March 24 (Bloomberg) -- Sales of existing homes in the U.S. unexpectedly rose in February as prices fell by the most in four decades.

Purchases increased 2.9 percent, the first gain in seven months, to an annual rate of 5.03 million, the National Association of Realtors said today in Washington. The median home value dropped 8.2 percent from a year earlier, the most since the organization began keeping records in 1968.

``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.''

Housing, now in the third year of its worst recession in a generation, is unlikely to rebound quickly as a glut on the market depresses property values and lenders toughen mortgage requirements to stem credit losses. The Federal Reserve last week said the outlook had worsened and pledged to do whatever was needed to revive economic growth.

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

The Standard & Poor's 500 homebuilder index rose 8.8 percent to 448.6 at 11:22 a.m. in New York.

Home Loan Banks

Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion as part of a government effort to pump money back into a market that slumped as the housing crisis deepened.

Economists had forecast existing home sales would decline to a 4.85 million pace, according to the median of projections in a Bloomberg News survey. 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 median sales price dropped to $195,900 from February 2007. The decline was led by an 8.7 percent drop for single- family houses.

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.

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

Inventories

The number of homes for sale at the end of February fell 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.

``If you look at the outstanding inventory of homes and the negative psychology, I think housing activity and prices will fall further,'' Mickey Levy, chief economist at Bank of America Corp. in New York, said in an interview with Bloomberg Radio. ``I'm looking for negatives in housing construction this year.''

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.

Competition for Builders

The supply glut is a hurdle 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.

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 Response

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.

-- With reporting from Craig Torres and James Tyson in Washington. Editor: Carlos Torres

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

Last Updated: March 24, 2008 11:30 EDT