The National Association of Realtors this morning (July 3) reported a 3.5% drop in its Pending Home Sales Index, based on contracts signed in May, to 97.7 , down from a downwardly revised April index of 101.2. The national index number is 13.3% below May 2006, when the reading was 112.7. In April, the index was down 10.4% from the same month last year.

The index rose sequentially in the West and Northeast, but was more than offset by declines in the South and Midwest.

Lawrence Yun, NAR senior economist, said, "Some transactions are being postponed from mortgage market disruptions." He continued, "Home sales should stay close to present levels in the months ahead given an accumulating pent-up demand."

The NAR said the pent-up demand results from slow household formation, which is significantly below levels that would be expected in a period of job creation and economic growth. "As consumer confidence improves, home sales will rise," Yun said.

The PHSI in the West rose 5.6% in May to 95.4 but was 13.7% below a year ago. In the Northeast, the index increased 3.8% to 93.1 but is 9.6% lower than May 2006. The index in the South fell 7.6% in May to 107.2, 15.4 percent below a year ago. In the Midwest, the index dropped 8.9% to 89.4, down 11.7% May 2006.

The Realtor association cautioned that annual changes in the index are more closely related to actual market performance than month-to-month comparisons. An index of 100.0 is based on the average level of contract activity in 2001, when it was created. As more months of data are accumulated, the month-to-month comparisons are expected to grow more meaningful.

Yun said the association believes "better supervised lending will put housing in a fundamentally healthier state over the long term. Mortgage purchase applications are trending up, with some of the rise due to buyers reapplying for alternatives to subprime financing."

A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.

In a research note put out after the NAR index was released, Michael Rehaut, the lead home building analyst at J.P. Morgan, said he beleived the index for May "will likely translate to weaker Existing Home Sales over the next few months. While we are modestly concerned that this may contribute to an incremental increase in inventory levels, we continue to believe that growth should moderate over the next several months, as we expect pricing to further soften and help move product to a greater degree."