Lean inventories hold back pending home sales WASHINGTON (Reuters) - Contracts to buy previously owned U.S. homes fell in February, held back by a shortage of properties, but there is little to suggest that the housing market's recovery is stalling. The National Association of Realtors (NAR) on Wednesday said its Pending Home Sales Index, based on contracts signed last month, slipped 0.4 percent to 104.8. Still, contracts last month remained at the second-highest level in nearly three years. The Realtors group and private economists blamed the pullback in signed contracts, which typically become sales after a month or two, on the lack of homes available for sale. "Rapidly shrinking inventories have held back home sales," said Celia Chen, a senior economist at Moody's Analytics in West Chester, Pennsylvania. All regions are tightening. There were 1.94 million previously owned homes on the market in February, representing a 4.7 months' supply. The inventory of new single-family homes available for sale during the same period was 150,000, or 4.4 months' worth. A six months' supply is normally considered as a healthy balance between supply and demand. While the supply squeeze could dampen the spring selling season a bit, the housing market recovery appears intact. Pending home sales were up 8.4 percent from February last year. "The spring selling season should still be good enough, but it is going to be very difficult for homebuilders to generate the same or near the same year-on-year sales growth as they did a year ago," said Steve Blitz, chief economist at ITG Investment Research in New York. The U.S. central bank last week said it would maintain its monthly $85 billion purchases of mortgage and Treasury bonds. The flow of foreclosed homes coming on to the market, which had been both a source of supply and a key obstacle to the sector's recovery, has dropped significantly in recent months, confounding both real estate professionals and economists. CoreLogic on Tuesday said so-called shadow inventory - homes either in foreclosure or being held from the market - dropped 15.4 percent to 2.2 million in January from a year ago. That was well below the cycle peak of 3 million units in January 2010. "We expect some of the positive momentum in housing activity to be surrendered in the near term," said Millan Mulraine, a senior economist at TD Securities in New York, citing the likelihood inventory will remain constrained. But the supply squeeze is also helping to push up home prices, putting a solid foundation under the recovery. Data on Tuesday showed home prices in 20 metropolitan areas tracked by S&P/Case Shiller soared 8.1 percent in January from a year ago, the biggest 12-month rise since June 2006. In a positive sign for sales, demand for loans to buy a home rose last week after two straight weeks of declines, a separate report showed. The Mortgage Bankers Association said its gauge of loan requests for home purchases, a leading indicator of home sales, increased 6.7 percent. The rise in loan applications, which came as mortgage rates fell for the first time in three weeks, unwound the prior two weeks' declines. But with roughly a third of home resales being cash purchases and investors making up a fifth of all buyers, mortgage applications may not be a good predictor of home sales. According to Moody's Analytics' Chen, supplies were the most tight in the West, while abundant in the Midwest. That was reflected in the NAR report, which showed pending sales barely rising in the West and rising 0.4 percent in the Midwest last month. Signed contracts fell in the Northeast and South. "Industry capacity constraints, however, will keep residential construction from ramping up as quickly as required to meet demand," said Chen. Concurrently, homeowners will release existing homes on the market at a slow pace. Reporting by Lucia Mutikani; Editing by Theodore d'Afflisio and Leslie Gevirtz