Here's When the Housing Market Will Be More Affordable

Inflation accelerated at a slower pace in January but came in higher than expected, data from the U.S. Bureau of Labor Statistics showed, prompting analysts to suggest that the Federal Reserve may take longer to lower borrowing costs.

The Consumer Price Index (CPI) inflation rose by 3.1 percent in January, a slightly smaller jump than the previous month's 3.4 percent. But the January CPI was higher than what economists expected. They had anticipated it to come in at 2.9 percent.

With inflation seemingly not slowing as fast as anticipated, economists suggest that an immediate slashing of interest rates by the central bank is off the table, with implications for the cost of home loans.

The rise of rates beginning in March 2022 helped push borrowing costs for mortgages up to 8 percent, their highest level since the turn of the century. While mortgage rates have fallen over the last few weeks to a mid-6 percent range, elevated inflation beyond the policymakers' target of 2 percent could arrest their downward momentum, housing economists suggest.

"For the housing market, today's data means that mortgage rates are likely to hang on to the narrow range they've occupied since late December, while moving toward the upper end of that range," Danielle Hale, chief economist at realtor.com, said in a note.

At the start of the year, some investors had expected the Fed to begin reducing its funds rate as early as March from its current two-decade high range of 5.25 to 5.5 percent. But policymakers suggested in January that while they had probably reached the end of their hike cycle, an immediate trimming of rates was unlikely.

Like in December, shelter costs were the largest contributor to inflation, rising by 0.6 percent in January and "contributing over two thirds of the monthly all items increase," according to the Bureau of Labor Statistics.

After the January reading, experts are now suggesting that a decline in rates may come in later.

"The Federal Reserve will not cut interest rates in the first half of this year," Lawrence Yun, the chief economist at the National Association of Realtors, said in a statement shared with Newsweek. "But rate cuts of 3, 4, or even 5 rounds will be possible in the second half of the year...Mortgage rates will be bouncy week-to-week but will most likely settle towards 6% by the year end."

The inflation reading supports the Fed's cautious approach to wait until policymakers are confident that prices are trending downwards to target, some analysts said.

"This report underscores the Fed's messaging that they'll need more information specifically inflation-related data before a policy transition," Quincy Krosby, chief global strategist for LPL Financial, said in a note shared with Newsweek. "The 'last mile'—as expected—is proving to be stickier and more stubborn."

Elevated prices have some analysts suggesting that the soonest the Fed may begin cutting rates is in the summer, as more inflation data comes in to give a fuller picture of how prices are doing.

"We did not believe a March cut was likely, instead we expect the first rate cut in May after plenty of inflation data is released," Ryan Sweet, the chief U.S. economist at Oxford Economics, said in a note. "Therefore, the January CPI does not warrant a change to our assumptions around monetary policy but lends some upside risk to the inflation forecast this quarter."

Sweet also pointed out that the Fed's policymakers pay closer attention to the personal consumption expenditures (PCE) inflation index which has been slowing down quicker than the CPI. The latest data from that metric is slated to come in later this month.

As for when the Fed may start cutting rates, a consensus appears to be emerging that the late spring, or summer, is the likeliest timeline for when borrowing costs may start to fall across the economy. As the Fed potentially slashes rates, mortgage costs may fall as well helping buyers see monthly payments decline in the process.

"Fed policymakers will likely put this inflation report [in] the 'not so good' column as they continue to exercise caution in assessing when to start easing policy," Gregory Daco, chief economist at EY, said. "Our longstanding view has been that the Fed would start cutting rates in May, but this report increases the odds of a June onset. We still expect a total of 100 [basis points] of rates cuts this year. Markets appear to slowly be aligning to this view."