Pending sales of existing homes rebounded from a seven-month low in May but demand for mortgages sank last week and the market is still struggling under the weight of a glut of unsold properties.

The National Association of Realtors said on Wednesday its Pending Home Sales Index increased 8.2 percent to 88.8. Pending homes sales lead actual sales of homes by a month or two.

Despite hopes among investors that U.S. housing might be turning a corner, the rise in contracts was merely a correction after an 11.3 percent fall in April and the market will continue to bounce along the bottom, economists said.

A Mortgage Bankers Association report showed applications for loans to buy homes dropped 3 percent last week to the lowest level since February 25.

The market is still flat, not showing any of the improvement we had been anticipating a few months ago because of stronger job growth, said Patrick Newport, an economist at Global Insight in Lexington, Massachusetts.

While the rise in contracts suggested a bounce back in home sales in June, economists cautioned against expecting a strong increase as many planned deals get canceled.

Demand for loans to buy a home has been modest so far this month. Existing home sales fell 3.8 percent in May.


The rise in pending home sales, which beat economists' expectations for a 3.8 percent gain, helped to lift stocks on Wall Street.

U.S. stocks rose for a third straight day, boosted mainly by the Greek parliament's approval of austerity measures, clearing a major hurdle in the country's bid to win access to international funding to avoid default.

Prices for U.S. government debt fell and the dollar was down against a basket of currencies.

The weak housing market is constraining U.S. growth and economists do not see a recovery any time soon in a sector that is grappling with an oversupply of homes, which is keeping prices subdued.

The housing market collapse helped to push the U.S. economy into its worst recession since the 1930s. According to the NAR, there were 3.72 million used homes on the market in May, excluding the so-called shadow inventory of homes which are at risk of being foreclosed upon or have been seized by lenders.

Economists are cautiously optimistic that home sales will gradually improve later this year and chip away at the huge inventory. Data on Tuesday showed a moderation in the pace of decline in single-family home prices in April.

What is emerging is that we have hit some bottom level of activity and that's a good thing, said Steve Blitz, a senior economist at ITG Investment Research in New York.

When you take that and marry it to the fact that you are not getting much new home construction, it means you are selling out of inventory of existing homes ... and you start to get new home construction. The industry is slowly moving in the right direction.

A slightly optimistic note was also sounded by the chief executive officer of KB Home, the fifth-biggest U.S. homebuilder, which said its net orders for new homes were down 11 percent in the second quarter, compared with the same period of 2010 but jumped 53 percent from the first three months of the year.

Although a broad-based housing recovery remains stalled, it appears that the worst of the crisis is behind the homebuilding industry as select markets for new homes are showing signs of stability, said Jeffrey Mezger.

KB Home earlier announced a bigger-than-expected loss, hurt in part by falling home prices.

The S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas slipped 0.1 percent in April on a seasonally adjusted basis after falling 0.3 percent in March, according to data released on Tuesday.

Last month, pending home sales increased in all four regions, with the Midwest and West notching double-digit gains. In the 12 months to May, pending home sales rose 13.4 percent.

(Editing by Andrea Ricci)