Mortgage rate drops to 6.78% as inflation slows

The average rate for a 30-year fixed mortgage dropped to 6.78% for the week ending Thursday following data released last week showing the rate of inflation is slowing.

The average had been 6.96% last week, according to mortgage giant Freddie Mac. The most recent national index reflects mortgage applications submitted to Freddie Mac by lenders from July 13 to July 19.

This week’s drop snapped a streak of three weeks in which rates climbed and brings the average back to where it was in early July. But borrowers are still facing some of the highest interest costs in decades. Last year, the average was 5.54% for a 30-year loan.

 The increase in mortgage rates over the past year has hurt home sales but prices have stayed high because the supply of homes is near an all-time low. That combination has made homeownership less affordable, particularly for first-time buyers. 

Before last year, when the average peaked at 7.08% in late October and early November, the average rate for a 30-year fixed mortgage hadn’t been this high  since 2006.

Last week, the U.S. Labor Department reported the Consumer Price Index increased 3% for the 12 months through June, which was the slowest rate of inflation since March 2021. Mortgage rates tend to rise during periods of high inflation.

“As inflation slows, mortgage rates decreased this week,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Still, the ongoing shortage of previously owned homes for sale has been a detriment to homebuyers looking to take advantage of declining rates.”

Long Islanders have experienced that trend. The number of homes available for sale at the end of June, about 5,000, was the fewest for that month in decades, according to OneKey MLS.

 In some parts of the U.S., home builders have stepped in to meet demand with new construction. New homes made up an unusually high one-third of all single-family home listings in the U.S. in May, The Wall Street Journal reported this week.

But that dynamic doesn't exist on Long Island, where the cost and availability of land limits the number of new builds.

"You have these major builders who could build 1,000 homes in Texas or the Carolinas and that’s just not possible here," said Kevin Dayton, vice president of mortgage lending at CrossCountry Mortgage in Melville. "There’s not enough space to build a significant amount of homes that will make up for the shortage we have."

Dayton said he has noticed more buyers pulling out of deals after their offers have been accepted but before they sign contracts. High prices and high rates are pushing people to the limit that they can pay while still qualifying for a mortgage, he said. 

“More deals are falling apart these days than I’ve seen in the last couple of years,” he said.

 Nationwide, elevated mortgage rates have hurt home sales. The number of sales of existing homes, which excludes new construction, fell 3.3% in June to an adjusted annual rate of 4.16 million, which is the slowest pace since January, the National Association of Realtors said Thursday. Sales were down 18.9% last month from a year ago. 

Meanwhile on Long Island, sales have picked up recently but are similarly lower than last year's level. There were 2,235 closed sales last month, which was up 14.6% from May. But the number of deals was 23.7% fewer in June 2022. 

The Federal Reserve will announce its monetary policy plans next week at a meeting of the Federal Open Market Committee. Economists expect the Fed to raise its benchmark interest rate once more on July 26, according to a Reuters poll.

The Fed’s actions influence the yield on 10-year U.S. Treasurys, which typically move in the same direction as mortgage rates.

Potential homebuyers watching mortgage rates should pay particular attention to future inflation reports, said Odeta Kushi, deputy chief economist at First American Financial Corp., a provider of title insurance and settlement services.

"Inflation is really guiding the Fed's monetary policy decisions and will be the key determinant for where mortgage rates head," she said. " … Higher recession risk tends to put downward pressure on mortgage rates and higher inflation expectations put upward pressure on mortgage rates."

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.