New home sales surged 20% in May, defying many experts' predictions. Here's why the Fed may be happy.
The volume of US new home sales jumped in May – and that could, surprisingly, be good news for the Federal Reserve. US Census Bureau
The surge in sales was a big surprise. The Federal Reserve's aggressive hikes to interest rates since last spring have driven up mortgage rates, making homes less affordable to potential buyers, and homeowners loath to sell and give up their low-cost, fixed-rate mortgages. That could be music to the Fed's ears, as falling house prices could mean overall inflation is waning. While the Consumer Price Index , the inflation benchmark, accounts for shelter costs using owner-equivalent rent instead of home prices, declining home prices are likely to put downward pressure on the index over time.
If home sales are up as a result of prices going down, that could give the Fed the green light to ease off in fighting inflation, which could reduce the the risk of a. Higher interest rates encourage saving over spending and raise borrowing costs, which can deter hiring and reduce consumption and investment, leading to an economic downturn.
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