When we were searching for a new home, I registered an account for Redfin to help our search. Somewhere along the line, after buying a home, I must have entered in new address.
Every single month, Redfin would send me an email about our home’s market value.
Some months it would go up. Some months it would go down.
There was little rhyme or reason to it. Eventually I unsubscribed because it was obnoxious.
But I know why they do it – it keeps Redfin top of mind. And whenever home values go up (or down), everyone loves talking about it.
I understand why it gets so much attention, it’s often the largest asset on anyone’s balance sheet. (we have official statistics too – median net worth with and without home equity)
And I play along… but I really don’t care about it. We’re going to be living here for the next few decades and so the value of our home, much like the value of our stock portfolio, is what it is – a number.
In our net worth spreadsheet, I track our home value as the purchase price plus any major renovations. I don’t account for appreciation, it’s essentially a “cost basis” figure. I include improvement costs because those home improvements increase the cost basis of the home, useful for when we calculate gains on the sale. They also offset decreases in other accounts to pay for those improvements.
For the folks who think about their home’s value a lot, I want to make one point – paying attention too closely to the value of your home is a bad thing.
Talk about it all the want but obsessing over it is bad for you.
Table of Contents
Higher Home Values Are Not Better
Everyone seems to think that a higher home value is better.
Unless you’re selling your home, a higher home value is not better.
Higher home values means you pay more for a lot of different things in ways you probably didn’t anticipate.
First, and most obviously, your property taxes will increase. Since they calculated as a percentage of your home’s assessed value, a higher assessed value means a higher amount of tax. I think we can agree paying more tax is worse than paying less tax. 🙂
Also, any maintenance and repair quotes will increase because those providers are clever. They know (rightfully or not) that the more valuable the house, the wealthier the owner, and the more they can charge. I’ve heard some providers call it the “driveway effect.” The nicer the driveway, the higher the quote. 🙂
And higher home values don’t make your life any better in any notable way. If your home is worth 10% more, is your day to day made any better? Is your bed any more comfortable? Is the view any better?
Nope. You just pay more in taxes.
You Care About the Wrong Things
The reason why many NIMBYs exist is because they care too much about the value of their home.
“Not in My Back Yard!” (but somewhere else is ok!)
While it started with affordable housing, it can apply to nearly anything that they view as a negative, mostly to their home values. You can build it, just don’t build it in my backyard because it might affect the value of my home!
Can you think of anyone against affordable housing? I can’t.
There are plenty of folks who simply don’t like those housing units to be near them. 🙂
Just a few years ago, a developer was building an apartment complex near a relatively affluent neighborhood and the tone of the Facebook group was astounding. People were Facebook furious!
It was almost universally hated (and anyone who said otherwise was attacked as if they were the ones building the complex!) and the reasons were all over the map. It would crowd local schools, the traffic would increase, the trash service would be impacted, etc.
But then someone said the quiet part out loud – “it will hurt home values!”
If you care too much about the value of your home, you might stop caring about the things that really matter.
It’s Tempting to Borrow Equity
If you track your home value, regardless of what you use to assess its value, you may be tempted to borrow against it. Home equity loans and home equity lines of credit are versatile tools but if you have a lot of equity, you might be be tempted to borrow a little bit for something fun.
Banks love to lend you money and they especially love it when the loan is secured by your home. 🙂
And when your home is suddenly considered more valuable, even by “objective” measures like an independent appraisal, it’s very tempting to take advantage of it.
In some cases the borrowing might be “responsible,” like an improvement to the home that increases its value but also its utility. Maybe you add a deck or a three-season room, something you’ve always wanted. It’s an investment that has some return (never 100%) but also improves how you enjoy your home.
Then there are less responsible ways, like cashing out some home equity for a vacation. I’m not arguing that this is bad and no one should do it, it’s your money so feel free to spend it as you wish.
But consider this – would you have taken out a personal loan to fund the trip? Or did the rise in home values make a home equity loan more convenient (and affordable)?
The Wealth Effect is Bad for You
The wealth effect is when you feel wealthier by virtue of your assets’ appreciation, usually on paper. When the stock market goes up, we feel like we’re richer… even if that money is locked away in a 401(k) or some other retirement account.
As a result of feeling wealthier, you spend more. It doesn’t matter that your income hasn’t increased, you feel wealthier because of rising asset prices and so you tend to spend more. It’s hard to measure the wealth effect on a national level but I suspect that you’ve seen or experienced this first hand.
While you wouldn’t want to make policy decisions based on anecdotal evidence, you can make personal ones based on anecdotal evidence… especially when that evidence is you!
And home equity is a little harder to tap into compared to unrealized gains in stock holdings. With stock holdings, you can sell it, earmark an appropriate amount for capital gains taxes, and get your money within a day. With home equity, you have to go through the process of getting a loan or line of credit.
The Poverty Effect is Also Bad for You
This is not an official term, as far as I know, but I use it to illustrate the other side of the wealth effect – when asset prices, like your home, go down in value – you feel bad about it. It stinks when your stock portfolio goes down in value.
When you care about the value of your home, it doesn’t feel great when your neighbor sells their home for less than you expect.
