The number of new contracts for existing home sales barely made it onto the bottom rung of analysts' expectations in May.  The National Association of Realtors® (NAR) said its Pending Home Sales Index (PHSI) was down from the April reading of 106.4 to 105.9, an 0.5 percent decline.  It is the second month in a row the forward-looking indicator has fallen and for the fifth straight month it lags its year-earlier level, this time by 2.2 percent.

Analysts polled by Econoday had been looking for results ranging from a 0.5 percent decline to a positive change of 2.0 percent. The consensus was for an increase of 0.6 percent from April's reading.

The PHSI is based on purchase contracts for existing single-family homes, townhomes, condos, and cooperative apartments.  Those contracts are typically expected to result in closed sales over the next two months.

Lawrence Yun, NAR chief economist, says this year's spring buying season will go down as one of unmet expectations. "Pending home sales underperformed once again in May, declining for the second straight month and coming in at the second lowest level over the past year," he said. "Realtors^® in most of the country continue to describe their markets as highly competitive and fast moving, but without enough new and existing inventory for sale, activity has essentially stalled."

The lackluster spring, according to Yun, has primarily been a supply issue rather than one indicating weakening demand.  He points out that, if it were waning buyer interest behind the slowdown in activity, then price growth would also slow, inventory would go up, and marketing times would lengthen.  Instead, the underlying closing data in May showed that home price gains are still outpacing income growth, inventory declined on an annual basis for the 36^th consecutive month, and listings typically went under contract in just over three weeks.

"With the cost of buying a home getting more expensive, it's clear the summer months will be a true test for the housing market. One encouraging sign has been the increase in new home construction to a 10-year high," added Yun. "Several would-be buyers this spring were kept out of the market because of supply and affordability constraints. The healthy economy and job market should keep many of them actively looking to buy, and any rise in inventory would certainly help them find a home."

The PHSI is at or below May 2017 levels in three of the four regions, but it did improve month-over-month in three of them.  However, a sharp downturn in pending sales in the South dragged down national results. Contract signings in the region were down 3.5 percent  from April to an Index of 122.9, unchanged from the previous May.

The index in the Northeast increased 2.0 percent to 92.4, but this is still 4.8 percent below a year ago. In the Midwest the index rose 2.9 percent to 101.4, 2.5 percent lower than May 2017.  The index in the West inched forward 0.6 percent in May to 94.7 but is 4.1 percent below a year ago. 

Yun has revised his April forecast for existing home sales this year. Rather than an 0.5 percent increase from the 5.51 million sales last year to 5.54 million sales, he is now predicting a decrease of 0.4 percent to 5.49 million units. He expects the national median existing-home price to rise around 5.0 percent rather than the 5.1 percent in his earlier estimate. In 2017, existing sales increased 1.1 percent and prices rose 5.7 percent.

The Pending Home Sales Index is based on signed contracts for home purchase.  The sale is usually finalized within one or two months of signing. The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months.

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. By coincidence, the volume of existing-home sales in 2001 fell within the range of 5.0 to 5.5 million, which is considered normal for the current U.S. population.