Demand for homes remains strong despite mortgage rates hovering near 7 percent, but buyers are finding few properties to choose from as homeowners insist on not selling their homes.

The shortage of housing inventory has become so severe that it is driving sales of homes for sale in the spring, which is typically the peak time to buy a home.

According to the monthly index released Thursday by the National Association of Realtors (NAR), sales were down 2.7 percent from the previous month.

The figure fell short of Wall Street's expectations. Economists expected pending home sales to be flat in May.

Pending home sales reflect transactions for which contracts have been signed for the sale of existing homes, but the sale has not yet been completed. Economists view this as an indicator of the direction of existing home sales in subsequent months.

The Big Picture: Despite the headline number showing a decline in home sales, the housing market is not in crisis - it is actually in recovery mode.

Considerable pent-up demand for homes from buyers who have accepted the new normal of high interest rates, combined with homeowners' reluctance to sell their homes and forgo the ultra-low mortgage rates of the rare pandemic era, has led to an imbalance between demand and supply.

And, unless mortgage rates rise sharply to scare off eager homebuyers or fall low enough to incentivize existing homeowners to sell, the housing market is likely to see this strange imbalance persist.

On the other hand, with new home sales surging 12 percent in May, builders are taking advantage of the opportunity to unload their inventories.

What are Realtors saying? "Despite the slump in pending contracts, the housing market remains resilient, with about three offers per listing," said Lawrence Yun, chief economist for the National Association of Realtors.

"The lack of housing inventory continues to prevent the full realization of housing demand," he added.

Yun suggested that the inventory of available homes could be boosted by possible tax incentives, such as increasing the capital gains that sellers can exclude from their taxes.