Average U.S. mortgage rate rises to 7.09%, highest since 2002

The average long-term mortgage rate rose to its highest level in more than 20 years this week, hurting housing affordability for Long Island homebuyers and making moving less attractive to homeowners who locked in cheap rates.

The average rate for a 30-year fixed mortgage climbed to 7.09%, the most expensive it has been to borrow since April 2002, according to data released Thursday by mortgage giant Freddie Mac.

The increase in rates, up from 6.96% last week, means people buying a home on Long Island will need to pay hundreds of dollars more each month in housing costs than they would have if they were taking out a loan last year. Some prospective homebuyers may not have enough income to qualify for mortgages at the higher rates.

Mortgage rates edged above 7% last October and again in early November before dropping slightly in the ensuing months. A year ago, the average rate for 30-year fixed home loans was 5.13%.

So far, higher borrowing costs have yet to push down home prices on Long Island. In July, the median price for a home in Nassau County hit a record $725,000, eclipsing the previous high set in July 2022 of $720,000. In Suffolk, the median sale price was $575,000 last month, which matched the high recorded a year earlier, according to OneKey MLS.

Meg Smith, an associate broker at Daniel Gale Sotheby's International Realty in Bay Shore, said she's been surprised that pandemic-era trends, such as lines of homebuyer hopefuls at open houses and offers $50,000 above asking price, have persisted even as mortgage rates have risen to 7%.

"Typically when the interest rate goes up, prices come down," Smith said. "... This is kind of an unprecedented market. All of the things that usually apply have not been applying." 

Mortgage rates began their ascent in early 2022 from around 3% as inflation gripped the economy. The Federal Reserve has raised its benchmark interest rate 11 times to its highest level since 2001 with the goal of constraining consumer prices.

But recent reports that the pace of inflation and the Fed could pause its campaign of rate hikes haven’t prevented mortgage rates from rising over the past few weeks. Mortgage rates tend to move in the same direction as the yield on 10-year U.S. Treasurys, which closed at its highest level since 2007 on Thursday. 

If investors believe inflation could pick up, mortgage rates could keep surging. Fears of a recession would tend to lead to lower rates.

"The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb," Sam Khater, chief economist at Freddie Mac, said in a statement.

 Smith noted that today's rates are still favorable in comparison to when she bought her first house in the 1980s with a 12% mortgage rate that rose to 17% over the term of the loan. But steeper interest costs combined with lofty purchase prices are eating up a growing share of Long Islanders' paychecks. 

The monthly mortgage payment for a $500,000 mortgage at today's average costs $3,336 a month for principal and interest before accounting for taxes and insurance. That's 22.5% higher than the monthly cost for the same mortgage at last year's 5.13% rate.

First-time buyers rocked

"The main area that seems to be the hardest hit is the first-time homebuyer market. The combination of the higher interest rate and the higher housing prices has really made it difficult," Smith said. "Interestingly, it doesn’t seem like it’s hitting the mid-to-high-end market as much."

Zahra Jafri, founder and president of Lynx Mortgage Bank in Westbury, said the lender continues to receive inquiries from Long Islanders to get pre-approved for loans, but they are having trouble finding properties to buy.

At the end of July, there were 5,089 homes on the market, which was nearly 30% lower than at the same time last year.

“What’s changed the demand for mortgage applications is inventory. We’re still getting inquiries, there’s still people looking, but there’s just not enough inventory, so overall applications aren’t strong,” Jafri said. “There’s still a huge supply and demand issue, which is what’s causing pricing to not come down in our area.”

Nationally, mortgage applications are well below last year's levels. The Mortgage Bankers Association index measuring mortgage applications for purchasing homes was down 26% for the week ending Aug. 11 compared with the same week a year ago.

In markets like Long Island's, where there are few listings and scant new home construction, the latest jolt in rates is less likely to hurt sellers. 

"If you’re in a market with extremely restricted supply, you will still probably be able to get attention on your home because there aren’t that many homes to look at," said Daryl Fairweather, chief economist at Redfin.

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.