Pending Homes Sales Drop: Deflationary Spiral or Temporary Slowdown?

Buyers signed fewer contracts to buy homes in May than in any time since the government starting keeping records on them. Based on information from the National Association of Realtors, pending home sales dropped 30 percent from April -- from 110.9 to 77.6 -- which is also 15.9 percent below May 2009.

While some believe this may be a sign the housing market cannot survive without life support from the government, take a breath and think about where we are. Some do think we're heading into a deflationary spiral, with housing prices again taking another big fall. But many others have been expecting the drop.

It's not hard to think about a doomsday scenario with today's pending homes report and the report that new home construction fell 2 percent. In addition we continue to hear about flat sales in the new homes market. Last week's new homes report indicated that sales dropped 33 percent to a pace that is slowest seen since records started being kept 47 years ago.

But Celia Chen, of Moody's Economy.com said that new homes data is "volatile" and Moody's is expecting that the numbers "could be revised upward" next month. She added that Moody's does not think we're headed into a deflationary spiral.