Homebuyers Get Good News­­—But They'll Have to Wait to Celebrate It

The Federal Reserve signaled for the first time this week that its cycle of raising interest rates has peaked and that it is likely to begin cutting later in the year but probably not as early as next month.

For homebuyers, the pivot toward rate cuts could help lower the cost of home loans, though the decision to hold rates suggests that it will take a little bit of time for mortgages to become cheaper.

Policymakers on Wednesday kept rates at their current range of 5.25 to 5.5 percent for the fourth time in a row. Beginning in March 2022, the Fed instituted hikes to battle inflation. The side-effect has been borrowing costs for home loans also went up, making buying a home the most expensive it has been since the beginning of the century.

Fed Chair Jerome Powell suggested that inflation was cooling and making progress toward the central bank's target of 2 percent but that it was still elevated.

"If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," Powell said.

The Fed's preferred gauge for prices—the personal consumption expenditures (PCE) index—stood at 2.6 percent in December on a year-over-year basis. The core PCE, which strips out the volatile energy and food prices, accelerated on a yearly basis by 2.9 percent in December, not quite at where it needs to be for the Fed to start cutting rates immediately, Powell suggested on Wednesday.

"We're going to be looking at this meeting by meeting," he told reporters. "Based on the meeting today, I would tell you that I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting."

The encouraging news for homebuyers, according to experts such as the Mortgage Bankers Association (MBA), is that rates are expected to come down, which would usher in a more affordable housing market.

"MBA continues to expect the Federal Reserve to lower rates later this year, which should help drive down mortgage rates and reinvigorate housing activity," MBA President and CEO Bob Broeksmit said in a note shared with Newsweek.

Housing economists point out that rates have been coming down from their peak in the fall on the back of economic news that inflation was falling and that the Fed was soon going to begin slashing rates.

While Wednesday's update from the Fed may keep rates elevated for slightly longer, the market expectation is they will come down, which would be good news for prospective buyers.

"If the data evolve as expected, a normalization in monetary policy is likely in the year ahead," Danielle Hale, chief economist at realtor.com, said in a note. "Details on when and how much remain to be seen, but easing rates should help usher in the affordability relief anticipated."

The 30-year fixed-rate mortgage averaged 6.63 percent as of February 1, according to Freddie Mac, another signal of improving affordability in the housing market.

"Mortgage rates have been stable for nearly two months, but with continued deceleration in inflation we expect rates to decline further," Sam Khater, Freddie Mac's chief economist, said in a statement.

Freddie Mac suggested that as the economy continues to remain strong and rates trend downward, 2024 could see an active housing market rebound from last year's struggles.

"The economy continues to outperform due to solid job and income growth, while household formation is increasing at rates above pre-pandemic levels," Khater said. "These favorable factors should provide strong fundamental support to the market in the months ahead."