Mortgage rates erode affordability for LI homebuyers

Buyers who set out to shop for a  house on Long Island at the start of this year were already facing a market tilted heavily in sellers' favor. 

The number of homes for sale on the Island hit an all-time low in January, pitting buyer against buyer in bidding wars that saw many sellers receiving tens of thousands over their asking prices. But at least buyers in early 2022 were benefitting from historically low mortgage rates that kept the interest portion of their monthly payments manageable. 

Not anymore. Not since the average U.S. rate for a 30-year fixed home loan rose by more than 2.5 percentage points in the first half of the year. The combination of record-high home prices and the run-up in rates led U.S. housing affordability to fall to its lowest level in more than 35 years in June, according to the mortgage technology and data company Black Knight. Last month, the average U.S. principal and interest payment cost 36.2% of the median household income for a buyer purchasing an average-priced home and putting 20% down. Historically, buyers have needed 25.1% of their household income to cover that portion of the mortgage, which doesn't factor in costs for taxes and insurance. 

“Buyers right now are a lot more nervous with the fact that interest rates have gone up because they’ve lost a significant amount of buying power," said Jeffrey Jimenez, a real estate agent who leads a team with eXp Realty in Hauppauge. “Anytime interest rates increase, their monthly affordability decreases.”

Those rising rates may start to cool the market by pricing some buyers out, slowing sales and eventually giving the buyers that remain more negotiating power. But for now, local buyers are facing a perfect storm of higher rates, tight supply and prices that continue to rise.   

Home prices  hit new records in June, with the median sale rising 11.8% from a year ago to $720,000 in Nassau and increasing 10.8% to $560,000 in Suffolk,  according to  OneKey MLS.

So what should a buyer do now? Hurry up or wait?

Newsday spoke with homebuyers, real estate agents and mortgage bankers to find out their expectations for the housing market. The local experts said they have started to see some effects of higher rates, such as sellers dropping their prices after a few weeks on the market and fewer buyers at open houses.

Still, none of the real estate experts interviewed by Newsday said they recommend postponing a purchase based on the outlook for rates and prices. While most expected prices to increase at a slower rate this year than in 2021, they advised buyers to make a purchase when they could afford to do so and to avoid trying to time the market.

"If people can afford the property, and it's a property they believe is a long-term home for their family, they should buy it because you just don't know what the future brings," said Richard Steinberg, founder and chairman of Nationwide Mortgage Bankers in Melville. 

An opportunity for buyers

At the end of 2021, the average U.S. mortgage rate for a 30-year fixed loan was at 3.11%. By the end of June, the average stood at 5.7%, according to mortgage giant Freddie Mac. 

To put that into perspective, a homebuyer purchasing a house for the Nassau median of $720,000, putting 20% down and choosing a 30-year fixed rate loan with the 3.11% rate would pay $2,462 in principal and interest each month, according to Bankrate.com's mortgage calculator. By the end of June, with the average rate at 5.7%, the same buyer would pay $881 more a month. 

Using the Suffolk median price, $560,000, a buyer putting 20% down would have paid $1,898 in principal and interest at the 3.11% rate. That payment jumped to $2,600 at the June rate of 5.7%, an increase of $685 a month. Those payments exclude the portion of mortgage payments used to pay for taxes and homeowners' insurance, which varies by home and community.

"We saw rates go from [about] 3% to 6% in a four-month period," Steinberg said. "That was definitely a shock to the system."

Rates have fallen since the end of June, and the 30-year fixed average was 5.51% for the week ending July 14.   

Still, higher rates mean many people no longer earn enough to qualify for loans, he said.  

"Those people, who I believe are temporarily out of the market, are giving opportunity to the people who can afford the home but the lack of inventory was keeping them out of the market," Steinberg said. 

Prema Chowdhury could hardly believe she was finally able to purchase a house — even while she was sitting at the closing table in late June. The 29-year-old and her husband, Kowshik Chowdhury, 42, recently bought a four-bedroom, two-bathroom colonial in Bethpage for $685,000 after narrowly missing out on buying a house in Queens last year.

