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Fewer buyers signed contracts to buy existing homes in May, likely because they can't find or afford what they want.
The pending home sales index from the National Association of Realtors dropped 0.8 percent month to month and is now 1.7 percent lower than May 2016. Expectations had been for a slight gain, but even April's reading was revised lower.
"Monthly closings have recently been oscillating back and forth, but this third consecutive decline in contract activity implies a possible topping off in sales," said Lawrence Yun, chief economist of the Realtors. "Buyer interest is solid, but there is just not enough supply to satisfy demand. Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast."
The number of home sales that closed this spring was slightly higher than a year ago, but the lack of listings clearly held the market back. The supply of homes for sale at the end of May was down more than 8 percent from a year ago, and homes that were listed sold at the fastest rate on record.
The tight supply is pushing home prices higher, considerably faster than income growth. Low mortgage rates have not been much help in offsetting these big price gains, and in fact may be exacerbating the problem, especially if rates begin to rise as is widely expected.
The inventory crisis is worst on the low end of the market, where demand is highest. The number of starter and trade-up homes currently on the market is down 15.6 percent and 13 percent, respectively, compared with a year ago, according to Trulia, a real estate website. The inventory of premium homes has fallen 3.9 percent.
The supply situation has buyer confidence in the housing market dropping. Just over half of renters say they think now is a good time to buy, according to the Realtors. That is down from 62 percent one year ago. While about 80 percent of current homeowners think now is a good time to buy, they are not listing their homes for sale. This may have more to do with weakening affordability than anything else. They don't want to sell if they can't afford a move-up home.