Rising mortgage rates threaten Long Island's spring real estate market

Mortgage rates are climbing to their highest level in months on inflation fears tied to the Iran war, threatening to raise costs for Long Island homebuyers and dampen the prime real estate selling season.

The average 30-year fixed rate rose to 6.22% for the week ending Thursday, according to Freddie Mac, the major mortgage purchaser, which has published weekly data since 1971. 

But another closely watched gauge published by Mortgage News Daily showed the average 30-year rate rose to 6.53% on Friday.

With Long Island already facing a dearth of homes on the market — the Island's inventory of homes for sale is the lowest in a decade — rising mortgage rates could quash a spring surge of new listings and home sales before April even arrives. That’s because higher consumer prices, particularly in the energy sector, can put upward pressure on rates.

There was great optimism in January for a strong spring market and the prospect of falling mortgage rates, said Stephen Probst, a loan officer at Fairway Home Mortgage in Freeport. The start of the Iran war on Feb. 28 halted that momentum, he said. 

"It’s like somebody jammed on the brakes," he said. "It’s going to hurt the spring market terribly."

Homebuyers have grown accustomed to rates above 6% over the past few years, said Zahra Jafri, founder and president of Lynx Mortgage Bank in Westbury. In fact, the current rate is below the three-year average of 6.69%, according to Freddie Mac’s data.

But homebuyers are counting on more owners deciding it’s time to sell, and the recent jump could lead more people to postpone putting their homes on the market.

"The concern is that increasing rates will put the pause button on for sellers, which ultimately would impact buyers too because there would not be enough inventory in our Long Island market," she said.

A shrinking supply of houses, when listings were already at their lowest point in more than a decade at the end of February, could drive up prices.

Prices have already risen significantly since the pandemic, with the median single-family home price at $850,000 in Nassau County and $685,000 in Suffolk in February, according to the latest data from OneKey MLS.

The volume of transactions and mortgage pre-approvals for hopeful buyers has been slower than expected this winter, partly due to heavy snowfall leading some home sellers to postpone listing, said Andrew Russell, owner and founder of RCG Mortgage in Hauppauge. But he expects a rush of buyers signing contracts from April to June. This rate increase won't jolt the market in the same way as the doubling of rates did in 2022.

"That was a terrible period," he said. "I truly feel now clients are not rate-sensitive. I really don’t feel the rate number is moving the needle."

Why mortgage rates are rising

Mortgage rates tend to move in tandem with the U.S. 10-year Treasury yield, which rose to its highest point on Friday since July. Often, political and economic turmoil can help drive this rate down — and lower mortgage rates — as investors seek safe assets like government bonds.

But the war’s effect on the price of oil, which was about $98 a barrel on Friday afternoon , or 48% higher than the same price a month ago, has renewed concerns about inflation. Mortgage rates tend to rise during inflationary periods, according to consumer finance website Bankrate.

That has turned the conventional wisdom about global turmoil's effect on mortgage rates on its head. 

"I’ve never in my career seen this," Russell said. "It’s always when there’s instability or volatility in the world, rates have always gone down. Now, it’s the opposite."

Federal Reserve chair Jerome Powell said Wednesday that inflation hadn't fallen as much as policymakers had hoped and it was unclear the extent to which the Iran war would drive up prices.

"In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy," he said.

With little indication when the war will end, the mortgage industry has little clarity on how that will affect real estate markets around the country this spring.

"Whether this upward pressure on rates — tied to Middle East tensions — will temper what should be strong spring demand remains to be seen," Bob Broeksmit, president and CEO of the Mortgage Bankers Association in Washington, D.C., said in a written statement.