line of thought in the financial press that homeownership should begin to be viewed as consumption, not investment. That’s at least a movement toward honesty in considering the whole notion of home equity as an asset.

But it does make things a little wacky because although my house cost only 1/2 the median price in my area when I bought it, it’s still half my assets. So, sometimes I just consider myself lucky. Sometimes I tell myself that means I need to save more in the other two asset classes. Of course I’m always saving as much as I reasonably can, so this could inspire me to choose more retirement funds over pre-paying the mortgage. Occasionally I calculate what my equity would be if my house had gone up only 3% per year–that would have brought me closer to 1/3.

Mostly I just think of my house more like an annuity and insurance policy than like a regular asset. It’s like an annuity in that if I actually live in it until the mortgage is paid off, my housing costs will decline substantially. And it’s like an insurance policy in that if my property taxes get too high for me to afford, that means my house is worth a lot of money and I can sell it and move somewhere cheaper. Of course, like with annuities and insurance policies, I’m in trouble if the “company” goes under, so if toxic waste or something is discovered on or or added to my property, then I will have made a bad bet.

Bryan–that is an awesome plan. Jim has a great point about real estate exposure, too.

In conclusion, I agree that the answer is that it depends. Specifically, if thinking of it as an asset inspires you to make wiser choices, then do that; otherwise, don’t.

That said, I’m hoping to move and turn my current home into a rental. At that point, the equity I have built up in that house will probably be included in my overall asset allocation. (As I could have sold the house instead of renting it and put the proceeds into my overall asset allocation mix.)

Home equity is simply the opposite of a mortgage: money on which you aren’t paying interest. If you suddenly get an extra $10,000, and try to decide between sticking the money in a CD or putting it towards your mortgage, either way you’ll be increasing your net interest income (interest earned minus interest paid).

If you have a HELOC, paying it off is similar to putting money in a high-yield savings account. You can get the money back, and you’re earning (not paying) interest at a variable rate. If you only have a regular mortgage, paying it off is similar to buying a bond of unknown maturity (as you get the money back whenever you sell, do a cash-out refi, etc.).

So, to the extent you have home equity, you should definitely consider it when making your allocation. As your home equity goes up, it may make sense to decrease your fixed income investments to compensate.

Even if I did plan on selling the house, I wouldn’t consider it as part of my investment portfolio just because it just seems to add confusion (at least for me it does). So for the sake of simplicity, I don’t include it as part of my portfolio but it does on on my balance sheet as an asset with the mortgage going under liabilities.