A forward-looking indicator of US home sales unexpectedly fell in January to its lowest level in more than three years as supply levels remain “woefully low” and mortgage rates rise.

Pending home sales, or signed contracts for homes where transactions have not yet closed, fell 4.7 per cent in January, the National Association of Realtors said on Wednesday — its steepest one-month decline since May 2010. Economists had been looking for an 0.3 per cent increase, according to a Thomson Reuters survey.

A regional breakdown showed that the index fell the most in the north-east, down 9 per cent, where severe winter weather at the start of the month is expected to have weighed on activity. Pending home sales declined in the Midwest, South and Western US as well.

“The economy is in great shape, most local job markets are very strong and incomes are slowly rising, but there’s little doubt last month’s retreat in contract signings occurred because of woefully low supply levels and the sudden increase in mortgage rates,” said chief economist Lawrence Yun.

Indeed, the report showed that number of available listings at the end of January was at an all-time low for the month and 9.5 per cent lower than a year ago.

The lower end of the housing market continues to feel the burden from the tight supply and affordability issues. Mr Yun added: “With the cost of buying a home getting more expensive and not enough inventory, some prospective buyers are either waiting until listings increase come spring or now having to delay their search entirely to save up for a larger down payment.”

Mr Yun believes that two things need to happen for supply levels to pick up: institutional investors need to begin to unload their portfolio of single-family properties on to the market and more hesitant homeowners need to decide to sell.

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