Allen Bostrom – Universal Accounting

I recently read an article authored by a well-known writer, we’ll call him Bob, wherein it was stated that a home is a liability not an asset.  Later, in a discussion with an associate, I understood that this is a rather controversial topic particularly among accountants.  As an accountant, I want to weigh in on the subject.

Bob asserts that a home is a liability because there’s an associated mortgage with it.  Specifically. what I understood he said was that a home is not an asset because the mortgage is a liability.  His sleight of hand is that he’s speaking of two different things:  a home and a mortgage – they are not the same.

In accounting, a home is shown as a personal asset at its market value.  The mortgage is shown as a liability at its principle value.  The difference between the two is equity.  The more equity, the greater wealth a person has.  If the person has paid off the mortgage, then the market value is the equity.  But, more importantly, when a person has paid off his mortgage, the cost for shelter is virtually eliminated.

I was further amused with Bob’s definition of wealth which is in essence the number of months a person can live without having to work.  Assuming a person has to have some form of shelter, if she’s renting, she has to pay a monthly amount to provide that shelter.  If she owns a home without a mortgage, then her wealth increases because the amount of wealth she has will last longer given the fact that she doesn’t have to make monthly payments.  The sooner she will reach that threshold by paying down her mortgage more quickly the greater the wealth she will have when that time comes.

For example, if a man monthly expenses of $4,000, including rent or mortgage payments, and has savings and investments of $100,000, then he has wealth that will last him 25 months.  On the other hand, if he has paid off his home, and his monthly expenses are only $2,000 then the same amount of savings and investments accounts for wealth for 50 months.  Using Bob’s explanation of wealth, that demonstrates a home is an asset.

That doesn’t seem too controversial to me – just simple common sense.