1. Real estate, stocks or any other asset have a worth at all times – it’s just that until you sell it the calculation of their “worth” is just an estimate. (For stocks it easier to get an accurate estimate as their are comparable sales happening all the time, for real estate valuation is a bit more of an art than science).
2. You home equity IS part of your net worth. The money realised can be used for any purpose – while you might buy a similar property, you could also “up size” to a more expensive property and take on more debt (but this wouldn’t change your net worth, just your gearing), or you could down-size to free up “cash”, but you could also start to RENT like lots and lots of other people. If you sold your house and started renting the realized equity could now be sitting in a bank account – would you still try to argue that this money doesn’t count as part of your net worth? An asset is an asset, regardless of current usage. Every asset is only worth what someone is willing to pay for it. And what you do with the realized value once its sold is irrelevant.