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Homes under construction are seen through a kitchen window at the KB Home Cottages at Harbor Pointe development in Harbor City, Calif.

Contract signings to purchase previously owned U.S. homes increased in May, indicating Americans may be responding to declining mortgage rates.

The index of pending home sales rose 1.1 percent from the previous month, in line with economist estimates for a 1 percent increase, according to data out Thursday from the National Association of Realtors in Washington. Contract signings were down 0.8 percent from May of last year on an unadjusted basis.

Key insights:

• The pickup in pending sales is welcome news for a housing market that lost momentum last year, as expectations of a Federal Reserve interest-rate cut have already started to push down borrowing costs for consumers. Mortgage rates hovering near an almost two-year low, stronger hourly earnings growth and a firm labor market may help deliver gains for residential real estate.

• Still, purchasing a median-priced home is a financial stretch for Americans in the majority of markets despite slowing growth in real estate prices, low borrowing costs and rising wages. The U.S. Home Affordability Report, released Wednesday by Attom Data Solutions, found that median selling prices were too high for average wage earners in three-fourths of the nation’s real estate markets during this quarter.

• Pending home sales are often looked to as a leading indicator of existing-home purchases and a measure of the health of the housing market in the coming months.

“Rates of 4 percent and, in some cases even lower, create extremely attractive conditions for consumers,” NAR Chief Economist Lawrence Yun said in a statement. While the Fed may cut interest rates this year, “there is no guarantee mortgage rates will fall from these already historically low points. Job creation and a rise in inventory will nonetheless drive more buyers to enter the market.”

Contract signings increased from the prior month in three of four regions, led by a 3.6 percent advance in the Midwest and a 3.5 percent gain in the Northeast. Pending sales were up 0.1 percent in the South and they fell 1.8 percent in the West.

Forecasts for monthly pending home sales in a Bloomberg survey of economists ranged from a decline of 0.3 percent to an increase of 2.5 percent.

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