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Benchmarking the Long Island Housing Market in Q4

Benchmarking the Long Island Housing Market in Q4

The typical Long Island housing market cools in the fall and winter. And that’s shaping up to be the case as we enter Q4. Despite the red-hot, pandemic-driven market that saw double-digit growth and extraordinary buyer competition in 2021, we’re inching back to a more normal state with a more regular seasonal slowdown.

Despite the slowdown, we still anticipate another busy Long Island housing market heading into 2022 with many pandemic-related pressures remaining in place. For example, we expect mortgage interest rates to inch up but remain low, demand to remain high despite tailing off slightly, and skyrocketing price growth to slow but not by much.

Mortgage rates start inching up

April 2020 changed the game for Suffolk County real estate when historical low mortgage interest rates sparked a buying and selling frenzy. However, September marked the potential tail end of the streak—mortgage rates are inching back up.

Experts forecast mortgage rates to hover between 3.2% and 3.3% by the end of 2021 and reach as high as 3.5% to 3.7% by the end of 2022. Long Island mortgage rates already reached the 3.25% mark. (Even a few percentage points higher is still very low, especially when compared to 2019 mortgage rates.)

A few percentage points seem small. However, even small changes in buying power impact home affordability.

Consider a home that costs $350K with a 20% down payment of $70K. The same $1,180 monthly payment (with principal and interest) at a 3% rate increases to $1,257 at 3.5% and $1,336 at 4%. Even single-digit growth in mortgage interest rate makes a difference.

So, what exactly is happening to mortgage interest rates? Three big influences make an impact: inflation, the Federal Reserve’s monetary policy, and the yield on the 10-year Treasury bond.


The cost of goods across industries is rising. The consumer price index—a key measure of inflation—climbed 5.4% in September year-over-year, marking the largest increase since 2008. And rising inflation puts pressure on the Fed to dial-back its low-interest rate policies.

The inflation rate in the U.S. is 4.1%—more than double the rate over the past decade. In New York, the inflation rate is up 0.5% over the month and 3.8% over the year. We can expect mortgage rates to inch up—unless inflation falls back.

The Federal Reserve’s monetary policy

The Federal Reserve stepped in during the pandemic to spur more borrowing and spending by keeping longer-term interests rates low, giving lenders the confidence to offer new mortgages with ultra-low rates. But after 18 months, the Fed could begin rolling back its monetary policies, easing support for the real estate market.

To date, the Fed has spent around $4 trillion on bond purchases to keep markets liquid. If the economy progresses as expected, the Fed is likely to pump the brakes on bond buying, pushing mortgage interest rates up.

Yield on the 10-year Treasury bond

Treasury yields move together with mortgage interest rates. And both could be on the rise.

During economic uncertainty, global investors flee to the safety of US Treasury bonds. During times of high confidence, with the economy on the upswing, investors look elsewhere for higher risk, higher return forms of investment. And the market is trending towards the latter.

When this happens, the bond price goes down, yields go up, and mortgage interest rates follow suit. And we can expect this cycle to continue through the end of the year.

Skyrocketing home prices could taper off—but not by much

Home prices skyrocketed over the past year. Low inventory and high demand created a hot seller’s market where Long Island home prices kept going up until reaching historic highs. Forecasts predict steadily rising home prices moving forward—but not at the same astronomical rate as in recent months.

Nassau and Suffolk County housing prices fell slightly in September, down from the historic highs set in August. The median sales price topped out at $670,000 in Nassau County and $530,000 in Suffolk County in August. In September, the median sales price dipped slightly to $665,000 in Nassau and $525,000 in Suffolk—both of which still reflect 12.9% growth year-over-year.

We expect a 4% to 5% home price appreciation over next 12 months, which is a huge drop from the record setting 19.7% year-over-year average home price growth in July. The bottom line: eager buyers can still find areas with affordable homes—but might need to look a bit harder.

Housing supply is growing

When supply goes down, prices go up. However, U.S. housing inventory is growing to a healthier supply.

The supply of housing—a measure of how long it would take to deplete the current for-sale inventory at the current sales rate—hit six months in August, a staggering increase over the record-low 3.5-month supply in August, September, and October of 2020. However, Long Island housing supply remains lower than the national average, hovering around 2.8 months in Nassau and 1.9 months in Suffolk.

A 3.9% increase in housing starts marks an annualized rate of 1.62 million homes. However, new home construction takes time. And new inventory won’t be ready for sale this winter. Despite production getting back to a more normal trend line, we don’t expect a huge supply difference before the end of 2021.

Logic suggests more supply should mean lower prices. However, that’s not always the case.

Sellers can still refuse to budge until fierce buyer competition and bidding wars slow down. The massive demand for single-family homes is still outpacing the supply, putting upward pressure on prices. And prices are downside sticky—sellers would rather withdraw from the market than sell for a lower price.

Buyer demand is cooling

We see early signs the frenzy is cooling down. Week-over-week mortgage applications dropped 6.9% in the week ending October 1. Although not a huge drop, the cooldown becomes more significant when linked with similar housing trends.

In August, average offers fell to four, down from 5.1 in May. Fewer offers give buyers a better chance to close while less competition means fewer people to bid up the price.

In Nassau and Suffolk counties, buyers are no longer willing to pay higher and higher for a home, indicating the potential top of what people are willing to pay. Many buyers are simply priced out. If the trend continues, home sale prices should moderate.

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