Even though it has almost no bearing your day to day life – it can have a negative impact on you. Unless you’re selling soon, a lower home value doesn’t matter to you. If you were intending to get a home equity loan, one sale isn’t likely to impact your appraisal (especially since it’s to get a loan).
Why would you let the value of your home have that effect on you? Why would you introduce the scarcity mindset (which is what happens when you feel this poverty effect) when resources haven’t really gotten scarcer?
Your house may be worth a little bit less but since it doesn’t affect you on a day to day basis, why let it actually affect you on a day to day basis??? 🙂
And that, my friends, is why I don’t pay that much attention to the value of our home. There’s almost no upside and plenty of downsides.
Did I make a compelling argument? Let me know what you think.
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I’ve lived in the same house for 42 years, the only one we’ve ever owned. Paid $32,500 for it back then and it is probably worth about $200,000 now. I’m glad it appreciated, its part of the millions I’ll hand down to our grown kids someday far in the future (I hope). I don’t obsess over it but to consider it not having any value doesn’t make sense from an estate planning standpoint. Its a tiny part of our estate but its more than pocket change. We are spending maybe $400K on land and a vacation house currently, all paid in cash. We’ll consider that an investment too, one we could easily sell if we needed to and one that is not correlated with our other investments.
Jim Wang says
You make a good point about the estate planning aspect, though I don’t value it at $0, it’s just valued at the cost basis.
Jeremy C.M. says
Guilty of the Wealth Effect. Thanks for pointing this out and reminding us!
I only care because we’re thinking of a move in the next couple of years. Over the past decade, I was frustrated by property tax increases due to rising property values yet when local tax increases based on property assessment value are put to vote, not a word is said about increased revenue due to property appreciation.
Jim Wang says
Policy makers love more revenue! 🙂
Refreshing perspective – agree it is always nice to see the increase … I don’t fret over the downturns (except maybe the dot.com bust and 2009!). In silicon valley there is rarely a downturn that is more than a blip in time – it has certainly screwed up our real estate calibration for the understanding the rest of the country.
Jim Wang says
I can see how that would happen!
Lazy Man and Money says
You brought up a lot of great points. There are a lot of reasons why home prices going up are negative.
Our town calculates property tax by multiply your assessed value by a town factor – something like $12.50. So if you have a $250,000 house you pay $3125 ($250 * 12.50). If the house goes up to $500,000, the rest of the houses in the town typically go up. The town’s budget is still the same, so they change the town factor to $6.25 per $1000. In the end, people mostly pay the same property tax.
Jim Wang says
Ha that’s so weird, they just adjust it so you keep paying the same? Kinda “nice” of your town. 🙂
Your “head in the sand” and “have no opinion / lais·sez-faire” approach is dangerous to say the least. One should always evaluate one’s “wealth” on an on-going basis to see if they are on track for their goals. Additionally, just because one’s accounts or home goes up in value does not absolutely trigger a spend more mentality.
Lastly, not having an opinion about one’s asset or activity around one’s asset “home” under the auspices that there are more important things to have an opinion about is ridiculous. For many, their home is their most valuable asset and you are arguing to not be assess whether they should take action (move) based upon what is happening to them. This is nothing but irresponsible writing on your part.
I sure hope you don’t provide financial advice that people pay for. Your writing isn’t “woke”, it is simply irresponsible.
Jim Wang says
I think you have brought some preconceived notions to what I wrote because I never said that you should keep your head in the sane or not evaluate your wealth. My point was that too many people care too much about their home’s value when it doesn’t matter all that much unless you are about to sell.
I love the random throwing in of “woke” as if it’s going to get me upset. 🙂
Thank you for rejecting my post, validating that your site edits out any honest criticism of your posts. I took a snapshot and will post on Twitter/FB to educate and inform others and let them judge for themselves if your site engages in deceptive practices, cloaking advice with a protective disclosure claiming you don’t provide financial advice.
All for the 1st amendment right, which means commentary online about your site is also protected.
Jim Wang says
Share all you’d like – but the site moderates comments if someone has never commented to keep out spam.
I’m not sure if this type of talk gets you much validation in real life but I suspect not. Best of luck to you sean.
Completely agree on this. I remember when everyone was doing the home equity loan when house prices were rising in 2006… oops that didn’t play so well when the prices crashed in 2008! I vaguely monitor the value, but I always see it as just a number that can change up or down at any time. It only counts when I get the sale money.
I sold my first house in 2010 for $1000 more (or maybe less can’t quite remember) than I paid for it 8 years earlier. Since I had never borrowed against it and had been aggressively paying down the mortgage, it was just a little disappointing. BUT then I was able to buy my current house for a lot less too – so swings and roundabouts 👍
Jim Wang says
I think that’s a healthy way to think about it – monitoring is important but don’t let it take over. 🙂
I think fewer people share stories like yours and they LOVE talking about how they bought a house for $32,000 in 1988 and sold it for $500,000 in 2018. 🙂
Good advice for ppl who tend to helicopter over their assets. Unless you’re planning to sell it in the next 6-12 months, not really a consideration.
Jim Wang says