July 3 (Bloomberg) -- Americans unexpectedly signed fewer contracts to buy previously owned homes in May as buyers waited for lower prices and lenders made it harder to get mortgages.

An index of signed purchase agreements, or pending home resales, dropped 3.5 percent to 97.7, the lowest level in more than five years, from a revised 101.2 in April, the National Association of Realtors said today in Washington.

The report underscores the Federal Reserve's view that the housing slump will hold back economic growth into the second half of 2007. Rising defaults on subprime mortgages and higher borrowing costs are contributing to the glut of unsold homes.

``I don't think it'll be a quick recovery by any means,'' said Russell Price, senior economist at H&R Block Financial Advisors in Detroit, who was among analysts who predicted a decline. ``Housing will be an ongoing drag for the economy.''

Economists expected pending sales to rise 0.5 percent, from an originally reported decline of 3.2 percent, according to the median of 27 forecasts in a Bloomberg News survey of economists. Estimates ranged from a drop of 2.5 percent to an increase of 2 percent.

Today's report showed that the May reading was the lowest level since September 2001, when the economy was in the midst of the last recession. April pending home resales were revised to a decline of 3.5 percent.

Pending resales decreased 13.3 percent from May 2006. The realtor group's data on pending home sales go back to January 2001 and the organization started publishing the index in March 2005.

Factory Orders

A separate government report today showed that orders placed with American factories fell less than forecast in May as demand for computers, electronics and fuel helped make up for a decline in aircraft bookings.

Orders fell 0.5 percent, following a 0.5 percent gain in April that was higher than originally reported, the Commerce Department said in Washington. Excluding transportation equipment, bookings rose 0.7 percent after rising 1.0 percent.

Treasuries were little changed after the two reports. The yield on the benchmark 10-year note was 5 percent at 10:13 a.m. in New York, from 4.99 percent late yesterday.

This was the third consecutive monthly decline for the pending home resales index, which has fallen in all months this year except February.

``Housing has yet to find a bottom,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, whose forecast was closest to the May reading.

The measure of pending home resales is considered a leading indicator of sales because it tracks contract signings. The NAR's existing-home sales report tracks closings, which typically occur a month or two later.

Sample Size

The existing-home sales report is based on a sample of about 40 percent of transactions in the multiple listing service used by real estate agents, while the pending-sales index covers about 20 percent.

Today's report showed pending resales fell in two of four regions. They dropped 8.9 percent in the Midwest and 7.6 percent in the South. Pending resales rose 5.6 percent in the West and gained 3.8 percent in the Northeast.

Sales of previously owned homes fell in May to the lowest in almost four years, the realtors group said June 25. Commerce Department figures showed new home sales, which economists consider a timelier barometer of the market, also dropped in May.

The excess supply is limiting building. Private residential construction spending fell 0.8 percent in May after dropping 0.4 percent the prior month, a Commerce report showed last week.

Defaults Rise

Mounting defaults on subprime mortgages -- loans to people with patchy or poor credit histories -- may throw more properties onto the market and weaken prices further, economists said.

KB Home, the U.S. homebuilder that has lost almost a quarter of its market value this year, reported on June 28 that it had a second-quarter loss as sales fell to the lowest in three years.

Housing has had a ``more dramatic correction than anyone anticipated,'' KB Home Chief Executive Officer Jeffrey Mezger said last week.

Federal Reserve officials have said the housing slump may take longer to ease than previously anticipated. They kept the target overnight interest rate unchanged at 5.25 percent last week and reiterated that the economy will continue to grow at a ``moderate'' pace.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net.

Last Updated: July 3, 2007 11:01 EDT