Higher mortgage rates squeeze Long Island homebuyers

Long Island homebuyers are facing mortgage rates above 5% for the first time in more than a decade, making housing less affordable at a time when prices are already near record highs. 

The average rate for a 30-year fixed mortgage was 5.11% for the week ending April 21, the highest it has been since April 2010, according to mortgage giant Freddie Mac. Last year at this time, the average 30-year fixed rate was 2.97%.

“It exceeded our expectations,” said Nadia Evangelou, a senior economist at the National Association of Realtors in Washington D.C. “We expected to have rising mortgage rates but we didn’t expect to have 5% so soon. As a result, the borrowing cost has increased significantly for buyers.”

The Federal Reserve said in March it plans to increase its benchmark federal funds rate several more times this year to tame inflation. The nation's consumer price index jumped 8.5% in March from 12 months earlier, the sharpest year-over-year increase since December 1981, driven by such factors as consumer demand, supply chain issues caused by the pandemic and oil and gas price spikes intensified by Russia's war in Ukraine.

When the Fed raises rates, it often leads to higher borrowing costs for people and businesses, including those seeking to borrow to buy homes. 

Higher rates could make housing prices unaffordable for some prospective buyers and cause listings to stay on the market longer, but Evangelou said she doesn't expect prices to fall. 

“We will see slower home price appreciation, but not a price drop,” she said. 

That's because the number of homes for sale remains unusually low both on Long Island and nationwide. There were 4,932 L.I. homes for sale at the end of March, which is an improvement from record lows set this winter but still 20% fewer houses than a year earlier.

Some would-be sellers might be deterred by the cost of finding a new home if they recently refinanced their mortgage when rates were at all-time lows. “It’s difficult for them to find a home and very difficult to find the same, low rate, so this can discourage some owners from selling their house," Evangelou said. 

Two schools of thought

As rates have risen, buyers have split into two camps, said Nancy Jarvis, an associate broker with Daniel Gale Sotheby’s International Realty in Carle Place.

There are “the buyers that are going to jump and buy because they’re nervous about rates or then you have the buyers that think the prices are going to go down,” Jarvis said.

She advises buyers to avoid trying to time the market and consider the cost of waiting if interest rates go up more. “They think the market’s going to go down, but they don’t realize their mortgage payment is going to be more” if higher borrowing costs outweigh a slightly lower price, she said.

Evangelou expects the 30-year fixed rate to average 5% across all of 2022, dating back to January before the big upsurge.  Evangelou said she expects the pace of inflation to slow later this year and mortgage rates to settle.

“As inflation will likely go down, mortgage rates will continue to rise but at a slower pace,” she said.

The Mortgage Bankers Association, a Washington D.C.-based trade group, projected 30-year fixed mortgage rates will average 4.8% each quarter starting in July through June 2023 , when they will begin to inch down.

The combination of high prices and rising rates has increased the monthly mortgage payment for a typical U.S. home by 37.8% in April compared with the same month a year ago, according to research published Thursday by Redfin. 

Put another way, buyers can afford less at higher rates. A homebuyer purchasing an $800,000 home, while putting $160,000, or 20%, in a down payment, when 30-year fixed mortgages were at 3% would pay a similar monthly payment today with rates at 5% to buy a $660,000 home — even while still putting $160,000 down. 

"Home shoppers who budgeted for a certain price just a month or two ago will have to scrap that and reassess what they can afford," said Jeff Tucker, senior economist at Zillow. "Finding a home that fits into shrinking budgets is not an easy task when inventory is as limited as it is now." 

The long search

Rochelle Provenzano, 34, and her wife Jennifer Orme, 38, recently felt lucky to find a house after a search that lasted about a year and a half. When they first got preapproved for a mortgage to start looking, they were quoted a 30-year fixed rate of 3.275%.

The couple found a willing seller in March. They paid $410,000 — $10,000 above the asking price — for a three-bedroom house in Centereach with one and a half bathrooms and below-average taxes for the area.

The couple offered the seller flexibility on the closing date, but in the meantime rates continued to rise. Their lender had initially offered a fixed rate of 4.75%, but by the time they were ready to lock their rate, it had risen to 5.325%. The higher rate will cost $130 more per month. That rate is locked in for 60 days but could change if their June 1 closing is delayed. 

“We had to sit and think because it brought our overall cost up over $300 a month more than what we had planned,” Provenzano said. “But the interest rates are still lower than they have been [historically], so it’s now or never because if the market doesn’t come down, but the interest rates go up, then we’re even more screwed.”

The average 30-year fixed mortgage rate last hit 8% in August 2000. The all-time high was 18.6% in October 1981, according to Freddie Mac data since 1971. 

High home prices and multiple bidders for each listing aren’t likely to fade quickly given the shortage of homes for sale, said Steve Probst, branch manager at Fairway Independent Mortgage Corp. in Hauppauge.

Probst expects higher mortgage rates to lead borrowers to look at other ways of financing purchases, such as through adjustable-rate mortgages or loans offered through the State of New York Mortgage Agency, which provides lower rates to first-time homebuyers. As of April 21, SONYMA advertised a 30-year fixed rate of 4.375% for borrowers who don’t apply for down payment assistance. The rate for borrowers applying for down payment assistance was 4.75%

“In the short run, there will still be a lot of competition because Millennials and Gen X [homebuyers] waited a long time to purchase homes, and there’s still a lot of pent-up demand from those borrowers,” Probst said. “There’s not enough housing and that will be a problem.”

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.