Average U.S. mortgage rate tops 7% for first time since 2002

Long Island homebuyers are facing a new grim milestone, with the average U.S. mortgage rate surpassing 7% for the first time in 20 years.

The average rate for a 30-year fixed home loan was 7.08% for the week ending Oct. 27, according to mortgage giant Freddie Mac, marking the first time it has reached that threshold since April 2002.

Last year at this time, the average rate was less than half that level, at 3.14%. The average moved up from 6.94% last week.

"As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month,” said Sam Khater, Freddie Mac’s chief economist. “In fact, many potential homebuyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward."

Long Island has seen a drop in the number of home sales, but prices here continue to outpace 2021 levels. The number of homes sold during the third quarter fell 15.8% compared with the same period last year, according to new data released Thursday by Douglas Elliman and appraisal firm Miller Samuel.

The median home price in the third quarter rose 6% to a record $620,000 for Long Island, excluding the Hamptons and North Fork. Surging mortgage rates have helped keep the supply of homes for sale sparse, as homeowners who bought or refinanced when rates were at historic lows face higher rates if they decide to move.

Buyers purchasing a home at that median price, putting 20% toward a down payment, would need to spend about $1,200 more a month toward the principal and interest portion of their mortgage payment at the current average rate compared with a year ago. That translates to $3,326 a month, before including taxes and insurance.

The increase in rates over the past year is the fastest since the early 1980s when the average rose as high as 18.6%, according to Freddie Mac. This time, the rate jump followed an all-time low rate of 2.65% in January 2021.

“We’re coming out of something that we’ve never seen before with the pandemic and rates that have never existed,” said Danny Pisani, executive vice president at Contour Mortgage in Garden City.

Pisani said the shift has reduced buying power and shifted the market from a low-rate environment in which “people could afford to buy a lot more than they normally would to the complete opposite now.”

He noted that more sellers are dropping their initial list prices to attract buyers, but the slightly lower prices haven’t offset the effect of higher rates on buyers’ monthly payments.

“You can’t compare it to the rates from the last two years because if you do that, you’re just going to be miserable," he said.

Nationwide, demand for home loans has fallen. The Mortgage Bankers Association said this week that its index tracking loans used in home purchases was down 42% for the week ending Oct. 21, compared with the same week a year ago. Refinance activity has dropped 86% compared with a year earlier.

 As rates have risen, more buyers are opting for adjustable-rate mortgages. Applications for adjustable-rate mortgages represented 12.7% of all loans for the week ending last week, compared with 3.1% last year, according to the Mortgage Bankers Association. The average rate for a 5/1 adjustable-rate mortgage was 5.96% this past week, according to Freddie Mac. That type of loan has a fixed rate for five years and then can adjust based on market conditions once per year.

The Federal Reserve has increased its benchmark rate five times this year and another hike is expected at the next meeting of the Federal Open Market Committee Tuesday and Wednesday. The Fed doesn't set mortgage rates, but some of the same factors that have led it to raise its benchmark rate, namely persistent inflation, have driven up the cost of borrowing to buy a home. Mortgage rates tend to move in the same direction as the yield on the U.S. 10-year Treasury note, which reached its highest level since 2008 on Monday before falling in the past few days.

What's ahead

Freddie Mac, which purchases mortgages on the secondary market, issued a forecast Oct. 21 predicting the 30-year fixed rate would average 6.8% in the fourth quarter of this year and fall to 6.2% in the fourth quarter of 2023.

“The loosening of the once incredibly tight for-sale inventory removes the intense upward pressure on home prices of the past two years,” economists at Freddie Mac wrote. Fewer sales have helped increase the supply of homes on the market, but homeowners are also less likely to move, if they can avoid it, because of higher rates. 

That loosening of the market seen in the South and West hasn't occurred on Long Island, which  had 4.1% fewer listings at the end of last month compared with September 2021.

“Until the inventory meets what the public needs, I don’t know that you will see a drastic change in sale price,” said Paul Musso, an associate broker with Realty Connect USA in Hauppauge.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.