The couple had reached a deal to buy the Queens house before their financing fell through. The process was complicated by the fact that Chowdhury is self-employed — she owns Joy Indian Restaurant on Flatbush Avenue in Brooklyn near Barclays Center — and her husband recently started a new job after returning from Hawaii, where he was serving in the U.S. Army.

“You have the hope of a new house and you almost got it,” Chowdhury said. “It just breaks you inside.”

The couple was interested in moving to a larger space than their one-bedroom apartment in East Elmhurst, Queens, as they look to start a family and move in Chowdhury’s in-laws to live with them.

They waited in line about two hours to see the house in Bethpage and offered well over the asking price of $600,000 to ensure they landed the deal in May. They were able to finance their purchase through Nationwide using a Veterans Administration home loan, which tends to offer lower rates than other mortgages, and secured a rate of 4.75%. They were able to close in about six weeks and avoid any further rate hikes, Chowdhury said.

“We wouldn’t have been able to buy the house if the interest rates went up” even more, she said.

 Fewer buyers in the market should give house hunters more confidence that they could bargain for a better price or avoid onerous terms, such as waiving an inspection contingency in their contract, said Seth Pitlake, a real estate agent with Douglas Elliman in Merrick. 

"Buyers have a little more security in the deal," Pitlake said. "In this transitional market, where you're playing against what may have been an aspirational price, if the property is lingering, the buyer should go in and see what they can do to negotiate. 

Recent data focused on future market activity showed signs that buyers could have better luck on that front, according to a report published July 7 by national real estate brokerage Redfin. The brokerage noted requests for home tours and Google searches for "homes for sale" are down compared with this time last year. Mortgage  applications fell 18% for the week ending July 8 compared with the same week in 2021, according to the Mortgage Bankers Association. 

"All of these indicators are painting a picture that the housing market has been moving sideways for the last month," said Taylor Marr, deputy chief economist at Redfin.   "Through June and now into the summer, it's looking like the housing markets are really hitting a point of stability."

Marr said he expects rates to be more stable through the end of the year, as fears of a recession prevent the type of steep rate increases that occurred in the first half of the year. The Federal Reserve is expected to raise its benchmark interest rate further at the end of the month with the goal of reining in record high inflation, but higher borrowing rates for consumers and businesses could lead to a recession. Mortgage rates tend to move in the same direction as the yield on 10-year U.S. Treasury bonds.

"Our current consensus is that rates won't trend toward 6%," Marr said. "There's too much expectation of softening in the economy. But rates are volatile. I think there's an increased chance they could even fall below 5%. But we certainly wouldn't expect rates to go down to 3%."

Why LI prices could stay firm

While buyers might have an improved stance to negotiate terms, they aren't likely to benefit from a collapse in prices, according to local real estate agents. 

Lina Lopes, an associate broker with Douglas Elliman in Farmingville, said she is advising buyers to keep searching, noting higher rents and the tax benefits of ownership, including deductions for mortgage interest. 

"I do feel a little bit of softening, but there's still a lot of people that have to find houses," she said. "It's not the craziness and the frenzy, but people are still buying."

The key factor keeping sellers in the driver's seat is the lack of homes for sale on Long Island. There were 7,016 homes for sale at the end of June, according to OneKey MLS. That was up from a record low of 4,424 in January. But in June 2019, before the pandemic supercharged homebuying demand, more than 13,500 homes were on the market.

“It’s still a competitive market,” said Tim Galligan, who leads a team with Keller Williams Points North in Woodbury. “Inventory is low. Buyers at open houses, instead of having 30 to 60 people there, there might be 10. We still have homes going $50,000 to $60,000 over the list price.”

Prices are unlikely to crash  on Long Island because of the lack of inventory and absence of housing development projects, such as those in the South, Steinberg said. 

"Long Island is a very insulated market because of the inventory constraints," he said. "When prices start settling, we won't settle as quickly or as much as some of these other markets. What really causes dramatic price decreases is unsold homes. Builders are forced to sell because they own too much inventory ... I don't know the last major development that I can remember with a major developer building [large-scale] neighborhoods on Long Island. There's just no land to do that."

Locking in with a float-down

Dionne Shuler knew her family of four had outgrown their first home on Staten Island after 17 years, but adopting a dog in February made it clear.

