U.S. Pending Home Sales Fell 3.7% in May

The number of homes going under contract for sale fell in May, a sign of slowing in the U.S. housing market.

The National Association of Realtors' pending home sales index, which tracks contract signings for purchases of previously owned homes, decreased a seasonally adjusted 3.7% in May from the prior month, the trade group said Wednesday. Sales typically close within a month or two of signing.

Economists surveyed by The Wall Street Journal had expected a more modest decline of 2.0%.

The index was 110.8 in May compared with a downwardly revised 115.0 in April. The gauge was down 0.2% last month compared with May 2015, its first annual decline since August 2014.

Lawrence Yun, the NAR's chief economist, pointed to tight inventory and fast-rising prices as mounting problems for the housing sector. "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," he said.

News Corp, owner of The Wall Street Journal, also owns Move Inc., which operates a website and mobile products for the National Association of Realtors.

The U.S. housing sector has posted solid gains in recent years, helping lift overall economic growth. The market's long postrecession recovery has been supported by historically low interest rates, which have moved lower so far this year. The average rate on a 30-year fixed-rate mortgage in May was 3.60%, down from 3.87% in January, according to Freddie Mac.

Sales of previously owned U.S. homes rose in May at its fastest pace since February 2007, the Realtors group said last week. Sales of newly built single-family homes, which are a small fraction of the overall market, rose 6.4% in the first five months of the year compared with the same period in 2015, according to Commerce Department data.

Home-building activity has been rising, too. Housing starts in the first five months of 2016 were up 10.2% compared with the same period a year earlier, including a 14.5% increase in the construction of single-family homes, according to the Commerce Department.

Still, as Mr. Yun noted Wednesday, the supply of available homes has remained tight, which is putting upward pressure on prices. At the end of May, there was a 4.7-month supply of unsold existing homes and a 5.3-month supply of newly built homes at the current sales paces.

The Federal Reserve, in its June 15 policy statement, noted that "the housing sector has continued to improve" since the start of the year. Fed Chairwoman Janet Yellen told lawmakers last week that "housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates."

Pending home sales declined in May across the country, led by a 5.3% drop in the Northeast and a 4.2% decline in the Midwest. Pending sales were down 3.4% in the West and 3.1% in the South compared with April. On an annual basis, sales in May were down in the Midwest, a bit lower in the West, flat in the Northeast and up slightly in the South.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com