WASHINGTON, June 27 Reuters Contracts to buy U.S. previously owned homes unexpectedly fell in May, indicating sales could remain subdued for a while as potential buyers grapple with higher mortgage rates and prices.

The National Association of Realtors NAR said on Thursday its Pending Home Sales Index, based on signed contracts, dropped 2.1 last month to 70.8. Pending home sales fell in the densely populated South and the Midwest, which is considered a more affordable region. The rose in the Northeast and West.

Economists polled by Reuters had forecast contracts, which become sales after a month or two, rebounding 2.5. Pending home sales dropped 6.6 in May on a yearonyear basis.

The market is at an interesting point with rising inventory and lower demand, said NAR Chief Economist Lawrence Yun.

The housing market has been thumped by a resurgence in mortgage rates, with sales and home building slumping in May.

Residential investment is expected to have softened in the second quarter after posting doubledigit growth in the JanuaryMarch quarter.

The average rate on the popular 30year fixedrate mortgage reached a sixmonth high of 7.22 in early May before retreating to 7.03 by the end of the month, data from mortgage finance agency Freddie Mac showed. It has since dropped to an average of 6.87 during the week ending June 20.

The first half of the year did not meet expectations regarding home sales but exceeded expectations related to home prices, said Yun. In the…