Housing Market Update: Will Rates Fall This Summer?

If you're a prospective 2024 homebuyer with a little time to spare, you may benefit from waiting to buy until summer.

The inflation measure that Federal Reserve policymakers prefer when looking at how prices are performing ticked down slightly from a year ago, the Commerce Department's Bureau of Economic Analysis revealed on Thursday—an encouraging signal that analysts say could lead to a cut in borrowing costs by the summer.

The personal consumption expenditures (PCE) price index accelerated by 2.4 percent in January slower than the 2.6 seen in December. The core PCE, which excludes the volatile food and energy prices, jumped higher on a monthly basis by 0.4 percent, the data showed.

Beginning in March 2022, the Federal Reserve hiked rates to the highest they have been in more than twenty years to combat inflation that had soared to record levels. The policy move pushed up borrowing costs across the economy, including for home loans.

Inflation has slowed over the last few months but has yet to hit the central bank's target of 2 percent. Last month, Fed chair Jerome Powell suggested that there has been progress in reducing the pace of price rises but policymakers want to be more confident that inflation is under control before they can cut borrowing costs. They held rates at their current elevated range of 5.25 to 5.5 percent range for the fourth consecutive meeting in January.

"Fed officials have signaled they do not need better news on inflation to cut rates, just continued good news. With the trend in inflation still downward, gradual rate cuts this year are still on the table," Michael Pearce, deputy chief U.S. economist at Oxford Economics, said in a note shared with Newsweek.

Mortgage rates have fluctuated in recent weeks after they declined from their peak in the fall when they skyrocketed to 8 percent, the highest level they had hit since the turn of the century.

After dropping to the mid-6 percent range to start the year, home loan rates have ticked back up to 7 percent, according to lenders. This was partly due to economic news that indicated that inflation was proving more stubborn to get to the 2 percent Fed target, delaying the prospects of when policymakers were going to slash borrowing costs.

Thursday's PCE inflation reading signaled that inflation was not accelerating as feared, analysts said, raising the possibility of a rate cut in the summer.

"This morning's data didn't come in hotter than expected and is a sigh of relief [for those] who were worried inflation was going to reaccelerate and cause the Fed to put off rate cuts for a much longer time, or even worse, begin raising rates again," Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in a note shared with Newsweek.

The PCE index is getting closer to the central bank's target, but the price for services jumped, which explains why the monthly inflation was higher in January than the prior month, according to KPMG's chief economist Diane Swonk.

"That means we need to see more cooling in service sector inflation to ensure that the Fed not only achieves its 2 percent inflation target but that inflation stays there," Swonk said in a note. "The goal is to eradicate inflation as a factor distorting household and firm spending decisions."

She added: "Service sector inflation...will keep the Fed on the sidelines with rate cuts until at least June."

The PCE price index trend, nevertheless, suggests that prices are slowing overall, a good signal for those wondering if policymakers will cut rates.

"For markets keenly focused on when the Fed will transition towards easing rates, this report will help restore confidence that it isn't 'if' the Fed will begin to cut rates in 2024, but 'when,'" Quincy Krosby, chief global strategist for LPL, said in a note shared with Newsweek.