April 3 (Bloomberg) -- More Americans signed contracts to buy previously owned homes in February, easing concern the real- estate market will get even worse.

The National Association of Realtors' index of signed purchase agreements rose 0.7 percent after dropping 4.2 percent in January. Economists had forecast a decline. The index was down 8.5 percent from a year earlier.

Lower borrowing costs and falling house prices are tempting some buyers back into the market, which is suffering its worst recession since 1991, economists said. Stocks extended gains after the report, which is consistent with predictions by the Federal Reserve that the slump in residential real estate will be contained.

``The chance of another outsized drop in housing is dissipating,'' said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. ``There has been remarkably little pass-through to the rest of the economy.''

Homebuilder shares shot up after the report. The Standard and Poor's Supercomposite Homebuilding Index of companies including Toll Brothers and Pulte Homes Inc. increased 1.5 percent to close at 565.75. The index is down 19 percent this year.

The gain in pending sales, combined with a drop in crude oil prices, propelled the Dow Jones Industrial Average up 1 percent. Shares of Home Depot Inc., the world's largest home- improvement retailer, and Wal-Mart Stores Inc. led the advance.

Leading Index

The index of pending resales is considered a leading indicator because it tracks contract signings. The Realtors' existing-homes sales report tracks mainly closings, which typically occur a month or two later.

``Housing is groping for a bottom here,'' said Eric Green, chief market economist at Countrywide Securities in Calabasas, California. ``Consumers are feeling better about getting into the market.''

A separate report showed U.S. retail sales gained 4.9 percent last week from a year earlier, the most in two months. Warmer weather spurred consumers to snap up clothing and holiday foods for Easter and Passover, according to the International Council of Shopping Centers and UBS Securities LLC.

Exceeding Forecasts

Economists anticipated pending sales to drop 0.5 percent, from an originally reported 4.1 percent decline the prior month, according to the median of forecasts in a Bloomberg News survey.

The gain in February ``is encouraging,'' said David Lereah, the real-estate agents group's chief economist in a statement. ``The data suggests an underlying stabilization is taking place in the housing market, but it will take another month or two to clarify.''

The rate on a 30-year fixed rate mortgage has averaged 6.21 percent so far this year, compared with a four-year high of 6.80 percent reached in July, according to figures from Freddie Mac. The firm is the second-biggest American mortgage finance company.

The existing-home sales report is based on a sample of about 40 percent of transactions in the multiple listing service used by real estate agents, while the pending-sales index covers about 20 percent.

Today's report showed pending resales rose in two of four regions. They increased 4.5 percent in the South and 2.9 percent in the Midwest. Sales dropped 6 percent in the West and 1.3 percent in the Northeast.

March Sales

It may take a few months for the actual sales figures to catch up with the pending readings, economists said. The decline in the January pending index will probably still be reflected in March sales of previously sold properties, they said.

Those sales unexpectedly surged in February by the most in three years, the Realtors' group reported last month. That report also contained some negative news. The supply of previously owned homes for sale increased even as sales jumped.

Purchases of new properties, which make up 15 percent of the market, fell in the first two months of the year, according to figures from the Commerce Department. February sales were the weakest in almost seven years, while the supply of unsold new homes at the current sales pace rose to the highest in 16 years, Commerce reported on March 26.

A decline in new-home construction, which subtracted 1.2 percentage points from economic growth in the fourth quarter, is showing few signs of letting up. Private residential construction spending fell 1 percent in February after a 1.7 percent drop the prior month, a Commerce Department report last week showed.

Defaults

Economists are concerned that mounting defaults on subprime mortgages -- loans to people with poor or little credit histories -- may throw more properties onto the market and weaken prices further. Foreclosure filings in February rose 12 percent from a year ago, RealtyTrac, an online listing of foreclosed properties, said last week.

New Century Financial Corp. this week became the biggest subprime mortgage company to go bankrupt after the lender was overwhelmed by customer defaults. The Irvine, California-based company filed for Chapter 11 protection yesterday. Since the start of 2006, more than 30 lenders have halted operations, gone bankrupt or sought buyers as defaults on subprime mortgages surged last year.

Fed Chairman Ben S. Bernanke, who still expects the economy will expand at a ``moderate'' pace, last week told lawmakers he expects the subprime fallout ``is likely to be contained.''

`Number of Risks'

Still, ``this forecast is subject to a number of risks,'' he said. ``To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector.''

Builders are still hurting. Lennar Corp., the largest U.S. homebuilder by revenue, last week reported a 73 percent plunge in fiscal first quarter earnings, and said it may miss its 2007 profit goal.

``Market conditions are very difficult across the country,'' Miami-based Lennar's Chief Executive Officer Stuart Miller said on a conference call. ``It is unclear today where there is another shoe to drop.''

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net.

Last Updated: April 3, 2007 17:59 EDT