March 24 (Bloomberg) -- Sales of existing homes in the U.S. unexpectedly rose in February for the first time in seven months, easing concern credit restrictions and falling prices would hurt demand.

Purchases increased 2.9 percent to an annual rate of 5.03 million, the National Association of Realtors said today in Washington. The median price of single-family homes dropped 8.7 percent from February 2007, the most in four decades of record keeping.

``It looks like this may be a temporary pause,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The price declines have helped, and people are still getting financing, though not on the good terms they could before. We're still a long way from a recovery in housing.''

The real estate market is unlikely to rebound quickly as a glut of houses on the market depresses property values and lenders toughen mortgage even more requirements to stem credit losses. The Federal Reserve last week said the outlook had worsened and pledged to do whatever was needed to keep the economy growing.

Stocks extended earlier gains after the report, while Treasuries remained lower. The Standard & Poor's 500 homebuilder index rose 6.5 percent to close at 439.1. The benchmark 10-year note yielded 3.55 percent at 4:23 p.m. in New York, up .21 percentage point.

Projected to Decline

Economists had forecast existing home sales would decline to a 4.85 million pace for February, according to the median of 63 projections in a Bloomberg News survey. Estimates ranged from 4.69 million to 4.9 million. January's 4.89 million pace was the lowest since the group began keeping records of combined single- family homes and condominiums in 1999.

The combined median sales price for single-family homes and condominiums dropped 8.2 percent, the most since those records began in 1999. The value dropped to $195,900 from February 2007. The median price for condos fell 4.9 percent.

Sales of single-family homes increased 2.8 percent to a 4.47 million pace. Those of condos and co-ops climbed 3.7 percent to a 560,000 rate.

``I would not read too deeply into a single month's data'' Lawrence Yun, the real-estate agent group's chief economist, told reporters. Yun projected sales would improve in the second half of the year as lower prices and cheaper mortgage rates make houses more affordable.

Regional Breakdown

Sales rose in three of four regions, led by an 11 percent jump in the Northeast.

The number of homes for sale at the end of February fell 3 percent to 4 million. At the current sales pace, that represented 9.6 months' supply, compared with 10.2 months in January.

Inventories may remain at elevated levels as foreclosures rise, continuing to pressure prices down, Briefing.com economist Timothy Rogers said. The Realtors group has said a five to six months' supply is needed to stabilize the market.

Home foreclosure filings jumped 60 percent and bank seizures more than doubled in February from the same month last year as rates on adjustable mortgages rose and property owners were unable to sell or refinance, according to RealtyTrac Inc., a seller of foreclosure data.

The supply glut is a problem for owners looking to get a top price and is also represents competition for builders, leaving little incentive to start new projects. The Commerce Department's report on sales on new houses is due March 26.

New Home Sales

Economists surveyed by Bloomberg News expect new-home purchases, which make up 15 percent of the market, to fall to the lowest level since February 1995. Housing starts dropped in February and the number of building permits granted was the lowest in more than 16 years, the government reported last week.

Hovnanian Enterprises Inc., New Jersey's biggest homebuilder, this month reached an agreement with banks on new lending terms after a drop in sales made it harder to generate cash. The company also reported its sixth straight quarterly loss.

``The market's too challenging to make accurate forecasts for fiscal '08,'' Chief Executive Officer Ara Hovnanian said on a March 11 conference call with analysts.

The ``deepening of the housing contraction'' was one factor Fed policy makers last week said was likely to hurt growth in coming months. On March 18, the central bank cut its main lending rate by three-quarters of a percentage point to 2.25 percent and said recent reports have shown the outlook for the economy has ``weakened further.''

Fed Action

The Fed has cut its benchmark interest rate by three percentage points since September and enacted other measures to try to keep the economy afloat. On March 16, it reduced the rate on direct loans to banks and said it will provide up to $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns Cos. after a run on that security firm.

Other government agencies are also struggling to limit the damage in housing. The Office of Federal Housing Oversight lowered the capital requirement on Fannie Mae and Freddie Mac to 20 percent from 30 percent last week. The initiative may immediately pump $200 billion into the mortgage market.

The goal is to ``help restart the housing engine that powers our economy,'' Fannie Mae Chief Executive Officer Daniel Mudd said at a March 19 news conference in Washington.

There are some signs that the existing home sales market may be stabilizing. The Realtors group said March 6 that its index of pending purchases, which reflects the number of Americans signing contracts to buy previously owned homes, was unchanged in January.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: March 24, 2008 16:34 EDT