Market Report:
Signs to watch for, some options to consider
 By JOHN SAURO

The Federal Reserve, which controls interest rates, has gotten what it wanted with 17 rate hikes: an orderly settling of the real estate markets with high levels of activity, as stated by its meetings. What does this mean to Connecticut residents? The increase in mortgage rates has taken some of the steam out of the local real estate market but, so far, has not hurt the market. Instead, the market is returning to healthier, realistic levels. Even with the downturn, this year is expected to be the third-strongest year in real estate nationally.

However, with $2 trillion of adjustable rate mortgages to reset in the next 18 months, homeowners in Connecticut are concerned about interest rates and the market. There are signs to watch for and options you should know about.

Job market

One good way to gauge the real estate market is to look at the job market. Connecticut’s job market remains strong and that bodes well for the real estate market. When people are working, they are able to meet their mortgage obligations. The current unemployment rate of 4.6 percent is at a historic low.

Importantly, Connecticut neighborhoods that are mostly owner-occupied will fair better than areas with investment or second homes, since people selling their primary residences may have to buy another home, while owners of investment properties and second homes don’t.

So, what should you expect if you’re buying or selling a home? First, forget all the negative media hype. This is a strong market for both buyers and sellers. There are more realistically priced houses to choose from and while mortgage rates are higher than a year ago, they are still at historically low levels.

Get a commitment

One way to have the upper hand is to get a mortgage commitment before you make an offer on a house. A mortgage commitment is not just a pre-approval letter; it is a commitment to lend and turns you into a cash buyer. This gives you great negotiating power when buying because the seller doesn’t wait for you to get a mortgage.

If you’re a seller, it will be necessary to adjust your thinking and price your house accordingly. The days of houses selling in hours at inflated prices are over. The speculators have left the marketplace and construction has caught up with demand. Listen to your real estate agent, they know the market and can price your house to sell if you truly need to move.

Use creative financing

If you have a house for sale it may take a couple more months of marketing time to sell. However, homes that are priced right are moving and, as the market settles, there will be more buyers who have been waiting for the market to shake out speculative sellers.

Homeowners wanting to trade up may be hesitant to buy before they sell their home. This can result in lost opportunities. One solution may be an “Entrepreneur Home Loan,” which allows you to buy a new home before selling your home by tapping the equity in the existing property. The payments are about half those of a conventional loan, which makes it easier to carry until the existing home is sold. Also, an Entrepreneur Home Loan may not require any cash down on the purchase.

This mortgage is not typically available at most banks, but some mortgage companies offer it. As the name suggests, these loans are used as an option by the self-employed and business owners, who can use the equity in real estate to finance business expenses. Monthly payments can be 45 percent lower than a conventional loan. Also, if you are in the camp that thinks rates will drop in 2007, the Entrepreneur Home Loan will readjust down with rates.

Adjustable vs. fixed rate

Rates are still historically low on both ARMs and fixed-rate mortgages. One thing to look at is whether you believe rates will go up, down or remain the same. Some believe the Fed will actually ratchet down rates starting in the first quarter of 2007. If that happens, then a monthly adjustable mortgage would make the most sense because you would get the benefit of rates dropping without having to refinance.

If you think rates will go up, then you will want to lock into either a 30-year fixed rate or an ARM that is locked for three, five, seven or 10 years.

Determining how long you intend to live in a residence can help decide the right amount of years to fix the rate. Be sure to check for any prepayment penalties and determine how much cash you want to put down. Many people tend to put down a large down payment to keep the mortgage balance and monthly payments low, only to refinance or take out an equity loan in the future for other matters that come up, such as remodeling or college tuition.

If you’re buying a home that costs more than expected, consider a mortgage with an interest-only optional payment. This will keep the payments more affordable and offer the opportunity to pay down the balance in the future.

If cash for the down payment is an issue, consider 100 percent financing. Especially if you have the cash but have it in an investment portfolio or business that provides you with an attractive return on investment.

What about equity loans?

Most equity loans are tied to the prime rate, which is 3 percent above the federal funds rate. This is a very volatile index and many people are consolidating their equity loans into new first mortgages even if the rate on their first mortgage is low. Equity loans and lines of credit are generally good for short-term financing and were very attractive a couple of years ago but have fallen out of favor since rates have risen.

Compare the total monthly payments on your first mortgage and equity loan with that of a new first mortgage. You may be pleasantly surprised.

While no one has a crystal ball, it’s important to remember that interest rates and the real estate market are cyclical and it’s believed interest rates have peaked. Some think the Fed has accomplished what it set out to do -- slow down the economy and keep inflation at bay. If the Fed were to raise rates again, it runs the risk of slowing down the economy too much, too quickly. As it is, the Fed has had a habit of overtightening and many experts are calling for the Fed to drop rates early in 2007.

John Sauro is president of North Atlantic Mortgage Corp. in Stamford. Reach him at john@northatlanticmortgage.com.