it’s also relevant to the personal situation of a homeowner. say you own a $2M home, but for whatever reasons, that’s effectively necessary, there are no reasonable cheaper options. you can sell and rent, but the stream of rents would capitalize to the same $2M you’d realize on sale. 1/

then what is your net worth? well, on the one hand, it’s $2M higher than if you didn’t own the home! you are definitely better off than owing a stream of rents worth $2M and having no corresponding asset. but you are not “rich”. all of your wealth is spoken for. 2/

if you can downgrade, say, in a few years when your kids are grown, then you do have net wealth. but another way of saying that is the stream of rents you’d owe without the house would capitalize to less than the $2M the house is worth, because the rents owed would decrease over time. 3/

you only have net wealth, though, to the degree you can reasonably consider downgrading, if the value if your home is no more than the capitalized value of what it would cost to rent. 4/

(that last is not always true! in the runup to 2008, price-to-rent ratios were very elevated, you could sell, owe the capitalized rent stream, and still come out ahead.) 5/

(a bit ironically housing wealth is only “real” wealth to a homeowner when it is “frothy”, when it has outrun its fundamental comparator of capitalized rents!) /fin