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The final push of the spring housing season turned out weaker than expected. Signed contracts to buy existing homes fell 3.7 percent in May compared to April, according to the National Association of Realtors.
April's reading was revised down. These so-called pending home sales were 0.2 percent lower than May of 2015, the first annual drop since August of 2014.
"With demand holding firm this spring and homes selling even faster than a year ago, the notable increase in closings in recent months took a dent out of what was available for sale in May and ultimately dragged down contract activity," said Lawrence Yun, chief economist for the Realtors. "Realtors are acknowledging with increasing frequency lately that buyers continue to be frustrated by the tense competition and lack of affordable homes for sale in their market."
That competition has pushed home prices higher faster than expected and far faster than income growth. Prices have reached new peaks in seven major metropolitan markets (Denver, Dallas, Portland Oregon, San Francisco, Seattle, Charlotte, and Boston), according to the latest report from S&P/Case-Shiller. Homes are also spending far less time on the market, averaging just 30 days in May, compared to 40 days a year ago.
Mortgage rates have remained very low, but applications for a mortgage to purchase a home are down 5 percent in the past month, according to the Mortgage Bankers Association. Rates fell further this week, in the wake of the Brexit vote, which increased affordability for buyers again, but without homes to buy, the low rates have less of an impact.
"In the short term, volatility in the financial markets could very likely lead to even lower mortgage rates and increased demand from foreign buyers looking for a safer place to invest their cash," added Yun. "On the other hand, any prolonged market angst and further economic uncertainty overseas could negatively impact our economy and end up tempering the overall appetite for home buying."
Regionally, pending home sales in the Northeast dropped 5.3 percent for the month and are now unchanged from a year ago. In the Midwest sales slipped 4.2 percent in May, and are 1.8 percent below May 2015. Sales in the South declined 3.1 percent for the month but are 0.6 percent higher than last May. The West saw a 3.4 percent monthly drop, and sales are 0.1 percent below a year ago.