Americans love their homes — maybe a little too much

As questions go, this one troubles me a lot: Do we love our homes more than we should? It bothers me because I’ve been a home ownership nut my entire adult life.

That's not hyperbole.

I bought my first, a rooming house in Boston’s South End, at age 23. I’ve been buying and fixing up houses ever since. A dozen, in all.

At first, I did the fixing-up work myself. But I quickly learned that guys who do remodels all day were way better at it than I am. Today, my best tools on the constructive side are a broom and a checkbook, not necessarily in that order. On the destructive side, well, I'm quite accomplished with a wrecking bar. Call me Mr. Tear-Out.

As investments, my houses have ranged from neutral to fantastic. But the real deal was about owning a home. Eventually without a mortgage.

So I'm not sure I qualify as an objective observer on this topic. In my heart, I am a homeowner.

But something jumped out when I did the data grinding for a recent update of the wealth scoreboard, which details our collective net worth by age group. For most Americans, home ownership is the primary source of net worth. Without it, our net worth is small. With it, our net worth is larger and better.

You can get a sense of this by examining the distribution of net worth with and without home equity for households in the age 55 to 59 age range — those on the runway to retirement.

As you would expect, home equity is a small part of net worth for the top 1%. With an all-inclusive net worth of at least $17.5 million, their net worth less home equity is $16.3 million.

Their $1.2 million in home equity could be a single home owned outright. It could also be two heavily mortgaged homes worth far more. Either way, the important fact is that only 6.9% of their net worth is in home equity. The remainder is in assets that earn returns.

They can afford the houses they own — and then some.

But as you go down the wealth pyramid, home equity becomes a greater and greater portion of net worth. It's 21.4% of net worth for the top 5% households. It's 22.3% for the top 10% of households.

At the top 35%, home equity is nearly half of net worth, or 48.6%.

For the 65% of all households below that, home equity is greater than 50% of net worth — or they aren't homeowners.

So? Is this a problem?

It is. Homes are wonderful places. They put a roof over our heads. But even if you own your home without a mortgage, it costs money. While estimates vary by location, most homes will cost about 4% to 5% of their value per year to operate.

Now let's ask an awkward question. How much do you need in investment savings to provide the income needed to support your house?

Answer: It takes about a dollar of investment money to support a dollar of home value.

What the Federal Reserve consumer finances study tells us is that at least two out of three households don't have enough in financial assets to support the amount of home equity they have when they retire.

If they have a remaining mortgage balance, the situation is worse. The only good news here is that the situation hasn't changed greatly in the 50 years I've been observing it. Basically, 65% to 70% of all households have held most of their net worth in home equity for decades.

What's the problem if the situation hasn't changed?

Everything else.

Half a century ago, 401(k) plans didn't exist. But pensions did. Today, pensions are an endangered species on two fronts. If they aren't gone altogether, there is a good chance they are underfunded. As a result, most future retirees won't have the virtual wealth of pensions to help pay shelter expenses. Most future retirees will be entering retirement with fewer income sources than past workers have had.

This observation goes way beyond arid statistics.

The most common retirement problem readers have is being house-poor — they love their valuable house but don't have the retirement income to support it.

For many, today would be a good time to think about downsizing.