Mortgage rates hit another 20-year high, battering housing demand

The average 30-year fixed U.S. mortgage rate ticked up slightly this week toa new 20-year high, at 6.94%, according to mortgage giant Freddie Mac. 

Rates for the most popular type of home loan last reached that level in April 2002. A year ago, the average was 3.09%. 

Higher rates have made it considerably more expensive for Long Islanders to buy a home using a mortgage. A homebuyer's monthly payment to cover principal and interest on a $500,000 mortgage is nearly $1,200 more when financing the purchase with a 6.94% rate compared with last year's average rate. That doesn't include the portion of the payment that covers taxes and insurance. 

Current rates are "adversely impacting the housing market in the form of declining demand," Sam Khater, Freddie Mac's chief economist, said in a statement.  

As rates approach 7%, demand for U.S. home loans hit a 25-year low this week. The Mortgage Bankers Association said Wednesday that its purchase index measuring mortgage applications fell 38% compared with this time last year for the week ending Oct. 14. Refinance activity is down 86% this year compared with the same week in 2021. 

 Long Islanders who can afford to make a purchase shouldn't change their plans based solely on mortgage rates, said Quentin Hardy, market leader at direct lender Movement Mortgage in Huntington. If rates move lower in the future, buyers will have the opportunity to refinance and lower their monthly payment. 

"A lot of what I'm trying to explain to people who are buying homes is to not let the interest rates dictate whether they buy or not because the rate is not permanent," Hardy said. 

On Long Island, the number of home sales that closed in September fell 22% compared with the previous year, according to OneKey MLS. Median home prices have fallen from records set in July but were still about 5% higher last month than in September 2021. The median price was $695,000 in Nassau County and $550,000 in Suffolk County last month. 

 The number of sales of existing homes in the United States fell for an eighth straight month in September, the longest streak of declines since 2007, the National Association of Realtors announced Thursday.  

The rise in rates has come as the Federal Reserve has taken increasingly aggressive steps to curb inflation.  Late in September, the Federal Reserve bumped its benchmark borrowing rate by another three-quarters of a point in an effort to constrain the economy and tame inflation. It was the Fed's fifth increase this year and third consecutive 0.75 percentage point increase. The Fed's next two-day policy meeting opens Nov. 1, with most economists expecting another big three-quarters of a point hike.

Mortgage rates don’t necessarily mirror the Fed’s rate increases, but tend to track the yield on the 10-year Treasury note. That’s influenced by a variety of factors, including investors’ expectations for future inflation and global demand for U.S. Treasurys. 

To combat higher rates, more borrowers are seeking out adjustable-rate mortgages, which begin with a fixed rate for a defined period of time, such as five years. Then, the rate fluctuates based on market conditions that adjust periodically. The share of adjustable-rate mortgages among mortgage applications was 12.8% last week, which was the highest it has been since March 2008. The share of these loans is still about one-third what it was in the early 2000s before the financial crisis. 

 Borrowers can sell or refinance before the fixed-rate period ends, but the loans carry the risk that homeowners may see their monthly payments rise in the future. The average rate for a 5/1 adjustable-rate mortgage, which has a fixed rate for five years and then adjusts once per year, was 5.71% for the week ending Oct. 20, according to Freddie Mac. 

"ARM loans continue to remain a viable option for borrowers who are still trying to find ways to reduce their monthly payments," Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association, said in a statement. 

With AP