A leading housing market indicator flashed its biggest warning sign in 2 decades

Pending home sales declined in May to the lowest level ever recorded, signaling more pain in store for the U.S. housing market.

According to the National Association of Realtors (NAR), pending sales declined 2.1% from April and were down 6.6% year over year. Economists in a Reuters poll were calling for an increase of 2.5% from the previous month.

In the housing market, a pending sale is when a seller accepts an offer and signs a contract, but has not yet closed the transaction. For that reason, pending sales are considered a leading indicator of housing activity.

While a 2.1% monthly drop might not seem like much, the latest report has huge implications for the housing market, said David Rosenberg, an economist who heads Rosenberg Research & Associates.

The pending home sales indicator, “with all its powerful multiplier impacts,” has fallen below the Covid crash in April 2020 and is now “the weakest since the series began in the 2001 downturn,” Rosenberg wrote. “But there’s no recession coming, right? Sure.”

As a way to downplay the trend, NAR chief economist Lawrence Yun said that the housing market was “at an interesting point with rising inventory and lower demand.”

But even Yun acknowledged that home sales have badly missed expectations in the first half of the year.

Housing affordability limits buyer demand

Economists say the U.S. housing market suffers from the one-two punch of low inventories and higher costs, making it nearly impossible for first-time buyers to make an offer.

While new housing inventory rose sharply in May, new builds account for just 13% of home sales. By contrast, the pending home sales data covers existing homes, which make up the lion's share of market activity.

Experts say higher mortgage rates are the biggest obstacle to the affordability crisis. In addition to deterring buyers, high rates discourage existing homeowners from selling.

Bank of America calls this the housing “lock-in effect.”

According to the bank’s analysts, the housing market will remain in a deep freeze so long as current mortgage rates remain much higher than rates most homeowners obtained a few years ago.

Although the NAR predicts lower mortgage rates in the second half of the year, other industry insiders aren’t convinced the drop will be substantial enough to lure buyers back into the market.

For example, analysts at the Mortgage Bankers Association, Realtor.com, and Wells Fargo think rates will hover between 6.5% and 7% this year before falling only slightly in 2025.