Pending home sales rose in May, but economists say it's just a blip

Pending home sales increased in May, breaking a streak of six successive monthly declines, but the National Association of Realtors said it is likely a blip and that sales will continue to fall as the year progresses.

The NAR’s latest data shows that contract signings, which are a forward indicator of home sales based on signed contracts to buy a home, rose by 0.7% last month. Contract signings are considered to be the most useful gauge of future home sales, though of course some deals may fall through.

Although the increase is encouraging, NAR Chief Economist Lawrence Yun said the data doesn’t hide the fact that the housing market is going through a transition. After all, contract signings are still down more than 13% from the same month last year.

“Contract signings are down sizably from a year ago because of much higher mortgage rates,” he pointed out.

Economists have previously cited the rapidly rising mortgage rates as the main culprit that has made buyers more cautious. Assuming a 10% down payment, the monthly payment on a media-priced single family home has increased by around $800 since the start of the year. That’s solely because of mortgage rates, which have risen by just over 2.5 percentage points since January.

Yun was critical of the mortgage rate increases: “Trying to balance the housing market by choking off demand via higher mortgage rates is damaging to consumers and the economy,” he said. “The better way to balance the market is through increased supply, which also helps the broader economy.”

The reality though is that housing shortages are the story nationwide, with a lack of listings causing big problems in the housing market and adding to affordability problems.

As such, fluctuations in home prices and housing affordability led to significant regional differences in contract signings in May, Yun said. For example, the Western region posted the largest decrease in contract activity. That is also the region of the U.S. where homes tend to be the most expensive.

“This further indicates the growing need to increase supply to tame home price growth and improve the chances of ownership for potential home buyers,” Yun said.