WASHINGTON, March 17 (Reuters) - Contracts to purchase previously owned U.S. homes unexpectedly increased in February amid a decline in mortgage rates, but further gains are likely to be limited by the war in the Middle East that is raising oil prices and fanning inflation fears.

The pending home sales index rebounded 1.8% last month to 72.1, the National Association of Realtors said on Tuesday. Economists polled by Reuters had forecast contracts, which become sales after a month or two, falling 0.5%.

Contracts increased in the West, the densely populated South and Midwest regions, but fell in the Northeast. Pending home sales slipped 0.8% from a year earlier.

Mortgage rates eased at the start of the year after President Donald Trump ordered government-backed mortgage firms Fannie Mae and Freddie Mac to expand purchases of mortgage-backed securities. But they have increased in recent weeks as the U.S.-Israeli war with Iran boosted oil prices and U.S. Treasury yields. 

Mortgage rates track the benchmark 10-year Treasury yield.

"The slight gain in pending contracts appears to be driven by improved affordability conditions," said Lawrence Yun, the NAR's chief economist. "However, those conditions could reverse if higher oil prices lead to an uptick in mortgage rates."

Housing affordability has become ⁠an increasingly potent political issue ahead of the November midterm elections. Trump last week signed an order to improve access to mortgage credit and remove regulatory barriers to the construction of affordable homes. Economists and realtors say increasing housing supply would address the affordability challenge faced by potential home buyers. There is a critical shortage of starter homes. 

Builders have not ramped up single-family home construction because of expensive building materials resulting from Trump's import tariffs. Labor shortages because of the administration's immigration crackdown are also adding to costs for builders.

There is also a shortage of building lots, while sluggish new home sales have left an oversupply of unsold properties on the market, constraining builders' ability to break ground on single-family housing projects. 

About 943,000 housing units were started in 2025, down from 1.016 million units in 2024, government data showed. 

A survey on Monday showed builder sentiment little changed in March, with builders continuing "to express affordability concerns stemming from elevated construction costs and shortages of buildable lots and labor."