I'm just guessing, but I suspect you've got clay with little organic matter in it. Adding peat moss and compost will help increase the OM.

In addition to the peat moss and compost, if you haven't been mulch mowing, start doing so. Core aerating may help. It might make sense to core aerate before applying the peat moss and compost so they can get into those holes.

Some people use "liquid aerators" (like Nitron A35 or Aerify) to help water penetrate. Some people use diluted baby shampoo since it acts as a surfactant/wetting agent.

One frequent poster here uses a soaker hose with the water turned on a trickle to soak the soil deeply and encourage fungal growth. I think he sets it so that it waters an area about 18 inches around the hose, leaves it for a week, then moves it 18 inches and keeps doing that until the entire lawn has been watered that way. It may be necessary to repeat the process.

My soil is sandy with not much organic matter. I've been trying to work in some OM with the beds but the grass I haven't really touched because I'm waiting till the fall or spring to put a sprinkler in. Then I'll concentrate on the lawn. Thanks for your help though.

sandy soil often becomes water repellant after becoming very dry but it depends on the sand too. you need to add organic matter but I would skip the peat moss because it also has water repellancy issues when it dries out. just go with some compost and also use mulches on top.

Your sandy soil, like my sandy soil, needs lots of organic matter to change its natural tendency to be hydrophobic, water repellent. Peat moss is a non renewable resource and you have better, cheaper materials to use readily available. The time I was in New Jersey I saw lots of deciduous trees most all places except right around Cape May, but even there was plenty of grasses that could be used to increase the OM in your soil. Along with getting lots of organic matter in the soil goes covering that soil with a good mulch that will 1) help prevent soil erosion, 2) help retain soil moisture (water), 3) helps control unwanted plant growth ("weeds"), 4) helps keep the soil cooler (which plants like a lot), and 5) adds more organic matter to that soil.

My soil did exactly the same thing. Ive now been mulching the flower and veggie beds with a thick layer of wood shavings from the horse stalls and from the chicken coop, and it has made a huge difference. I can now move the mulch aside and the soil is moist.