) -- Rising mortgage rates are beginning to impact the market for existing home sales.

The National Association of Realtors' Pending Home Sales Index declined 0.4% in June to 110.9 from a downwardly revised 111.3 reading in May.

Economists polled by Bloomberg expected the index to decline by 1.4% from the original estimate of 112.3.

Pending Home Sales is a forward-looking indicator of future sales transactions. 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.

The index is still up 10.9% year-over-year.

The Pending Home Sales Index in May was the highest level reported since 2006. Economists speculated that the rise in mortgage rates may have sparked an increase in purchases.

But rising interest rates may have taken some of the momentum out of contract activity in June, Lawrence Yun, chief economist of the NAR said in a release. He also cited a "persistent lack of inventory" as another reason for the slowdown in contract signings.

Though pending sales is a reasonably good predictor of existing home sales, in a rising rate environment, some contracts may never close. "There are some homebuyers who sign contracts with strong lender commitment letters, but have floating mortgage interest rates. Those rates can be locked as late as 10 to 14 days before closing, so some homebuyers may change their minds if the rate rises too much, which apparently happened with some sales scheduled to close in June," Yun said in a press release. "Closed sales may edge down a bit in the months ahead, but they'll stay above year-ago levels."

Existing home sales

unexpectedly dropped in June, though most of the decline was explained by a lower share of distressed sales. Conventional sales increased, which is a healthy sign for the housing market.

Economists believe rising interest rates will likely dampen affordability, but will not derail the recovery as housing is still relatively affordable compared to historic levels and confidence in the housing recovery and the economy often offsets rising interest rates.

Rising rates might slow the pace of home price gains. Inventory levels may however be an even bigger driver of home prices. A shortage of inventory could drive prices higher even if rates cool some of the demand. As rising prices encourage sellers to list homes and more inventory comes into the market, however, prices should begin to cool.


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-- Written by Shanthi Bharatwaj New York.

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