June 26 (Bloomberg) -- Sales of previously owned homes in the U.S. rose in May from the lowest level in at least nine years as a slide in prices lured some buyers into the market.

Resales increased 2 percent to a 4.99 million annual rate, higher than forecast, from a 4.89 million pace in April, the National Association of Realtors said today in Washington. The Commerce Department separately said the economy grew at a 1 percent annual pace in the first quarter, capping the weakest six-month expansion in five years.

The supply of homes for sale remains about twice the level representing a stable market, according to the NAR, and figures have yet to show any sign of sustained sales gains. Federal Reserve officials yesterday said the housing contraction will likely damp growth into 2009.

``It's going to be a long, painful end'' to the housing industry's decline, Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in an interview with Bloomberg Radio. ``Prices have come down enough that affordability has been restored in some markets and we're starting to see some buyers come back in.''

Stocks dropped and Treasuries rose today on growing concern that earnings at banks and consumer companies will trail forecasts. The Standard & Poor's 500 Stock Index fell 2.9 percent to close at 1,283.15. Benchmark 10-year note yields fell to 4.04 percent at 4:09 p.m. in New York from 4.10 percent late yesterday.

Price Declines

The median price of existing homes dropped 6.3 percent from May last year to $208,600, the NAR said. Last year's nationwide drop in prices of single-family homes was probably the first since the 1930s, according to the group.

Buyers are now facing a dilemma. While prices are forecast to keep falling, mortgage rates are rising as concern about inflation mounts.

``The rising interest rates are a trigger to create buyer urgency,'' Ken Baris, president of Jordan Baris Inc. Realtors in West Orange, New Jersey, said in a telephone interview. ``Within the last six weeks we've seen a nice pop in the market.''

The average rate on a 30-year fixed mortgage was 6.3 percent yesterday, up from 5.79 percent at the start of the year, according to Bankrate.com.

Economists forecast home resales would rise to a 4.95 million pace, according to the median of 72 projections in a Bloomberg News survey. April's level matched a record low. The group's total figures, which include single-family homes and properties such as condominiums, date from 1999.

Approaching `Bottom'

``I think we are close to a bottom,'' Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said in an interview with Bloomberg Television. ``Sales will probably fall another 5 percent or 10 percent before bottoming by the end of the summer. It will be a feeble recovery, we will kind of bounce along the bottom.''

Resales rose in three of four regions, led by a 5.5 percent gain in the Midwest. Purchases increased 4.6 percent in the Northeast and 2 percent in the West. Sales dropped 0.5 percent in the South.

The Commerce Department's revised gain in gross domestic product was up from the preliminary estimate of 0.9 percent released last month. A decline in residential construction subtracted 1.1 percentage points from growth in the period.

Declines in residential construction have been a drag on growth since the first quarter of 2006. In addition, demand for furniture and building materials has sagged and home prices and consumer confidence have fallen.

'Further Deterioration'

Lennar Corp., the second-largest U.S. homebuilder, today reported its fifth straight quarterly loss as the company was forced to cut prices to attract buyers.

``The remainder of 2008 will likely see further deterioration in overall market conditions,'' Miami-based Lennar's Chief Executive Officer Stuart Miller said in a statement today.

Labor Department figures today separately showed that the number of Americans collecting unemployment benefits reached a four-year high of 3.14 million in the week ended June 14. Initial jobless claims held at 384,000 last week, the department also reported.

Compared with a year earlier, home sales were down 16 percent in May.

Sales of existing single-family homes climbed 1.6 percent to an annual rate of 4.41 million pace. Purchases of condos and co-ops increased 5.5 percent to a 580,000 rate.

`Distressed' Sales

``Home sales are rising in distressed markets,'' said Paul Bishop, a senior economist at the agents group. About one-third of total purchases last month were ``short sales'' that reflected foreclosures or distressed properties, according to NAR estimates.

The number of previously owned unsold homes on the market at the end of May fell 1.4 percent to 4.49 million from 4.55 million in April. The total represented 10.8 months' supply at the current sales pace. The agents' group has said that a five- to-six month's supply reflects a balanced market.

Existing home sales account for about 85 percent of the U.S. housing market, while new home sales make up the rest. Monthly figures for resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier.

Recent reports suggest the housing slump will continue. The Mortgage Bankers Association's index of loan applications to purchase homes fell last week to the lowest level in more than five years.

New-Home Sales

The Commerce Department said yesterday that sales of new homes fell to a 512,000 pace last month, the second-lowest reading since 1991. At that pace, it would take 10.9 months to sell all the houses currently on the market.

Fed policy makers yesterday left the benchmark interest rate at 2 percent, ending the most aggressive series of rate cuts in two decades, and said growth risks had diminished while higher energy costs boosted the threat of inflation.

The ``ongoing housing contraction,'' stricter lending rules and the jump in fuel costs were among the trends the central bankers predicted would hurt economic growth.

To contact the reporters on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net; Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: June 26, 2008 16:19 EDT