In May, an unexpected drop in an index of US pending existing-home sales has brought the market to its lowest level on record. The National Association of Realtors reported a 2.1% decrease in contract signings, with the reading dropping to 70.8, the lowest figure recorded since 2001. Economists surveyed by Bloomberg had predicted a modest 0.5% gain.

The decline in pending sales comes as prospective buyers face challenges due to elevated mortgage rates and soaring home prices. NAR Chief Economist Lawrence Yun acknowledged the market's current state, saying, "The market is at an interesting point with rising inventory and lower demand." Yun anticipates that an increase in supply and a job-creating economy will eventually lead to greater home buying, especially when mortgage rates decrease.

Existing-home closings have remained stagnant, hovering around an annualized 4 million for over a year. This has been partly attributed to the "lock-in effect," where sellers are reluctant to list their homes and give up their current low mortgage rates.

The record high selling prices, which reached $419,300 in May, have also deterred potential homebuyers. However, the market has witnessed a gradual rise in listings, giving some optimism for future sales. Yun highlighted that the supply of existing homes has increased by more than 18% compared to last year.

A sustained easing in borrowing costs could provide vital support to home sales. Currently, the average 30-year fixed mortgage rate stands at around 7%, more than double the rate at the end of 2021. Though there were hopes that the Federal Reserve would cut interest rates soon, concerns about inflation persist, tying the central bank's hands. As a result, officials now anticipate only one reduction in rates this year, as opposed to the three cuts expected back in March.

Regional differences in pending sales were notable, with the Northeast and West experiencing slight gains in May contract signings for previously owned homes. Conversely, the South and Midwest witnessed their pending sales indexes fall to their lowest levels since 2010.

Pending home sales are considered a leading indicator of sales of previously owned homes since houses typically go under contract a month or two before the final sale.

Overall, the US housing market continues to face headwinds as rising mortgage rates and high prices continue to discourage buyers. A wait-and-see approach is being adopted to gauge the impact of increasing inventory and potential future home sales.