Pending home sales rebounded in May as mortgage rates fell

Contract signings to purchase previously owned U.S. homes increased in May, indicating Americans may be responding to declining mortgage rates.

The index of pending home sales rose 1.1% from the previous month, in line with economist estimates for a 1% increase, according to data from the National Association of Realtors in Washington. Contract signings were down 0.8% from May of last year on an unadjusted basis.

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House for sale

The pickup in pending sales is welcome news for a housing market that lost momentum last year, as expectations of a Federal Reserve interest-rate cut have already started to push down borrowing costs for consumers. Mortgage rates hovering near an almost two-year low, stronger hourly earnings growth and a firm labor market may help deliver gains for residential real estate.

Still, purchasing a median-priced home is a financial stretch for Americans in the majority of markets despite slowing growth in real estate prices, low borrowing costs and rising wages. The U.S. Home Affordability Report, released by Attom Data Solutions, found that median selling prices were too high for average wage earners in three-fourths of the nation's real estate markets during this quarter.

Pending home sales are often looked to as a leading indicator of existing-home purchases and a measure of the health of the housing market in the coming months.

"Rates of 4% and, in some cases even lower, create extremely attractive conditions for consumers," NAR Chief Economist Lawrence Yun said in a statement. While the Fed may cut interest rates this year, "there is no guarantee mortgage rates will fall from these already historically low points. Job creation and a rise in inventory will nonetheless drive more buyers to enter the market," he added.

Contract signings increased from the prior month in three of four regions, led by a 3.6% advance in the Midwest and a 3.5% gain in the Northeast. Pending sales were up 0.1% in the South and they fell 1.8% in the West.

Forecasts for monthly pending home sales in a Bloomberg survey of economists ranged from a decline of 0.3% to an increase of 2.5%.

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