Once you remove home equity, the average person's net worth looks completely different. For most households, a home isn't just a place to live. It becomes the largest item of value they own, which will more often than not lead to major problems. Mortgage payments act like force savings. Home values rise gradually, and before people realize it, a single item begins to define what their net worth looks like. Most people know that housing matters, but few realize just how dominant it is in the typical balance sheet. That's what we're going to explore.
Before we dive into the numbers, let's start with what net worth actually is because a lot of people are defining this incorrectly. Net worth is everything you own minus everything you owe. That includes cash, retirement accounts, investments, cars, and property. Home equity is just the value of your house minus what you still owe in the mortgage. Some people say things like, "I don't include my home equity," or, "I don't count my car in net worth." That's fine if you're trying to get an idea of your retirement readiness, but it's not net worth. In this case, they're trying to focus on stuff that's actually spendable or investable rather than things that depreciate or don't produce income.
Leaving certain items out can make it easier to see financial flexibility, but it's important to remember true net worth includes everything. You can skip certain assets for specific purposes and that can make sense, but it's a different calculation than net worth. Let's look at the numbers using figures from the US Census Bureau. Median net worth across households of all ages is just over $191,000. That number might sound reasonable at first glance, but it can be pretty misleading if you don't break it down. You could probably guess that a big chunk of that net worth comes from home equity. But the actual amount will surprise you. When we remove home equity from the equation, median net worth drops dramatically to just under $62,000. That's roughly 2/3 of the median household's net worth tied up in the home. That's not a small piece. It's the single largest store of wealth most families have. Cars, retirement accounts, cash, and investments make up the rest, but they often pale in comparison to what's sitting in the house. This gives a very different perspective than the headline net worth number alone.
When you look only at total net worth, it can make families seem financially stronger than they really are in terms of liquid or accessible resources. Remove the house and what's left is much smaller than most people expect. What's left to handle emergencies, invest, or make big life moves, it turns out, is often very limited. And that's where the issue comes in. It's not just a math curiosity. The fact that so much net worth is locked in illiquid assets can have real consequences when it comes to growing wealth through compounding. But let's see why this is a problem that most people don't even realize.
As people get older, they earn more, save more, and accumulate more stuff. This isn't always about smart investing. Often, it's just about buying more things like cars, electronics, kitchen appliances, furniture, clothes, even gadgets they'll use once or twice before throwing them away. All of these count as assets in a broad sense, but they don't generate income or really increase financial security. Home equity does grow, too, usually gradually as people pay down mortgages and housing prices rise. This is the classic middle class cycle. You start out with a modest home, maybe a small condo or a starter house. Over time, as income increases, you buy a bigger house, remodel it, or upgrade appliances, and the mortgage slowly comes down. The value of the home ticks up, adding to net worth, but it's largely tied to a single item, your house, which isn't very liquid.
For example, a family might buy a $300,000 house at 30, upgrade to a $500,000 house by 40, and have a couple of cars, a new TV, and a stock kitchen. Their net worth rises on paper, but most of that could be tied up in home equity and depreciating cars. Rather than increasing investment contributions slightly, as people have more disposable income and they get older, they divert the extra income towards material items that don't provide continual returns.
Imagine someone has a net worth of $300,000. Most of that, about 70% or $210,000 is tied up in home equity. Let's say the house is worth $500,000, but they still owe $290,000 on the mortgage. That $210,000 is the part that counts as equity and gets included in net worth. It looks like a big solid block on paper, but it's not cash in the bank. You can't just spend it or invest it without selling or refinancing the house. Next, about 5% of their net worth, roughly $15,000, sits in a bank account, checking, savings, or a small money market. This is liquid money they could actually use right away for emergencies, investments, or large purchases. Compared to the home, it's small, but it's still the part that gives them real flexibility. Another 5%, about $15,000, is tied up in finance cars, appliances, furniture, and other miscellaneous items.
These things do have value, but they depreciate. Cars lose value the moment they leave the lot. Electronics get outdated quickly, and furniture wears out over time. It counts towards net worth, but in practical terms, it doesn't grow wealth the way cash or investments do. Finally, about 20% or $60,000 is in retirement savings. Growing compounding investments that will grow exponentially and fund their retirement lifestyle. So even though the total net worth $300,000 looks substantial, it's not as straightforward as having 300 grand in the S&P 500. When you remove home equity from the picture, median net worth drops substantially. It doesn't vanish entirely, but what's left is a much smaller pool of assets. This helps explain why average net worth numbers can be misleading at first glance.
Hearing $300,000 might make people think, "Wow, that's a solid nest egg." But they don't realize that growth from there is hindered by typical middle class behavior. And if you're thinking this only applies to younger households, it doesn't. The proportion of net worth held in home equity stays high across nearly all age groups, around 65 to 70% for most adults. The only age group that looks different is those under 35, where home equity makes up about 44% of median net worth since many haven't bought a home yet. Even as people age and accumulate wealth, housing often continues to dominate the balance sheet rather than being replaced by diversified investments.
If you're 60 years old with a net worth of $300,000 and only $100,000 of that is an investment that can actually grow and compound, what does that mean for your retirement? You can't live off home equity unless you sell, downsize, or borrow against it, which often results in lifestyle compromises. So, what should people do differently? Spend less of growing income on depreciating items and steadily increase investment contributions that keeps wealth balanced instead of letting home equity dominate the picture. Without their home, the average person's balance sheet is far thinner than it appears. Having value tied up in a home is still far better than having no value at all. And whether that's good or bad depends entirely on someone's stage of life and their goals. But one thing is clear. When most of net worth is concentrated in a home and you have very little money in compounding investments working for you, financial flexibility and independence become much harder to achieve.
