Michael Palazzolo has a varied background. After his first career as a software engineer, he worked for a national credit housing counselling agency. In this role, he counselled clients in both the pre-purchase phase as well as others who were trying to keep their homes during the housing meltdown ten years ago. He is now a registered investment advisor who has started his own fee-only financial planning firm.
I sat down to talk with Michael about some of the insights he has gained, particularly in his work helping people just before the housing crash. Many of these people found that they were having difficulty making their mortgage payments because of purchasing a home that was too much of a stretch for them. Prices dropped abruptly, leaving many homeowners underwater. They had to decide to either “tough it out” or short-sell. Those who “toughed it out” had to do so for a very long time. Housing prices are just barely starting to return to 2006 levels ten years later.
In discussing this chain of events, Michael referenced a book called Guide to Money Happiness, stating that “debts are hard, assets are soft.” Once you get into debt, it is extremely hard to get help navigating your way out of it.
I asked Michael what advice he would give to families and couples to avoid this situation. He advises that anyone purchasing a home needs to consider what their situation is going to be 3-5 years from now. Factor in any future changes in income, additions to the family or anyone leaving the workforce. Then he suggests a common-sense, step-by-step process for creating a workable budget, beginning with the things you have to pay. He advises including about 10% of your income as retirement savings. “Whatever is left,” he says, “accommodates the mortgage, and everything else.” Once you know what you want to pay for a house, you can give agents the price range you’re seeking, instead of the amount the bank says you can borrow.
The traditional home buying process is problematic because most home buyers assume that the amount of money authorized by the bank is a reasonable amount for them to borrow. But this amount depends solely on the bank’s expectation of being repaid. It has nothing to do with lifestyle choices and does not take any other expenses into account. This problem is exacerbated when agents show home buyers properties that are at or over someones reasonable price range. It’s hard to be content with a home that costs $1000 a month after seeing a home that costs more. Accepting less can be very disappointing.
Michael admits that this is difficult; however, if home buyers can’t afford the house they want, it’s better to find out sooner than later. He encourages them to look at the big picture of their entire life; a big house isn’t everything.
There are many key components to a smart home purchase that are often overlooked. These include community, amenities, and travel time. Neighborhoods can play a crucial role in the life of a family. Proximity to children’s friends, schools, and other couples are important to consider. The ability to easily access downtown amenities, as well as the amount of travel time to work, school, family, and friends all should factor into the decision. Now that there more options for schooling, commuting time to school has become just as important as the commute to work. The creation of opportunities for your children is a significant commitment that needs to be considered.
Michael remarked that incompatible priorities in relationships can often have a profound and long-term impact when it comes to home choice. An older spouse in a second marriage may take on a huge mortgage to keep a younger spouse happy. Parents may help their adult children with a home purchase, a decision which has long-term implications for their own future and retirement. Candid conversation is key to ironing out these differing priorities. Without such conversations, homebuyers can find themselves making a lifestyle choice “by default” as these choices end up being made for them by circumstance.
I asked Michael about the common perception of a house as an “investment.” In his opinion, a house should be considered an asset rather than an investment. The equity will not really benefit you unless you sell it. Thus, a house cannot be considered an investment if you are living in it.
We also talked about changing attitudes to home buying. People do not stay in their homes for as long as they used to, and often equity is used as a “Band-Aid” for budgeting problems. Equity should be used cautiously and intentionally; it shouldn’t be your only asset, because this is not diversified enough to protect you in the event of downturn. If you are not able to nurture any other investments, it’s best to downsize your ambition in terms of a home purchase and save the money to invest in a 401k or financial portfolio.
But what if buying what you can afford means buying a house that’s just not as nice as you wanted? Michael advises home buyers to settle for “good enough.” They can always use any money they save towards the cost of their second home. He referenced his own experience of purchasing a small home with a great location close to downtown, having the intention to only stay there five years. Instead, he and his wife stayed for 16. This choice freed him up to travel and gave him the power to make a career change. Avoiding a situation in which you are financially stressed and house poor can provide you with a lot more options and freedom.
In closing, Michael tells prospective home buyers to “enjoy the process.” Buying a home is an exciting and happy event. Take a step back from the pressures and the expectations, and keep your emotions in check so you can make the best choices for your life as a whole.
Those who are interested in Michael’s financial planning services can schedule a free phone consultation by going to his website at http://www.fintentional.com/.