“After our dog came, my husband looked at me, and he’s like, ‘Yeah, babe, I think it’s time,” Shuler said. “We just need more space.”

The couple started looking at homes on Long Island in the spring with the goal of finding a home with room for a home office, where Shuler, 41, an administrative law judge at a state agency, could work from home. She and her husband Robert, 47, were also looking for a strong school district, where their children, ages 6 and 10, could attend public school. In April, they were pre-approved at 4.9%. By the time they found a home to buy in mid-June, their bank was only offering rates above 6%, with one offer as high as 6.6%. Shuler turned to RCG Mortgage in Hauppauge, which helped them find a loan with a 5.9% fixed rate that still allowed their monthly payment to fit within the couple’s budget.

“That is how volatile this market has been,” Shuler said. “My advice is to shop smart and budget in the rate increase because you never know where it goes.”

The Shulers expect to close in early August on a four-bedroom colonial for $999,000 in Hewlett that is zoned for Lynbrook schools. 

Their loan includes a float-down option that will allow them to lock in a lower rate when they close in early August if rates drop. Lenders typically charge a fee to let borrowers lock in against rate increases but take advantage if rates drop before they close. “We suspect, maybe by the beginning of August, it might go a little lower,” Shuler said.

She added that because this wasn’t their first purchase, the couple wasn’t as phased by rates approaching 6% as a first-time homebuyer who might be surprised by rates above 3%. Historically, the 30-year fixed rate has averaged about 7.8%, since Freddie Mac started tracking those rates in 1971. The average rose above 15% in the early 1980s.

Ways to lower your payment

Float-down options are among the ways homebuyers can look to reduce their monthly payment. Each option carries expenses or risks, and different strategies might not be right for every buyer. A borrower can buy points, paying more upfront to a lender to receive a lower interest rate. Buying a single point, which costs 1% of the total loan amount,  typically reduces the interest rate by a quarter-point. For example, on a $500,000 mortgage, one point would cost about $5,000 and might lower the interest rate from 5.5% to 5.25%. 

Michael De La Torre, 34, said he knew it was time for his family of four to move to a larger house last fall and feels fortunate he was able to list his home in Seaford in November and land a 3.375% mortgage rate in February to finance the family’s purchase of a four-bedroom house in Wantagh. He said he paid some cash upfront for less than a full point to lower the rate.

“It was perfect timing,” De La Torre said. “I was tracking [the rate] and it was 5% within a month and a half.”

Some borrowers are also turning to adjustable-rate mortgages. The average 5/1 adjustable-rate mortgage, in which the rate is fixed for the first five years and then adjusts once per year, was 4.35% for the week ending July 14, according to Freddie Mac. That’s more than a percentage point lower than the 30-year fixed rate, but adjustable loan products aren’t for everyone, said Kevin Dayton, vice president of mortgage lending at CrossCountry Mortgage in Garden City.  

“For anybody who thinks that interest rates are going to potentially go down in the future or level off, adjustable rates aren’t so bad because you’re potentially locked in for five or seven years,” Dayton said. But if rates rise, monthly payments can increase each year after that initial period.  

Dayton said there’s been some additional interest in adjustable loans recently but the loans still carry a stigma from the 2008 housing crisis. Nationwide, adjustable-rate mortgages represented 9.6% of loans for the week ending July 8. In January, before rates rose, the ARM share was 3.1%, while those loans represented about one-third of home loans at their peak in 2005, according to the Mortgage Bankers Association. 

“Have I seen it tick up? A little bit but not significantly,” Dayton said. 

The volatile market has led to tough decisions for buyers choosing when to lock in a rate, at which point the rate won't change as long as a buyer closes within a specified time frame, such as 30 or 60 days. In the absence of a crystal ball, Andrew Russell, owner and founder of RCG Mortgage, said he asks clients whether they would be more dissatisfied if they locked and then rates fell, or if they failed to lock and rates rose.

"Based on what they say, that's the route we take," Russell said. 

He said buyers should also know their initial rate might not be their rate forever. The company constantly monitors to see whether it can offer previous clients a lower rate to refinance a mortgage. 

"If their monthly payment can go down, we'll be the first ones to tell them," he said. 

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.